/ 14 November 2005

Denel posts R1,6bn loss

Parastatal arms manufacturer Denel on Monday posted a R1,6-billion loss for the financial year ended March 31.

”As Denel’s chief executive Shaun Liebenberg revealed in Parliament last month, the group posted an after-tax loss of R1 604,4-million (2004: R377,5-million loss) on gross revenues of R3 784,2-million (2004: R4 442,2-million). This was announced at its annual general meeting in Pretoria today,” Denel said in a statement.

Although Denel anticipated the red ink, preliminary figures earlier in the year indicated a much smaller loss.

Liebenberg informed the public-enterprises portfolio committee on October 18 that certain impairments, contract risk and performance guarantee provisions, as well as provisions for retrenchments, pensions and litigation, further impacted on the results.

Contributors to the adverse financial performance were mainly failure to achieve sales targets, increase in provisions for postponement or cancellation of major contracts, and the adverse impact of the exchange rate.

With local military sales accounting for 30% of total sales, Denel derived about 55% from exports.

The rand strengthened by 12,2% against the dollar in the year under review.

Included in the contract risk provision is an amount of R679,8-million in respect of loss on the Rooivalk attack helicopter programme.

This amount represents estimated costs to complete outstanding work on the programme for which Denel’s external auditors required an independent assessment on the reasonableness and completeness of these estimates.

Lacking such expert services to assist the auditors resulted in a limited qualified audit opinion.

Denel’s board approved the adoption of the going concern basis in preparation of the annual financial statements, despite Denel posting consistent losses over the past number of years.

The board took the following factors into consideration:

  • The group has started to implement its new macro strategy focused on core business that will strengthen the balance sheet, establish overall profitability and ensure stability;
  • The shareholder’s (South African government) view of the group as a strategic asset and its written undertaking to preserve its going concern status;
  • In addition, the shareholder has given guarantees to Denel’s bankers amounting to R1 515-million to fund operations until March 31 2006.

”The board believes there are adequate funding facilities to meet the group’s immediate future obligations,” Denel said in a statement released after the annual general meeting.

In thanking the board, Minister of Public Enterprises Alec Erwin expressed his confidence that Denel is being positioned for a turnaround within the next three to five years.

”There is wide acceptance of the strategic proposals which, although some refinements still need to be made, will create a focused and viable enterprise to serve the South African and worldwide market,” he said.

Denel’s strategy is to focus on the manufacture and supply of specialised subsystems and key components to major global prime contractors in the aerospace and defence-related fields.

The group will actively seek strategic alliances and partnerships with local and global defence players.

The highly complex industry in which Denel operates is characterised by global consolidation where a small number of large companies in the developed world, supported largely by their governments and defence forces, dominate the market. In light of this reality, Denel’s five-point macro strategy is based on:

  • securing privileged access to a guaranteed minimum proportion of South Africa’s defence development and procurement spend;
  • partnering with state agencies for the purpose of joint business planning and expert marketing responsibilities;
  • focusing on growing the commercially viable businesses where Denel has real technological leadership, while ring-fencing the other businesses or operating them under management contracts;
  • securing the necessary scale through a number of equity business partnerships with major global players; and
  • raising capabilities and productivity to world-class levels and exiting those businesses where this cannot be achieved.

”Denel’s capability to galvanise advanced technologies and manufacturing gives me comfort that it can play an important role in the provision of defence and security equipment for the SANDF [South African National Defence Force], particularly that which would enhance South Africa’s peacekeeping capacity in Africa,” Erwin said. — Sapa