Denel’s reversal of?fortune

2014-02-23 14:00

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State-owned defence and aerospace group Denel has managed to do in less than 10 years what SA Airways (SAA) couldn’t. It turned its fortunes around.

Denel designs and manufactures military equipment, combat vehicles and helicopters. It is owned by the government and falls under Public Enterprises Minister Malusi Gigaba’s purview.

The group reported a net profit of R71?million in the year to March 2013, its second year of profitability – a far cry from the R377.5?million in losses it made in 2004, when it announced plans to restructure its operations and embark on a turn­around strategy. The majority of these operations had been making a loss since Denel was unbundled from Armscor in 1992.

During its 2005/06 financial year, Denel asked for a capital injection of R5.3?billion from the government to help implement its turnaround strategy.

To date, R4.2?billion has been granted.

Fellow state-owned entity SAA has, in comparison, received about R16?billion in ­bailouts and has commissioned nine turnaround strategies over the years with not much to show for it.

Last month, the airline reported R1.17?billion in losses.

Fikile Mhlontlo, Denel’s group financial director, said Denel started experiencing serious financial underperformance caused by a sharp decline in orders in 2000. “That placed the company in a bit of a crunch,” he said.

“That difficult time hasn’t been experienced in Denel SA only. Other defence companies around the world also went through the same difficulties following the end of the Cold War.”

This saw Denel enter into strategic partnerships with other players in the industry, including Germany’s Rheinmetall and Carl Zeiss Optronics (renamed Cassidian Optronics), the French Safran group and Swedish defence group Saab.

These partnerships helped Denel to bolster exports, which now contribute to half the group’s revenue.

Mhlontlo said Denel also bolstered its leadership team, sold off noncore businesses and streamlined its support services function.

Mhlontlo said the strategy was mostly driven by the chief executive’s office and by Denel’s management team.

“It was either we turnaround or die. There was nothing in-between,” he said.

Now Denel is on a growth trajectory. Its bosses have committed to growing revenue to more than R7?billion in the next five years, and to creating a long-term order book of more than five times turnover.

Although Mhlontlo declined to name names, the group has managed to attract big clients, mostly governments around the world.

But all sales have to be approved by the National Conventional Arms Control Committee – a section of Cabinet that ensures arms trade and transfer policies conform to international standards. Mhlontlo said the committee takes a number of factors into consideration before allowing the sales, such as the nation’s stability and diplomatic relationship with South Africa.

Denel is also working on broadening its strategic focus from the defence industry, and is homing in on humanitarian services and technology development.

“We are a hi-tech company,” said Mhlontlo.

“We’re investing heavily in research and development.”

Denel chief executive Riaz Saloojee previously told Parliament that the company was investing more than R500?million a year in this area, with a specific focus on the production of artillery and ammunition. Mhlontlo said Denel would also like to see its capabilities used in more commercial areas that were complementary to its service base.

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