Denel plans to diversify and expand role in the economy
DENEL is planning to increasingly use its technological capabilities to help drive the development of local industries in line with state thinking. The state-owned arms manufacturer, which on Friday released a strong set of financial results for the year to end-March, plans to diversify its operations and feed into different sectors of the economy.
CAPE TOWN — Denel is planning to increasingly use its technological capabilities to help drive the development of local industries, in line with government thinking on the role of state-owned enterprises in promoting growth and employment.
The governing African National Congress has repeatedly emphasised that state-owned companies and development finance institutions should play a greater catalytic role in promoting economic growth.
The state-owned arms manufacturer, which released a strong set of financial results on Friday for the year to end-March, plans to diversify its operations and feed into different sectors of the South African economy. For example, Denel Aviation was recently awarded a contract to maintain Transnet National Ports Authority’s helicopters and discussions are under way with government departments for the company to participate in offsets arising out of the acquisition of new fleets by South African Airways and SA Express.
In addition, the group plans to be involved in the Passenger Rail Agency of SA’s programme of rolling stock revitalisation by producing the interiors of passenger rail coaches.
The planned rejuvenation of the South African Defence Force’s fleet of armoured and transport vehicles as well as envisaged maritime and civil security investments would also boost locally earned revenue, Denel CEO Riaz Saloojee said.
He also said the group planned to diversify its product range, for example, in the space, civil security, command and control and maritime arenas. “Denel is growing from being a predominantly defence company into a broader technology clearinghouse that can add value to high-tech engineering and manufacturing programmes to revitalise the country’s infrastructure,” Mr Saloojee said.
The company was looking to play an expanded role in the country’s industrial development to contribute to the achievement of the objectives set out in the national development plan and the industrial policy action plan. About 71% of Denel’s procurement expenditure of R3.6bn last year was sourced locally, and it spent more than R500m on research and development and a further R64m on skills development and training.
According to Denel group financial director Fikile Mhlontlo, about 50% of the confirmed future order book of R32bn, which would be executed over the next 5-12 years, was local and most of it for the military. He said he saw strong potential for it to penetrate Denel’s traditional mar- kets more deeply, such as South America and particularly Brazil where it is very strong, the Middle East, Far East and Africa. Denel does not have a strong presence in the American and European markets.
While Denel has historically relied mainly on numerous small contracts, Mr Mhlontlo said since 2011, it had secured two significant orders — missiles for the Middle East, as well as infantry combat vehicles. It was also contracted to supply components for the A400M aircraft, in addition to other large contracts.
However, the steady stream of small “bread and butter” contracts were vital to maintain the group’s core capability.
“We have a lot more big contracts lined up,” Mr Mhlontlo said. Discussions were taking place with the Department of Defence for the continued production of an upgraded Rooivalk helicopter. The financial benefits from Denel Land System’s contract with the South African National Defence Force to supply new Badger infantry combat vehicles would only be felt in the second phase of the project down the line.
Profit more than doubled to R194m in the year to end-March from the previous R71m, on strong growth of 17% in sales to R4.6bn (R3.9bn). Operating profit climbed 91%, bolstered by the 12% reduction in operating costs. Exports — buoyed by a weaker rand — played a significant role in Denel’s performance, rising 28% on the previous year.
“Exports now account for 50% of total revenue, including participation in a number of countries in the Middle East, Asia and South America for the development and production of missiles, turrets for infantry combat vehicles, the manufacturing of advanced aerostructures for military and civilian airlift, and the utilisation of the Denel Overberg Test Range by international clients,” Mr Saloojee said.
Denel’s debt to equity ratio has seen a significant improvement over the past two years from a ratio of 2.8:1 in 2012 to 1.1:1 in 2014.
Credit ratings agency Fitch recently upgraded Denel’s rating to an ‘ AAA’, and Public Enterprises Minister Lynne Brown has expressed confidence in the company’s sound governance.