Sponsored by TCI International Inc.
03 Mar 22. AeroVironment, Inc. Announces Fiscal 2022 Third Quarter Results. AeroVironment, Inc. (NASDAQ: AVAV), a global leader in intelligent, multi-domain robotic systems, today reported financial results for its fiscal third quarter ended January 29, 2022.
“The Company continued to face several challenges during the third quarter, particularly in terms of supply chain constraints, the ongoing effects from the federal government’s Continuing Resolution, and a tight labor market,” said Wahid Nawabi, AeroVironment chairman, president and chief executive officer. “However, these issues were anticipated, and we made measurable progress in addressing and mitigating such headwinds going forward. The Company’s results were largely in line with our forecast, although certain work was pushed into the fourth quarter, and we are maintaining our guidance for fiscal year 2022.
“We’re actively taking steps to reduce costs, manage working capital, and increase operational efficiency during this challenging operating environment. This includes partnering with suppliers to improve delivery times, consolidating our facilities footprint, and streamlining our workforce. While such actions, in the near term, negatively impact both margins and working capital, they improve product throughput and overall customer satisfaction while positioning us for future success.
“We’re pleased with our solid backlog as well as the many opportunities which lie ahead for AeroVironment. Our focus on winning the US Army’s Future Tactical UAS – FTUAS – Increment 1 serves as the proving ground for our Medium UAS systems which, if all goes well, could lead to significant contracts in the quarters to come. Given this opportunity, and expanding demand from overseas customers, I believe the Company is on the right path for better results in fiscal 2023 – including increased margins, stronger organic growth, and higher cash flow. We’re investing in leading-edge technologies that will provide for years of solid performance and the returns our investors have come to expect.”
FISCAL 2022 THIRD QUARTER RESULTS
Revenue for the third quarter of fiscal 2022 was $90.1m, an increase of 14% from the third quarter of fiscal 2021 revenue of $78.8m. The increase in revenue reflects higher service revenue of $27.1m, partially offset by a decrease in product sales of $15.7 m. The increase in revenue was primarily due to revenue from the Medium Unmanned Aircraft Systems (“MUAS”) segment of $21.2m and the Unmanned Ground Vehicles product line of $9.6m, as a result of our acquisitions of Arcturus UAV (“Arcturus”) and Telerob GmbH (“Telerob”) in February and May 2021, respectively, and an increase in customer-funded research and development revenue of $7.7m. These increases were partially offset by a decrease in revenue in the Small Unmanned Aircraft Systems (“Small UAS”) segment of $26.2m.
Gross margin for the third quarter of fiscal 2022 was $21.4m, a decrease of 25% from the third quarter of fiscal 2021 gross margin of $28.6m. The decrease in gross margin reflects lower product margin of $9.3m, partially offset by higher service margin of $2.1m. As a percentage of revenue, gross margin decreased to 24% from 36%. Gross margin was negatively impacted by $5.1m of intangible amortization expense and other related non-cash purchase accounting expenses in the third quarter of fiscal 2022 as compared to $0.6m in the third quarter of fiscal 2021. With the acquisitions of Arcturus and the Intelligent Systems Group of Progeny Systems Corp. (“ISG”), we experienced a higher proportion of service revenue, which generally has lower gross margins than product sales.
Loss from operations for the third quarter of fiscal 2022 was $14.1m, an increase of $13.5m from the third quarter of fiscal 2021 loss from operations of $0.6m. The increase in loss from operations was primarily the result of a decrease in gross margin of $7.2m and an increase in selling, general and administrative (“SG&A”) expense of $6.9m, partially offset by a decrease in research and development (“R&D”) expense of $0.6m. SG&A expense included acquisition-related expenses and intangible amortization expense of $4.8 m in the third quarter of fiscal 2022 as compared to $3.5m in the third quarter of fiscal 2021. SG&A expense in the current quarter also included additional headcount and support costs associated with the acquisitions of Arcturus, ISG and Telerob.
Other expense, net, for the third quarter of fiscal 2022 was $1.5m, as compared to other income, net of $0.1 m for the third quarter of fiscal 2021. The increase in other expense, net was primarily due to higher interest expense of $1.5m resulting from the term debt issued concurrent with the acquisition of Arcturus.
Benefit from income taxes for the third quarter of fiscal 2022 was $15.4m, as compared to $0.9 m for the third quarter of fiscal 2021. The increase in benefit from income taxes was primarily due to the decrease in income before income taxes and an increase in certain federal income tax credits.
Equity method investment income, net of tax, for the third quarter of fiscal 2022 was $0.2m, as compared to equity method investment loss, net of tax of $0.1m for the third quarter of fiscal 2021.
Net income attributable to AeroVironment for the third quarter of fiscal 2022 was $10 thousand, or $0 per diluted share, as compared to $0.2m, or $0.01 per diluted share, for the third quarter of fiscal 2021.
Non-GAAP earnings per diluted share was $0.32 for the third quarter of fiscal 2022, as compared to $0.14 for the third quarter of fiscal 2021.
As of January 29, 2022, funded backlog (remaining performance obligations under firm orders for which funding is currently appropriated to us under a customer contract) was $226.3m, as compared to $211.8m as of April 30, 2021.
FISCAL 2022 — REVISED OUTLOOK FOR THE FULL YEAR (UNCHANGED)
For the fiscal year 2022, the Company continues to expect revenue of between $440m and $460m, net loss of between $12m and $8m, Non-GAAP adjusted EBITDA of between $59m and $65 m, loss per diluted share of between $(0.47) and $(0.33) and non-GAAP earnings per diluted share, which excludes litigation settlement expenses, acquisition-related expenses and amortization of intangible assets, of between $1.23 and $1.37.
