Centurion – State-owned enterprise Denel reported positive results for the 2015/2016 financial year on Tuesday. However, the defence company believes there is room to improve its liquidity and has plans to improve its debt equity ratio in the next five years.
Speaking at the results announcement at the head office in Centurion, Denel acting CEO, Zwelakhe Ntshepe, explained that the second largest defence company on the continent will be focusing on achieving sustainable growth for the future.
“Denels’ revenue has grown by 41% to R8.228bn, which was attributed to a 6% surge in exports which account for 58% of revenue,” he said. The company achieved a net profit of R395m, an increase from R125m on the previous year. However the debt to equity ratio at 1.6 is not at “acceptable levels”.
The company’s equity position is at R2 321m, and borrowings increased by R1 559m to R3 717m. Odwa Mhlwana, acting group financial director, said that the business’ turnover had grown in excess of 25% per annum over the past five years. “This growth comes with the huge expectation of funding of working capital to support it,” he said.
Borrowings had grown “substantially” to support growth. The SOE will be looking to change its “contracting mechanism” with other SOEs, namely Armscor, explained Mhlwana. “We need a different way to contract in a way that seeks to create a space for Denel to grow.”
The company’s cash position reflects an excess of R2bn. “But a big portion of the cash is ring-fenced and not accessible to the business.” This ties in with negotiations with Armscor. “We must find a different way to contract between entities to efficiently use cash resources,” he explained.
The business will also look at improving efficiencies for better profitability levels, he explained. Operating expenditure was reported at 15%, coming down from 16% in the previous year. “We are not satisfied. We must increase the profitability to support the debt equity ratio,” he said.
Denel expects that the debt position of the business will change in the next two years and within the next five years the business’ position will be at levels that are more “comfortable”, he added.
Among strategies to drive sustainability, Ntshepe said the company will focus on increasing its order book. Last year’s records show levels were worth R35bn, and this year it dropped to R29bn. “We have the ability to continue for the next four years without worrying if we have the top line to execute it,” said Mhlwana. But there are plans to improve the number of deals signed in the next few years.
The company is looking to increase operations within external markets. Mhlwana explained that instead of selling defence articles from “homebase” there will be knowledge sharing through joint ventures and partnerships in other countries where products will be manufactured.
“Strategic partnerships in the markets we operate in will yield results for the benefit of the business,” he said. These markets include the Middle East and Asia Pacific.
“Asia is a critical market for growth… It is the biggest market outside the US in terms of defence spending,” he added.
Referring to reports about Denel Asia, Mhlwana said: “The issue is closed”. After conducting analysis of the process, Mhlwana said shareholders agreed that the company had done nothing wrong.
Read Fin24's top stories trending on Twitter: