Tough year for Denel offset by “better performance”

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The Denel Group annual results for the 2016/17 financial year show a company that not only weathered a challenging global economic period, but managed to perform better than anticipated, acting chief executive Zwelakhe Ntshepe said today.

Speaking at the Group’s corporate headquarters in Irene he pointed out the global defence industry and the South African industry, faced the challenges of growing profitably in an ever increasing cost-sensitive and competitive market while also making cost cutting decisions to maintain acceptable financial performance.
“Denel has not been immune to these challenging economic conditions,” he said.
“The resilience and hard work of our employees has seen us again weathering the storm and ready to take the Denel group to another level of growth and sustainability.
“The results we present would not have been possible without the resilience and support of our employees, suppliers and our clients. We are consolidating on the gains of some hard decisions taken as the leadership collective, where some divisions have been consolidated and we are entering new capability areas.
“This has all happened at a time when Denel, similar to most State Owned Companies in the country, has been subject to intense media scrutiny that has caused reputational damage to our brand,” Ntshepe said.

He said the state-owned defence and technology was always quick to identify trends and position itself to respond to opportunities.
“The group will continue to look for closer co-operation and alignment in the local defence and research communities as well as internationally. These will be alliances where we benefit from global expertise to enhance our product offering and penetrate new markets.
“More than 60% of our revenue already comes from exports and our future business outlook is bolstered by a strong order pipeline.
“Based on substantial exports, Denel is able to maintain, expand and build on a broad scope of sovereign and strategic technologies that would otherwise not have been possible. Credit must go to the Ministry of Defence and Veterans, Armscor and the SANDF whom remain our anchor client and we are indebted to them for much of our product portfolio and technology funding. It demonstrates the mutual benefit to be derived between collaborating Government entities. With more than 75% of both the local and export work being localised back to South Africa by Denel, the local defence industry benefits substantially from this partnership.
“Going forward our strategy to create value for our shareholder and the people of South Africa will be guided by: Strengthened customer and stakeholder relationships in support of long-term business prospects; efficiency, productivity and profitability; creating capacity for cash generation; enhanced capabilities and innovation; and creating a dynamic and vibrant organisation.”
“The core of our growth strategy is in maintaining a continuous increase in the order book and managing cash-flow. Both will be made possible through strong relationships with key clients, suppliers, stakeholders and above all active political support from Government on our export opportunities. We continue to leverage existing global partnerships to secure future business. We have consolidated some divisions and embarked on initiatives to diversify our business offerings.
“The results are a reflection of the tough economic conditions the industry has weathered in the past year and the resilience of our business. We continued to maintain revenue levels above the R8bn mark, recording a moderate 2.5% reduction in turnover to the previous financial year. Exports increased by 5% and now account for 63% of the group’s total revenue. Relationships with foreign clients continue to grow and long-term partnerships have secured strategic projects.
“Profitability continues to be satisfactory and exceeded set targets by 9% posting a total of R333 million NPAT (net profit after tax). Return on sales was maintained at the 4% level in line with prior year’s 4.8%. This year to year maintenance of profitability was achieved in spite of a reduction in sales in real terms (inflation factored) and is attributable to the Group’s cost containment discipline. The group is embarking on a strategic drive to further reduce the OPEX percentage to sales currently at 18% towards a 14% range. With the tough and volatile international trading conditions, Denel returned profitability in spite of a forex loss of R232 million booked for the year. The current debt to equity ratio of 1.2:1 is still not acceptable. Plans are in place to bring it down to acceptable levels. An important key lever towards developing the Denel business into long-term sustainability is in optimising the cost structure through operational excellence.
“The speed of change, accompanied by a global shift towards asymmetric conflict has led to increased impetus for Denel to be at the cutting edge of innovation in the defence and technology sectors.