The foregoing estimates are forward-looking and reflect management’s view of current and future market conditions, subject to certain risks and uncertainties, and including certain assumptions with respect to our ability to efficiently and on a timely basis integrate our acquisitions, obtain and retain government contracts, changes in the timing and/or amount of government spending, changes in the demand for our products and services, activities of competitors, changes in the regulatory environment, and general economic and business conditions in the United States and elsewhere in the world. Investors are reminded that actual results may differ materially from these estimates. (Source: BUSINESS WIRE)
03 Mar 22. Melrose holds on to its money. Shares hit by company’s decision to preserve cash.
- Disposals bring in £2.7bn
- Net debt drops by £1.9bn to £950mn
Melrose Industries (MRO) has made its name buying and turning around engineering businesses, earning big returns for its shareholders in the process.
Its largest deal to date, the £8bn acquisition of GKN almost four years ago, has been an uphill struggle from the start, given the opposition to the deal from unions and politicians who accused it of looking to strip the target of its assets.
The fact that GKN’s two main business lines are supplying an aerospace industry that has been battered by the pandemic and an automotive sector struggling to make enough cars due to chip shortages clearly haven’t helped.
Add to this the developing situation in Ukraine, which doesn’t affect the company directly, but causes more disruption for its car making customers, and the timing hasn’t been ideal.
Yet, while there are still questions in terms of the pace of recovery on revenue, chief operating officer Peter Dilnot said the company has focused “on the things we can control” and is confident of delivering its objective of generating a 12 per cent operating margin.
Its restructuring of the automotive business should complete this year and it is now in full swing in terms of reshaping the aerospace division, which involves exiting a group of lossmaking defence businesses in the US. This should conclude next year.
A £451mn operating loss last year includes a £452mn amortisation charge against acquired intangible assets and £269mn of restructuring costs. If these and other charges are discounted, its operating profit more than doubled to £375mn, the company said.
A less disputable improvement was made in its cash position, which benefited from disposals of businesses acquired during previous turnarounds. These brought in £2.7bn, meaning that even after returning £729mn to investors in September, net debt dropped by £1.9bn to £950m. The company increased its dividend and had flagged to investors that it planned to return even more cash if conditions allowed but it has now put the brakes on this plan.
“We were lined up to do it and we can afford to do it, the issue is a macro one,” Dilnot said. “If things [in Ukraine] do escalate beyond where they are today it would seem, in retrospect, foolish to have re-levered our balance sheet.”
Investors were clearly disappointed, with the company’s shares plunging 8 per cent in early trading before pulling back.
They are currently trading at about 18 times Broker Investec’s adjusted earnings per share forecast of 7.6p, in line with their five-year average. A recovery either in aviation or the automotive sectors is by no means guaranteed, but demand is strong in both markets and Melrose is in a better place to benefit once revenues recover. We maintain our buy stance. Last IC View: Buy, 183p, 2 Sep 2021. (Source: Investors Chronicle)
03 Mar 22. French company Thales’ annual core profits rise 32%. Thales posted a 32% rise in operating income and record cashflow, as Europe’s largest defence electronics company swung back into the black in its aerospace business and saw higher margins in digital security.
The French company said its 2021 operating profit rose to 1.649bn euros ($1.83bn), on sales of 16.2bn, up 5.3%. New orders of 19.9bn euros outstripped sales and Thales said it expected this to happen again in 2022. Targets for this year also include a further rise in sales to 16.6-17.2bn euros and a higher operating margin of 10.8-11.1% compared with 10.2% in 2021.
Chief Executive Patrice Caine told reporters the company remained interested in bolt-on acquisitions across its three core areas of aerospace, defence & security, and digital identity & security.
In practice, this means potential deals worth up to 500m euros in enterprise value, he said.
Thales said last month it was potentially interested in acquiring any cybersecurity asset that could be for sale.
Thales reported free cashflow of 2.515 bn euros in 2021 and raised its forecast to 5.5bn euros for 2021-23. It also raised its dividend 45% to 2.5 euros a share. ($1 = 0.9007 euros) (Source: Reuters)
04 Mar 22. France’s Dassault Aviation said on Friday it expected to post lower sales this year than in 2021, as it reported a steep rise in annual earnings fuelled by higher deliveries of its warplanes. The maker of Rafale fighter jets saw its operating income more than double to 527m euros ($580.33m) from 261m in 2020, while net sales climbed to 7.23bn euros from 5.49bn the previous year. Chief Executive Eric Trappier said 2021 had been an “exceptional” year for Dassault’s order intake, though the period had been marked by inflation and supply chain disruptions. Dassault said its order intake jumped to 12.1 billion euros last year, including previously reported orders for 51 Falcon business jets and 49 Rafales, of which 37 were for export. Defence intake fuelled the jump, accounting for some 9.2bn euros of order intake, up from 1.5bn in 2020. Dassault had already reported 30 Falcon deliveries in 2021, down from 34 in 2020, and 25 Export Rafales, up from 13. The group expects to deliver 13 Rafale and 35 Falcon jets in 2022. Dassault noted that no agreement had yet been reached with Airbus (AIR.PA) on the next phase, 1B, of the Franco-German-Spanish fighter project known as FCAS. Dassault’s objective is to make a decision on the next-generation manned and unmanned future combat system this year, it added in the results statement. The value of Dassault’s stock has soared by nearly a fifth since Russia launched its invasion of Ukraine nine days ago, as investors bet on bigger military budgets and Germany pledged to spend more than 2% of the country’s GDP on defence. Dassault’s shares were up around 2% in early trading in Paris. The group proposed a dividend of 2.49 euros per share. ($1 = 0.9081 euros) (Source: Reuters)
03 Mar 22. UK’s Meggitt flags possible write down from Russian aircraft program. British aircraft parts maker Meggitt Plc flagged a possible “material” write down on a Russian aircraft program in the next 12 months on Thursday amid the Ukraine crisis, after posting a lower annual profit hit by supply disruptions. The company, a component supplier for aircraft makers including Boeing (BA.N) and Airbus (AIR.PA), has been trying to mitigate supply chain disruptions, curtail lead times and look for alternatives for electronic parts due to pandemic-related hindrances.
