Publication: Business Day Issued: Date: 2007-10-30 Reporter: Linda Ensor

Denel CEO Warns of Munitions Blowout

 

Publication 

Business Day
Date 2007-10-30
Reporter Linda Ensor

Web Link

www.businessday.co.za

 

Cape Town ­ Denel’s munitions business was likely to be insolvent *1 by the end of the financial year if nothing was done to salvage it, group CEO Shaun Liebenberg has warned.

The munitions business is the largest single division in the group and contributed a third (R1,1bn) to Denel’s total turnover of R3,3bn in the year to end-March. It employs about 3100 of the group’s 7634 employees.

Denel Munitions designs and manufactures small, medium and large-calibre ammunition and ammunition factories.

Liebenberg told Parliament’s public enterprises committee last week the munitions business had to generate R1,2bn in orders to break even, but was far short of this. Orders from the South African National Defence Force came to only about R120m *2 and there was some uncertainty about further orders.

“Export orders are inconsistent and have a low to negative margin,” Liebenberg said. “This business is likely to become insolvent by the end of the current financial year if the alternatives proposed are not implemented.”

A proposal for an equity transaction for Denel Munitions had been approved by the Denel board. Discussions were being held in this regard with a big European company. Denel was also seeking equity partnerships for its other businesses in order to bring global expertise, market access and research and development input to them.

Liebenberg hinted at a possible split of the small and medium-calibre operation from the rest of Denel Munitions. The business would focus on foreign niche markets for innovative products.

Liebenberg said Denel Dynamics’ missile business would be insolvent *1 by the financial year-end unless solutions were found to its problems. Central to these was its inability to achieve sufficient sales to cover overheads in the short to medium term.

Regarding the group as a whole, Liebenberg said the five-year turnaround strategy was on track after the first two years. Provided all the restructuring plans were implemented, he was confident Denel would be financially viable on a sustainable basis within 24 to 36 months.

“The ability of the group to continue as a going concern is dependent on the successful implementation of the business strategy.” He said the government ­ which has pumped in R3,5bn to recapitalise Denel ­ was committed to support the company as a going concern.

In the year to end-March, Denel posted a net loss of R549m, compared with the previous year’s loss of R1,36bn.

The disposal of five noncore businesses was at an advanced stage, and six had already been sold. Total noncore asset sales have so far generated R606m.

Liebenberg told the committee the focus on forward sales was starting to bear fruit, and relationships with stakeholders were improving. However, the unbundling of Armscor could affect this momentum. The lack of “visibility” of the procurement budgets of the defence department and Armscor undermined Denel’s ability to plan its business.

Liebenberg said the South African Air Force would have to make a strategic decision on the future of the Rooivalk in the light of its potential obsolescence and redundancy, and its funding requirements over the long term.

With acknowledgements to Linda Ensor and Business Day.


*1       So much for the Minister of Defence's undertaking to support the local defence industry, of which Denel is the main player.

Me think thee speaks with two tongues.

Either the government wants a strategic local defence industry, which it says it does, or it doesn't.


*2      A strategic defence industry cannot survive on sales of R120 million per year.


The government spent R60 billion in 2007 Rands on the Arms Deal and committed the country to a further R500 billion to R900 billion in 2007 Rands (yes - billions) over the next 30 years in equipment lifecycle costs.

Yet it can only order R120 million of ammunition per year for all three combat services (Project Coast is fortunately over so the SA Medical Services doesn't require funding for ammunition).

It doesn't feel to me like the new political elite quite considered the Defence Review report which came out in 1997 after a two year investigation period and included a whole chapter on the defence-related industry.

All these turkeys saw were the golden eggs of plump tax-fed geese as they chanted :
" One for you, one for me and one for the ANC"
as they slaughtered the majestic birds on the alters on Graft, Enrichment And Retribution *3 *4.


*3      Including an over two-thirds political majority and insuperable grip on political power in our lifetimes.


*4      GEAR ™.