“The Denel Group already meets many SANDF requirements in land, sea and air. We expanded our capabilities into the cyberspace environment. Cyber-threat is the on the rise to our national security and economic interests.
“To this effect, the establishment of the Denel Tactical Cyber Command Centre (DTC3) was an important step toward strengthening South Africa’s sovereign capabilities in critical areas and stimulating the growth of research and development in highly-specialised sectors.
“Denel has ongoing discussions with the SAAF and the Department of Defence on upgrading the current Rooivalk Mk1F fleet. The world-class capabilities of this combat helicopter have strengthened Denel’s reputation as a globally respected defence manufacturer. The Rooivalk is unmatched in providing our forces with unrivalled levels of protection, mobility and firepower. This product provides Denel with lucrative opportunities both locally and internationally which Denel is relentlessly pursuing.
“At the 2016 Africa, Aerospace and Defence (AAD) exhibition among products Denel brought to the market was a new machine-gun. This is a new generation light-weight machine gun, the Denel Machine Gun-5 (DMG-5) which opens up new opportunities in regions such as South America, Middle East and Asia.
“The launch of the Africa Truck emphasised Denel’s ability to deliver products designed to meet the unique requirements of the SANDF especially in its deployment during peacekeeping operations on the continent. This is a national flagship programme providing an African solution by Africans aimed at opportunities locally and as well as the rest of the African market.
“The Denel Group values and prioritises its contribution to the national socio-economic imperatives of government. These include skills development, job creation and transformation. The Group’s Mentorship Programme ensures our younger employees have the necessary support to enhance their development as they enter their careers of choice.
“For Denel, transformation is a non-negotiable that is implemented in a responsible manner across the group. Currently black employees make up 62% of the workforce, while female representation has grown to 26%. During the past year 84% of new appointments came from African, Coloured and Indian communities; with more than 50% being female. We have set ourselves targets to do even better by the end of the current financial year.
“Denel would not continue to exist without the support and relationships with our communities. As the group, we place a high premium on national socio-economic imperatives including transformation and skills development. In the past year we allocated significant financial resources into our flagship corporate social investment project, the Schools Outreach Programme (SOP). This programme provides extra maths and science tuition to learners in historically disadvantaged areas. We cover Eastern Cape, KwaZulu-Natal, Limpopo, Free State, Mpumalanga, North West and Gauteng.
“The Middle East and Asia-Pacific regions are key export targets for the company. We are making progress to extend our footprint in these markets. Denel Vehicle System has delivered N35 4×4 vehicles to a customer in the United Arab Emirates and received further orders for RG12 and RG31 mine-resistant vehicles.
“In the past financial year we completed the consolidation of all Denel aviation-related business at the Kempton Park campus, resulting in the establishment of Denel Aeronautics. The objective is to improve efficiency and productivity and optimise cost structures through operational excellence.
“Denel Aeronautics is the leading aerospace company in Africa and a powerhouse in design, manufacturing and MRO solutions to the military and commercial sectors on the continent. We continue to deliver on our commitments the world’s most advanced military airlifter, the A400M.
“Denel has also grown its footprint in the aviation sector with the full acquisition of Turbomeca Africa (TMA). The Competition Commission has approved this transaction subject to certain human capital conditions. TMA manufactures engine components – including gears, gearbox casings, shafts and couplings – for Safran Helicopter Engines. The company supports 40 customers in 20 countries, including the SA Air Force, the SA Police Services and a number of civilian air operators,” Ntshepe said.

Key highlights of Denel’s 2016/17 annual financial results include R8 billion in revenue (compared to R8.2 billion for 2016); R2.021 billion cash (compared to R2.003 billion for 2016); a net profit of R333 million (compared to R395 million for 2016); research and development investment of R609 million (compared to R550 million) and R3.265 billion in borrowings (down from R3.717 billion in 2016). Debt to equity ratio is 1.2:1, compared to 1.6:1 in 2016.



Denel’s 2016/17 employee numbers are slightly down, from 5 114 in 2016 to 4 941.