“As we look ahead, and notwithstanding that the recovery in civil aerospace is likely to remain uneven in the short-term, the outlook and long-term fundamentals for our civil aerospace business remain positive,” Chief Executive Officer Tony Wood said.
Meggitt is one of the suppliers to Russia-based Irkut’s (IRKT.MM) MC-21 aircraft development programme, which is due to enter service this year. Irkut’s parent firm United Aircraft Corporation is majority owned by Rostec, Russia’s state aerospace and defence conglomerate.
Senior Plc , which supplies cabin air circulation systems for the MC-21, also said earlier this week that the Ukraine-Russia crisis could affect sales to that programme.
Another British aerospace supplier Melrose separately said on Thursday that it was reviewing the timing of its returns to shareholders as global markets reel from the impact of Russia’s invasion of Ukraine.
Meggitt said underlying operating profit was 177.3m pounds ($237.62m) for the year ending Dec. 31, compared with 190.5m pounds a year earlier.
Meggitt, which also supplies wheel and brake systems for military fighter programmes, said its 6.3 billion pound deal with U.S. peer Parker-Hannifin (PH.N) was on track to close in the third quarter of this year.
The company’s takeover by Parker-Hannifin is still under the regulatory scanner, with Britain probing the transaction over national security concerns. ($1 = 0.7462 pounds) (Source: Reuters)
03 Mar 22. Melrose Industries PLC today announces its audited results for the year ended 31 December 2021.
- The results are ahead of expectations with better cash generation and a bigger reduction in net debt1 and leverage1
- At constant currency, despite global supply challenges, sales were up 2% year on year and, notably, Group adjusted1 operating profit tripled to £375m, showing the substantial benefit of restructuring actions increasingly coming through
- The Group statutory operating loss was £451m; of the £826m adjusting items, only £200m were cash items, almost all relating to restructuring projects
- All businesses returned to growth, with further benefits coming from restructuring actions. The Melrose businesses are actively working to mitigate the current inflationary pressures through all necessary means and remain fully committed to achieving their previously stated operating margin targets
- Melrose generated free cash flow1 of £125m in the year, prior to disposal proceeds, with net debt1 reduced to £0.95bn and leverage1 to 1.3x adjusted1 All businesses continued to be cash positive, therefore fully funding all their improvement and restructuring costs, with their cash generation qualities transformed since acquisition
- Working capital in the GKN businesses has reduced to 3% of sales from 5% at the GKN acquisition, with further opportunities existing to improve Aerospace inventory levels
- Ahead of plan, the opening net debt1of £3.4bn at the GKN acquisition has been fully repaid in less than four years, save cash returned to shareholders over the period, helping to protect shareholder value and de-risking the GKN transformation during some of the most challenging trading conditions
- The GKN UK pension schemes are now in surplus helped by £1 in every £3 of free cash flow1 since acquisition being paid into the Group’s pension schemes, thereby freeing up more free cash flow1 in the future
- Melrose has improved its ESG positioning and reporting in the year, including highlighting the substantial benefits delivered by its proprietary sustainable technology. A new stand-alone Melrose Sustainability Report will be published, for the first time, alongside the 2021 Annual Report
- A final dividend of 1.0 pence per share is proposed, up by one third on last year, giving a full year dividend of 1.75 pence per share
- Aerospace has seen adjusted1 operating margins improve by c.4 percentage points and growth return with sales in the second half of 2021 up 18%2 on 2020. Under new leadership, it has materially advanced the restructuring of its cost base and operations, with all required significant restructuring projects now underway
- The underlying qualities of the Aerospace businesses are being improved including the accelerated development of new sustainable technologies. The Group will also benefit from exceptionally strong long-term future cash flows in Engines. An Aerospace Investor Day is to be held on 8 June 2022 to explain its exciting full shareholder value potential
- Automotive ended the year positively with 2021 fourth quarter sales up 12% on the third quarter, being almost back to levels seen in the first half of the year. Sales in early 2022 have started similarly positively, consistent with the most recent industry data
- Powder Metallurgy sales volume grew at more than double the rate of growth in car production in 2021 due to continued significant market share gains
- In 2021, adjusted1 operating margins in both Automotive and Powder Metallurgy more than doubled despite the well-publicised supply challenges. During 2022, the full run rate benefits from the required restructuring projects in Automotive and Powder Metallurgy will materialise giving the opportunity to realise this shareholder value
- Life of programme business wins of c.£5bn in Automotive in 2021, of which more than one third are for pure electric vehicles (BEV), confirm that Automotive is both gaining market share and keeping pace with the faster than expected market conversion to electric vehicles. Importantly, these share gains are being achieved at terms consistent with its higher margin target
- Ergotron is running efficiently, making 25% adjusted1 operating margins
- The new Hydrogen technology business, which has been separated from Powder Metallurgy, has a dedicated new CEO and management team and is positioned to achieve its first sales this year
Justin Dowley, Chairman of Melrose Industries PLC, said: “We have realised gains for shareholders by doubling the value of Nortek and significantly outperforming all Group cash generation targets, which has de-risked the route to value realisation from GKN. We have transformed the GKN businesses to increase their full potential including investing in sustainable technology and properly funding their pension schemes. With the benefits of significant restructuring increasingly coming through, combined with the strong cash generation, Melrose is positioned to create, and realise, significant value for shareholders.”
03 Mar 22. Chemring issues the following update announcement on trading in the period from 1 November 2021 to 25 February 2022, to coincide with the Company’s Annual General Meeting taking place later today.
Current trading and outlook
Both sectors have performed well since the start of the current financial year, in line with management expectations. Due to recent positive order intake, including Roke’s award of an £8m contract to supply electronic warfare (“EW”) equipment to the Swedish Ministry of Defence which is expected to be partially delivered in FY22, the Board now expects the financial results for the current year to be slightly ahead of the current consensus of analyst expectations.*
The Group continues to successfully manage the ongoing post-COVID-19 challenges with its supply chain, labour availability and other inflationary pressures. The Group has worked to pass through costs and to generate additional operational efficiencies, and as such does not expect there to be any material short-term financial impacts.
