Denel CFO Carmen Le Grange has identified the businesses that the State-owned defence group was exiting or was planning to exit, as part of its turnaround strategy. She did so in an address to the recent 2019 Aerospace, Maritime and Defence Conference, in Pretoria.

The turnaround plan had ten elements, namely to maximise the business value of the core businesses; maintain and expand strategic partnerships; exit noncore businesses; improve governance; drive cost reductions; optimise the property portfolio (Denel has a lot of property but was not in the property business); secure funding; ensure skills and capability management; improve the group’s order intake; and restore the Denel brand and employee morale and loyalty.

She first listed the sectors that the new management had identified as core capabilities for the group. These were missiles and precision-guided munitions, artillery systems, infantry systems, system integration and cyber. Almost as important and needing to be retained were the Overberg test range and Denel’s shareholding in Rheinmetall Denel Munition.

To be exited were the aerostructures business (part of Denel Aeronautics); the foundry (part of Denel PMP); Gear Ratio (producer of automotive equipment and locomotive drivelines and part of Denel Vehicle Systems); Denel Sovereign Security Solutions; Mechem (mine clearance); Spaceteq (satellites and satellite systems, part of Denel Dynamics); protected vehicles manufacturer LMT (which had gone into business rescue); and Densecure (an insurance captive). Additionally, Denel would dispose of its 30% shareholding in Hensoldt Optronics (part of Hensoldt South Africa). Group management thought they could generate cash of about R1.56-billion by exiting these businesses.

Regarding all Denel activities and units listed neither as core nor noncore, the group would seek strategic equity partners. Strategic equity partnerships depended on shareholder (that is, government) approval.

Denel had certain requirements that such strategic equity partners had to meet – they had to commit to investing capital into the business; to be able to improve access to markets; to be able to add expertise and technology to the business; to be able to protect the existing jobs and, preferably, increase local employment; and to guarantee to maintain indigenous capabilities in South Africa. The group had already received 40 expressions of interest to partner with it in these businesses.

Le Grange reported that the order intake for 2019/20 had so far reached R7.8-billion, up from only R509-million in the 2018/19 financial year. Denel had a “solid” order backlog of R17.4-billion, covering about four years of sales revenues. It had received its largest ever order, worth R6.3-billion. Operating costs had been cut by R500-million, and management hoped to further cut these by another R500-million. Its liquidity crisis had been significantly eased by the State providing R1.8-billion in recapitalisation funding. The group, she assured, was paying its taxes and paying its employees.

“We are moving towards a Denel of the future,” said Le Grange. “Denel is expanding beyond defence into a broader technology clearing house, especially in the digital space and cyber. “We believe we’ve made significant progress in strengthening governance. We’re introducing strategic equity partnerships and private-sector involvement in our noncore businesses, subject to shareholder approval.”