Denel contemplates selling divisions to turn profitable

South African state-owned defence group Denel could sell stakes in some divisions as part of a new strategy to return to profitability within two years, its chief executive said on Tuesday.

The company has also asked the government for financial support to help underpin a strategy its board approved last week, Daniel du Toit told Reuters in an interview.

The strategy includes seeking equity partners in some of its core divisions, although a stake in the group is not for sale. It could also sell manufacturing and technology licenses.

“We are the custodians of a sovereign and a strategic capability on behalf of the government and we will not dilute it or let it go,” du Toit said at the IDEX military exhibition in Abu Dhabi.

Denel, a cornerstone of South Africa’s once-mighty defence industry, has been plagued by years of mismanagement. Du Toit was named as new chief executive in December as the government tries to turn around the cash-strapped company.

Du Toit said he was not aware of an offer by Saudi Arabia.

Saudi Arabian Military Industries (SAMI) CEO Andreas Schwer said this week the state-owned defence firm was in talks to invest in several South African companies but it had not made a formal decision.

As part of the new strategy, Denel plans to shutter some operations where there is duplication or it is cheaper to buy the service from a third party. Affected employees would be retrained so they could move to other parts of the company.

One operation likely to be cut is the manufacturing of ammunition cartridges which du Toit said could save the company 40-50 million rand.

Denel believes it could win 21 billion rand ($1.5 billion) in contracts in the next six months and another 19 billion rand in the following 6-9 months, mostly in the Middle East and North Africa.

Du Toit said that the company could be generating 8 billion rand in revenue in three to four years time, up from around 3 billion rand today, based on the new strategy.

Denel has also started talks with existing customers to cancel or renegotiate “onerous” contracts. Du Toit did not disclose which contracts the company is looking at.

“I am trying to clean up as soon as possible. I don’t want to take any of these things into the future,” he said .
Denel expects to find out whether the government will give it a capital injection and access to additional facilities when the budget is announced on Wednesday.

However, the cash-strapped company is not relying on the injection and would be able to continue if he does not receive the assistance it asked for, du Toit said.