Net debt at 25 February 2022 was £28.4m (28 February 2021: £51.0m) as strong operating cash conversion continues to fund investment in capital expenditure. We expect to reduce net debt further by the year end.
Our strong balance sheet has allowed the Group to increase organic investment and returns to shareholders while continuing to search for high quality, complementary acquisitions similar to Cubica, which continues to perform well. The Group’s acquisition pipeline remains healthy.
Having started the financial year with order cover of 84% our expected FY22 revenue is now 89% (2021: 89%) covered by revenue in the period to date and the current order book, split 99% (2021: 94%) in Countermeasures & Energetics and 73% (2021: 79%) in Sensors & Information. The order book stood at £476m at 25 February 2022 (2021: £481m).
In the Sensors & Information sector, Roke has continued its positive momentum into FY22. Order intake has been strong with notable highlights during the period being the renewal of its largest UK framework contract for the next three years with an expected value of c£20m per annum, which represents growth of 40% over the average of the last three years.
As noted above, Roke also secured a further sale of EW equipment into Sweden with the award of a contract by the Defence Materiel Administration (“FMV”) of the Swedish Ministry of Defence, to provide advanced EW equipment to meet a number of Swedish Armed Forces requirements. All Roke EW systems now feature a common operations and planning software suite, designed to maximise operator effectiveness and deliver enhanced situational awareness, and this order demonstrates the strong market demand for Cyber and Electromagnetic Activities (“CEMA”) capabilities.
In the Countermeasures & Energetics sector, Chemring Countermeasures USA (“CCM USA”) has been awarded an initial delivery order valued at US$16.8m for the supply of MJU-75/B infrared countermeasures. This award was made under a five-year split award IDIQ with total contract value of up to US$250m. Deliveries for this initial contract will be made in FY22 and FY23 with all work completed at CCM USA’s new fully-automated manufacturing facility in Toone, Tennessee. Characterisation and testing activity continues and we remain on track to generate revenue from the new facility in the second half of the current financial year.
Interim results date
The Group will report its interim results for the six months ended 30 April 2022 on 8 June 2022.
03 Mar 22. “Overlooked” defence shares rally on higher spending prospects.
Pressure builds on Nato countries to meet spending commitments as expert forecasts a new “militarised border” through the middle of Europe and ESG thinking shifts
- US currently accounts for 70 per cent of Nato’s $1.17tn expenditure
- Spending by European nations to meet target needs to increase by $73bn
Defence shares soared this week as investors began to realise that however the war in Ukraine ends, the need for European nations to spend more on strengthening their borders has become self-evident. Following the invasion, there have even been calls for ESG funds to stop screening out weapons makers, although some in the sector have pushed back forcefully on this.
“I think we’re going to end up with a militarised border down the middle of Europe again. We haven’t seen that for a long, long time,” said Kim Catechis, an investment strategist at Franklin Templeton Institute.
“The peace dividend that Europe has enjoyed looks like it’s being reversed, at least temporarily.”
Since Russia’s invasion of Ukraine last Thursday, shares in UK defence companies have soared. BAE Systems (BA) and Chemring (CHG) have jumped by 23 per cent and Avon Protection (AVON) by 22 per cent. Other defence-related companies such as Cohort (CHRT), Qinetiq (QQ) and Babcock (BAB) have all made double-digit gains.
One key catalyst for the re-rating was German chancellor Olaf Schulz’s announcement on Sunday (see boxout) that the country would raise defence spending above the 2 per cent threshold that members of the North Atlantic Treaty Organisation (Nato) commit to spend, but which few actually meet.
The last time Germany reached the 2 per cent threshold “was in 1989-90, which is when the Berlin Wall was falling”, Catechis said. It spent an estimated 1.5 per cent of GDP on defence last year, according to investment bank Jefferies. Other European giants were even bigger laggards – Italy spent 1.4 per cent while Spain, which only managed 1 per cent.
The US still does most of Nato’s heavy lifting, coughing up around 70 per cent of the organisation’s expenditure of $1.17tn (£880bn).
Former US president Donald Trump “was constantly going on at Nato members to pay their dues and he was pretty much ignored”, said David Morrison, senior markets analyst at brokerage Trade Nation.
“[Now] I think the situation really has changed. They can’t, in all consciousness with what’s going on in Europe now, not be seen to be putting in the very basic commitment.”
If European Nato members increase spending to meet the 2 per cent threshold, analysts at Berenberg believe spending would increase by $73bn. This equates to a 7 per cent rise, or 23 per cent excluding US contributions.
European defence companies have posted the strongest gains, with Germany’s Rheinmetall (DE:RHM) up 58 per cent since last Wednesday’s close. Italy’s Leonardo (IT:LDO) has also gained 30 per cent and France’s Thales (FR:HO) 27 per cent. Growth in the valuations of US defence contractors Northrop Grumann (US:NOC), Lockheed Martin (US:LMT) and Raytheon has been less spectacular but are still in double-digit territory.
An overlooked industry
Russian invasion aside, shares in defence companies have been “overlooked and undervalued” for a while, said Henry Carver, an analyst at Peel Hunt.
The FTSE 350 Aerospace and Defence sub-index is up 11 per cent since the start of this year, but down 6 per cent over the past five years, according to FactSet. Followig recent gains, it now trades at 16-times forward earnings, above the broader benchmark’s 12-times.
Shares in the sector were sidelined as investors poured more money into ESG funds, which typically run negative screens to omit investments in military companies, tobacco firms and other investments that are deemed unethical.
Fund managers have found it easy to ignore shares on ESG grounds given their underperformance in recent years but this may be harder to do given their renewed growth impetus, Carver said.
