A healthy balance book
Denel’s financial turnaround continues apace. Despite a challenging global economy, the defence company achieved an impressive financial performance in the past year.
Revenue has more than doubled over the past five years, from R3.6bn in the 2011/2012 financial year to R8.2bn in the past financial year. Revenue this year grew by 41%. Net profit improved by R125m to R395m (up from R270m in 2014/2015).
This phenomenal growth has, however, placed significant strain on the company’s cash resources, says acting group CFO Odwa Mhlwana: “We remain highly geared with debt of R3.7bn (up from R2.2bn in 2014/2015).”
Placing additional pressure on the company is the fact that 45% of this debt is due in the next 12 months. Mhlwana says that the plan is to refinance this debt.
Despite these challenges, he maintains that the Denel business model has proven to be robust, with profit margins gradually increasing, programmes largely on schedule and financial support by government and financial institutions continuing.
“We have grown our order book in line with our strategy, increased both revenue and profits, maintained capital market confidence in the company, as well as our Fitch rating as AAA long-term and F1+ shortterm,” says Mhlwana.
The company’s gearing ratio, he says, will improve as Denel continues to post profits, normalises its growth and reduces its dependency on borrowings. “Many of our long-term contracts require significant working capital, which means that growth will be funded by maintaining an acceptable level of debt.”
A sovereign rating downgrade to junk status, he adds, should not influence Denel’s rating or its ability to secure funding in the capital market. “We only issue local paper and we believe local investors still prefer government and bank paper due to liquidity. Though Denel could have a pickup in the liquidity spreads, we don’t foresee a negative influence on our liquidity.”
In the past year, Denel’s investment in research and development grew by 18%. “We continue to make a significant investment into research and investment,” says Mhlwana. “Not only does this investment ensure Denel remains competitive and viable, but it also benefits the greater SA industry such as the downstream manufacturing industry, thus stimulating economic growth.
“Projects such as the R8.3bn Hoefyster programme to develop a new generation of infantry combat vehicles benefit more than simply Denel, given that SA companies will deliver more than 70% of the total value of the contract.”
Denel’s export revenue is up 57% this year compared with the previous financial year, though Mhlwana says he expects this figure will grow as the company ventures further and consolidates its gains in the export market. Export revenue has been an important contributor to Denel’s net profit in the past few years and will continue to be a critical component of Denel’s growth strategy. “Defence capability comes at a considerable cost,” says Mhlwana. “Exports allow the company to leverage this cost and retain this sovereign capability in a costeffective manner.”
The company’s financial focus areas will be on restructuring the debt profile of the group to align the balance sheet to the debt repayment plans as well as the government guarantee profile, managing revenue growth to sustainable levels with a focus on managing working capital and, finally, streamlining investment in the future of Denel on business development infrastructure and R&D.