Moreover, with many governments around the world sending arms to Ukraine to give the country a better chance of defending itself, Carver said there is an argument to be made that some defence stocks “should sit on the right side of ESG”.
“There’s a humanitarian rationale to equipping the right kind of military,” he said, adding that companies in the sector offer protection to people, soldiers and assets.
Swedish bank SEB this week lifted some of its restrictions on investing in defence companies, although it maintained a block on any company involved in the making of “controversial weapons”, such as anti-personnel mines, biological and chemical weapons or cluster bombs.
Whether those who invest in ESG funds would be happy to see their money buying shares in companies that make tanks or bombs is another matter, though.
While there are scenarios where it can be argued that weapons are being put to a positive use, “I think there’s still a very strong argument for exclusion” from ESG funds, said James Alexander, chief executive of the UK Sustainable Investment and Finance Association.
“If you’re a weapons manufacturer, a big part of your work is sales and you’re incentivised to get as many weapons out into the world as possible. I don’t think that’s aligned with the sort of world we want to create.”
The Great German rearmament
Germany’s approach to its defence has always been a compromise between two competing strands within its society. While the militarism associated with the old Prussia disappeared along with its name in 1945, German governments have had to carefully balance the security demands of being a member of Nato with a strong pacifist strand of public opinion, the extent of which can be quite surprising to outside observers.
Therefore, Chancellor Olaf Schulz’s extraordinary move to commit €100bn (£75bn) immediately to a special fund to upgrade the Bundeswehr is a radical departure in a country where the debate around defence is usually conducted with considerable circumspection and decision-making is done via an agonising consensus-building process.
The boost to spending in response to Russia’s aggression towards Ukraine also contains a commitment to raise spending to the Nato-recommended minimum of 2 per cent of GDP, in what is a less eye-catching but equally significant move. Based on 2021 figures, Germany’s annual defence spending would rise from €52bn to over €70bn overnight and rocket the country up the league table to the third-highest defence budget in the world. It is no wonder, then, that listed companies within the German military-industrial complex are suddenly in huge demand from investors.
Chief among the winners is the company Rheinmetall (DE: RHM), based in Düsseldorf in the Rhine valley. The company manufactures a broad range of vehicles, guns and ammunition, including the iconic Leopard tank.
The German decision follows years of deliberate under-investment in its armed forces, which resulted in many of its key weapons systems lying idle for want of spares and replacements. Upgrading the Bundeswehr won’t be cheap and replacing its worn-out equipment and rebuilding the strategic impact of its Panzer arm will be a high cost, but hugely profit task for the defence manufacturers.
Another winner was the Munich-based company Hensoldt (DE: HAG) which specialises in sensor technology, radar and electronic warfare. Even more traditional companies such as ThyssenKrupp (DE:TKA), which manufactures submarines, attracted investor interest.
Currently, Germany exports around three-quarters of its defence production, but as the Bunderwehr’s demands increase with its now hugely upgraded budget, this proportion is likely fall significantly as home demand picks up. (Source: Investors Chronicle)
03 Mar 22. Meggitt PLC (“Meggitt” or “the Group”), a leading international engineering company specialising in high performance components and sub-systems for the aerospace, defence and selected energy markets, today announces audited results for the twelve months ended 31 December 2021. CEO, Tony Wood commented: “We delivered a robust performance in 2021, during which we adapted to challenging market conditions and finished the year with a good cash performance and increasing momentum, as shown by our encouraging order intake. Throughout this period the safety of our employees and delivering for our customers remained our priorities and I would like to thank all Meggitt employees for how they rose to the challenges posed by the effects of the pandemic and supply chain disruption. As we look ahead, and notwithstanding that the recovery in civil aerospace is likely to remain uneven in the short-term, the outlook and long-term fundamentals for our civil aerospace business remain positive. As a result of our successful strategy, the work we have done to position the Group and the proposed acquisition by Parker-Hannifin, I am confident about the prospects and opportunities that lie ahead for our employees and all our other stakeholders.” Summary • Recommended all cash offer of 800 pence per share from Parker-Hannifin approved by shareholders on 21 September 2021 with the transaction expected to complete in the third quarter of 2022
- Measures maintained to ensure the well-being of our people and safe operations at all our global sites
- Group revenue 5% lower for the full year on an organic basis with 8% growth in H2 vs H2 2020 and sequential growth of 12% in H2 vs H1; Group revenue was 12% lower on a reported basis at £1,489m (2020: £1,684m)
- Civil aftermarket: organic revenue growth of 7% for the full year with 51% growth in the second half and 58% in the final quarter; strong order intake in the fourth quarter with book to bill of 1.11x for the full year (H1: 1.00x)
- Group performance reflects challenging albeit improving market conditions and global supply chain disruption with underlying operating profit 7% lower at £177m (FY 2020: £191m)
- Strong improvement in Group underlying operating margin with H2 margin of 14.3%, 520 basis points higher than H1 (9.1%)
- Statutory operating profit of £63m (FY 2020: loss of £297m) with the prior year impacted by the non-cash impairment of intangible assets and other asset write downs
- Good cash performance with free cash flow of £46m (FY 2020: £32m) and net debt in line with last year at £780m (FY 2020: £773m)
- On a covenant basis, ratios of underlying net debt:EBITDA of 1.9x and interest cover of 11.3x, well within covenant limits
- Successfully refinanced and extended maturity of Group debt with new three year $410m facility
- In line with the terms of the previously announced proposed transaction with Parker-Hannifin, the Group is not paying a final dividend for 2021
- Continued progress on key strategic initiatives: o Investment in operational capability with the completion of our new manufacturing centre of excellence at Ansty Park, UK and further investment across a number of our global sites o Good progress on development of differentiated technologies enabling the transition to net zero aviation and cleaner energy o Addition of 11 SMARTSupportTM contracts, securing further market share in the aftermarket o Continued progress on sustainability under our People, Planet and Technology framework Outlook Building on the positive momentum in 2021 and good order intake at the end of the year, the outlook for our civil aerospace business is encouraging. However, with a number of countries still experiencing high infection rates and with travel restrictions in place, forecasting the pace and trajectory of this recovery remains difficult, particularly in the shortterm. The prospects for our energy and defence end markets are expected to remain solid. Looking ahead, based on the significant progress we have made to transform the Group, our diverse end market exposure and leading market positions, we are well placed to benefit from the recovery in civil aerospace and to deliver long-term profitable growth. Since the Group is in an offer period under the UK Takeover Code, we are not providing financial guidance for 2022, nor are we able to comment on expected performance relative to any analyst forecasts that may be available.
03 Mar 22. Meggitt reveals rising book-to-bill multiple. The aviation parts manufacturer awaits the antitrust decision.
- Domestic air travel volumes up
- Order books improved through the second half
Meggitt (MGGT) expects its £6.3bn takeover by US rival Parker Hannifin will complete during the third quarter despite an ongoing competition investigation. However, given the proliferation of deals involving UK defence contractors amid a worsening global security situation, you wonder whether the government may force regulators to take a harder line. The Ukraine crisis could also have a material impact on results through 2022 due to a possible write-down on a Russian aircraft programme.
The group, a supplier of components to the aviation industry, saw 12 per cent sequential revenue growth over the two halves of 2021, with encouraging growth in aftermarket sales, although year-on-year statutory comparisons may be flattering due to the level of impairment on intangible assets in the prior year.
Parker Hannifin obviously pitched its offer during a severe downturn in Meggitt’s principal markets, but there are certainly signs that the aviation market is lumbering back into life. Available seat kilometre capacity in the domestic market was running at 85 per cent of 2019 levels during last December, although international activity is still well adrift of pre-pandemic levels. And there have been curious outcomes across civil aviation markets, with utilisation rates for business jets growing strongly through the year, as many fliers (presumably well-heeled ones) see them as a viable alternative to commercial flights. We will probably see more meaningful trends emerge over the northern hemisphere summer. For now, the health of the industry is still inextricably linked to the clinical situation on the ground.
Order books for original equipment manufacturers are looking increasingly healthy on the back of rising demand for new-build aircraft, with total deliveries of new aircraft from Airbus (FR:AIR) and Boeing (US:BA) up by a third on the prior year. The anticipated increase in customer demand is also reflected in a step up in working capital commitments through the period. Defence outlays in the US, which represent the lion’s share of Meggitt’s annual defence revenue, were up 4 per cent.
The order book also provides encouragement. Orders were up 9 per cent on an organic basis, with a book-to-bill multiple of 1.01 suggesting that orders have been slightly outstripping products shipped, a dynamic increasingly in evidence through the second half of the year. The Parker Hannifin deal was approved by shareholders on 21 September and the US firm could finalise the deal at a point when air traffic is rebounding strongly – we shall see. Hold. Last IC view: Hold, 742p, 2 Aug 2021. (Source: Investors Chronicle)
03 Mar 22. Darktrace profits as companies fortify cyber defences.
The crisis in Ukraine is raising awareness of the importance of good cyber defence.
- Churn rate falls while Ukraine conflict should trigger more in cybersecurity
- Adjusted Ebitda more than doubles
The crisis in Ukraine has heightened awareness of the importance of cybersecurity. Darktrace (DARK) – which uses artificial intelligence (AI) technology to defend customers from attacks – has seen its share price jump 40 per cent in the last week. However, Darktrace’s strong set of results shows that companies were aware of the risks of cyber-attacks long before recent events.
Operating profit swung to £8.7mn from a loss of £4.9mn last year. This was due to 52 per cent revenue growth coupled with lower-than-expected expenses, including lower travel and entertainment costs because of the pandemic. These are expected to return next year, but by the hope is that spending cuts elsewhere will help to offset them. Chief executive Poppy Gustafsson said the company was on a “path to sustainable profitability”.
Sales also moved in the right direction. A vital metric for companies that rely on subscription or rolling contracts is the annual recurring revenue (ARR) retention rate. This was up to 105.1 per cent from 99.9 per cent last year, reflecting existing customers upping their spend. Darktrace has also increased its full-year ARR growth forecast, from 19-24 per cent to 24-29 per cent, largely due to favourable foreign exchange conditions.
As well as getting more from its current customers it is also bringing in new ones, adding 926 in the first half of the year. Management said that although there hasn’t been an increase in cyber-attacks yet, the war in Ukraine has caused an increase in enquiries about Darktrace’s services. Increased awareness of risk should help drive more customer acquisition.
These are strong results but the company is trading at a hefty 10 times forward revenue multiple, according to FactSet. There are also a lot more competitors entering the fray. Cybersecurity is set to grow but it is not certain yet that Darktrace will be capturing it all. Hold.
Last IC View: Hold, 711p, 15 Sep 2021. (Source: Investors Chronicle)
01 Mar 22. BATM’s cyber offering set to surge.
- Cyber security business to “grow substantially” in 2022
- Further large government defence cybersecurity contracts likely to be won
- Growth in diagnostic orders for non-Covid-19 diseases offsets an anticipated slowdown in sales of Covid-19 diagnostic kits
- Closing cash pile of $64.7mn (£48.7mn) net of borrowings equates to a fifth of market capitalisation
BATM Advanced Communications (BVC:53p), a provider of medical laboratory systems, diagnostic kits, cybersecurity and network solutions, has released annual results as I previewed last week (‘Bargain hunting in the tech sector carnage’, 21 February 2022). I will not dwell on last year’s financial performance which was in line with my analysis. The positive outlook has not changed, either; management guidance points to current year underlying cash profit rising from $15.1m to $18.1m on 13 per cent higher revenue of $158m.
Of far more interest right now are prospects for the group’s cybersecurity business, which provides advanced cyber defence capabilities for large volume high-speed network traffic. The unit accounted for 25 per cent of the $20.7mn revenue reported from BATM’s network and cyber division in 2021, so it is relatively small part of the overall group. But the cyber business won an $18mn contract with a long-standing defence department customer last year and expect “many more government defence contract wins this year”, according to chief executive Dr Zvi Marom. The geopolitical backdrop couldn’t be any more favourable.
BATM is also developing a new cyber security solutions product to address a growing market opportunity “beyond the defence industry”. It will be released in the second half, and is likely to be in demand as more organisations look to protect themselves from cybersecurity attacks. For example, UK window replacement firm Safestyle (SFE) reported a 10 per cent hit to first-half revenue today due to interruptions caused to order processing and customer service levels following last month’s Russian cybersecurity attack.
BATM’s closing cash pile of $64.7mn (£48.7mn) net of bank borrowings was better than I had anticipated, some of which will be used on a share buyback programme, subject to shareholder approval. Trading on a modest enterprise valuation to cash profit multiple of 13.5 times, and with further contract wins likely for BATM’s edge computing and network function virtualisation product suite, Edgility, the shares rate a buy. (Source: Investors Chronicle)
28 Feb 22. R1bn injection for Denel from medical fund. Public Enterprises Minister Pravin Gordhan has revealed that nearly R1bn held in a medical fund is becoming available to Denel, which can use it to meet its various obligations such as paying tax. Previous bailouts, from government, have gone to servicing debt. Gordhan revealed this to Parliament’s Joint Standing Committee on Defence (JSCD) on 24 February. Ahead of a discussion on Denel and its ability to meet South African National Defence Force (SANDF) contracts, he said the state-owned defence conglomerate is facing “slightly better prospects.” He said that “today a High Court decision was made that funds that were held in a medical aid – let’s call it a trust for now – which were inaccessible to Denel, notwithstanding the fact that these were so called surplus funds…the Court decided that those funds can in fact be accessed, provided the welfare and wellbeing of those members that are still left in the medical aid trust…are provided for.
“I was told it is just short of a billion rand. That will actually help…at least give Denel some room to meet some of its obligations, for example to the South African Revenue Service, and place some of its entities on a better footing in order to deliver on contracts.”
Gordhan could not provide more detail as the decision had just been made, but said “we might well be at the beginning of a process or period at which Denel can find its feet again.”
According to Business Day, the trust’s assets exceeded its actuarially valued liabilities by a significant amount. Denel applied to court for access to the funds in return for offering trust beneficiaries an annuity. The trust was set up to pay the postretirement medical fund contributions of former employees employed before 2002 who opted not to switch to a new medical aid scheme. Acting Denel Group CEO William Hlakoane said on Friday that about 70% to 80% of the beneficiaries had accepted the offer, with the remainder not rejecting it but being uncontactable. The beneficiaries’ postretirement medical aid contributions will in future be funded by annuity payments under the group life annuity policy held by the trust.
Denel is also getting R3bn this financial year from National Treasury but this will be going to servicing government debt, and does not address the more than R1.5bn Denel owes to employees and suppliers.
“Where we need assistance and got very little, is operating capital,” Gordhan told the JSCD. “As you know, when there’s no operating capital, as you know you can’t produce anything, you can’t sell anything and can’t bring in revenue. Where government did assist, government paid off guaranteed debt. A couple of bn rand has been paid out. There is a small amount outstanding.”
The minister added that Denel has a substantial order book and if even half the order book materialises, it will be “helpful” to the company. For example, if tax clearance certificate issues can be sorted out with the South African Revenue Service, Denel PMP can resume production – it has one pending order worth R140m.
“It’s important to put Denel back on its feet, in a lot more lean way, focussed on the right areas with some cash in its pocket to do the things it needs to do. There’s lot of orders available if we could just sort out the liquidity problem on the one hand and re-attract skills,” Gordhan said.
Scarce skills is a problem for Denel, as the company lost nearly 500 staff between April and December 2021, bringing head count down to 2 185. The technical workforce has been particularly badly hit, with production technicians going from 1 193 in December 2020 to 761 in December 2021; engineers going from 367 to 198; and design and development technicians dropping from 292 to 240 in the same period.
Denel is technically insolvent and facing a litany of troubles. Available cash is insufficient to meet operational requirements, including the payment of salaries and suppliers, and at the end of December 2021, Denel owed R789m to employees and R900m to suppliers.
The company’s current tax status is “non-compliant” due to the substantial tax liability that remains unpaid. The total amount owed to the South African Revenue Service is R529m, made up of VAT of R83.7m, PAYE of R440m and corporate tax of R5m.
As Denel missed the 30 October 2021 deadline to submit its annual financial statements, the JSE suspended Denel’s listing at the beginning of February.
“The uncertainty on Denel’s future state has impacted the current customers who are concerned about Denel’s ability to deliver on contracts on hand, leading to a possible call on prepayment and performance guarantees (circa R3.4bn),” Denel told the JSCD.
After narrowly avoiding liquidation after Saab Grintek Defence brought a liquidation application last year, Denel faces stiff resistance from employees, suppliers and trade unions seeking to recover salaries and unpaid debts. Earlier this month the courts ordered Denel to pay R90 m to Solidarity members, and Denel is concerned about the increased letters of demand being delivered to it.
Nevertheless, Gordhan is cautiously optimistic about the future of Denel. The company, he said, “is like a broken house that still has its pillars standing, but a lot of work needs to be done to renovate it and make it habitable again. [It will be] hard work, tough work.”
“We have an interim Chair and Board that are very committed to making Denel work,” Gordhan said. “Through thick and thin these few members of the Board have stuck it out under the guidance of the Interim Chair. Hopefully they will assist us getting Denel back on its feet after being on its knees for a substantial period of time. That could also mean better interaction with the defence force in terms of their needs. We are going to need some agility and flexibility in how we fashion Denel going forward…that is what will emerge in the next month or two.” (Source: https://www.defenceweb.co.za/)
28 Feb 22. Senior’s slow recovery continues. Company returns to profit despite falling revenues.
- Restructuring efforts have generated savings
- Return on capital employed still weak
Engineering group Senior (SNR) is climbing its way back to profitability, albeit slowly.
Like peers such as Rolls-Royce (RR.) and Melrose (MRO), its fortunes are tied to the global aviation market, although much less so now than before the pandemic.
Last year, its aerospace division made up 37 per cent of revenue, half of the 75 per cent it generated in 2019. This decline in share has occurred even as Senior’s top line has dropped by 40 per cent.
The recovery in aerospace is taking much longer than anticipated, with the market buffeted by external shocks such as the emergence of the Omicron variant and Russia’s invasion of Ukraine. However, the general trend in civil aerospace is one of improvement, which the group expects to continue “in 2022 and beyond”.
Action to address costs, including the closure of an aerospace facility in France and the sale of a company making helicopter structures in the US, mean it is at least now back in the black, making an operating profit of £10.5m last year, compared with a loss of £177.3m in 2020.
Since 2019, it has incurred £46.7m of restructuring costs, but said these had delivered £90m of savings. Other divisions serving semiconductor, land vehicles and energy markets have fared better, but its overall return on capital employed stands at only 1 per cent, way below the 11.1 per cent achieved before the pandemic and the group’s medium-term target of 13.5 per cent.
Broker Jefferies expects earnings per share of 3p for the year ahead, which makes Senior’s shares look expensive at almost 44 times forecast earnings. Although future years look much brighter, the group still seems some way off a return to normal service. Hold. Last IC View: Hold, 164p, 12 Oct 2021. (Source: Investors Chronicle)
28 Feb 22. Defence stocks jump on news of German defence spending increase. Markets are digesting a raft of fresh sanctions that landed over the weekend: Swift ban, Russian central bank assets frozen, flight bans and all sorts. We have also seen an incredible turnaround in German post-war military restraint as it announced plans to increase the defence budget by €100bn this year. Hensoldt (HAG), a German aerospace and defence supplier, jumped 87 per cent, whilst Rheinmetall (ETR: RHM) rallied almost 50 per cent. Other defence stocks rose handsomely: BAE Systems (BA) rallied 13 per cent and Leonardo (BIT: LDO) in Italy climbed 15 per cent. Look for Lockheed Martin (NY: LMT) and Raytheon (NY: RTX) later on. (Source: Investors Chronicle)
24 Feb 22. BAE Launches Digital Intelligence Business. BAE Systems has formed a new Digital Intelligence business, bringing together many world-class digital, data and cyber capabilities from across the Company to deliver a greater digital advantage to its customers and partners.
The creation of the new business, comprising almost 5,000 people in 16 countries around the world, reflects a growing requirement from customers to gather, process and manage complex data. Digital Intelligence will deliver a greater range of digital capabilities alongside leading cyber, intelligence and security expertise to an extensive portfolio of government, defence and commercial customers around the globe. The business will focus on helping customers from across the Company to operate successfully, securely and efficiently in the digital world.
Digital Intelligence incorporates recent strategic acquisitions by BAE Systems, which further enhance the Company’s capabilities in digital, data analytics and space, positioning it to accelerate growth in an evolving market. Acquisitions include: In-Space Missions, a UK company which designs, builds and operates satellites and satellite systems; PPM, a developer and manufacturer of high-end electronics; and data consultancy and digital services company, Techmodal.
David Armstrong, Group Managing Director, BAE Systems’ Digital Intelligence business said: “We have some of the very best digital capabilities in the market. By bringing them together into one business, we will bring a greater range of capabilities to our customers and capitalise on market opportunities. We will also be able to offer exciting career development opportunities to the most talented people operating in this sector.”
Existing projects under the new business
The business will specialise in securely collecting, connecting and understanding complex data, so that customers can make can make near-real time decisions in the most demanding multi domain environments. Existing projects include:
- Developing communication systems which enable military land, air and maritime platforms to communicate with each other to share real-time mission imagery whilst on operations;
- Transforming national Automatic Number Plate Recognition (ANPR) technology to prevent crime – the resulting data set involves over 50m ANPR reads per day, with feeds from 11,000 cameras;
- Delivering satellite and communications technology, which is embedded within the operational infrastructure of major broadcasters globally;
- Helping the Royal Navy predict failures on warships before they happen and providing detailed analysis of how to diagnose issues;
- The 2020 In-Space Missions launch of the world’s first commercial satellite ‘rideshare’ service, Faraday;
- Veritas, the product which helps the British Army accurately plan and forecast requirements for equipment and material – significantly improving inventory and fleet management and delivering multi-million-pound savings;
- Working with more than 200 financial institutions worldwide to help protect them against financial crime, fraud and cyber crime;
- Developing a simulation modelling toolkit for passenger and vehicle security screening, which is used to provide the UK’s Department for Transport with a detailed understanding of the impact of different security screening operations at major air and sea ports;
- Helping the Royal Navy transform how it gains insight from vast amounts of disparate data, enabling better decision making; and
Creating a mixed vendor ‘rainbow team’ in Australia to address integrated cloud and data capabilities in a way that will enable global collaboration within multiple geographies for our customers. (Source: ASD Network)
24 Feb 22. Intelsat has formally confirmed its emergence from Chapter 11 reconstruction. The satellite operator said it had emerged as a private company with a substantially strengthened capital structure to support its growth as the leader in satellite communications. This final milestone follows receipt of regulatory approvals, completion of certain corporate actions, and satisfaction of other customary conditions.
Intelsat’s now-effective Plan of Reorganization, supported by all creditor groups and confirmed by the Bankruptcy Court on December 16th 2021, has reduced the Company’s debt by more than half, from approximately $16bn to $7bn. In connection with emergence, Intelsat obtained $6.7bn in new financing consisting of a revolving credit facility, term loan, and secured notes. Supported by new equity owners, the Company is now best positioned for long-term success as it continues to innovate and bring new services to market.
Intelsat also has a new Board of Directors, composed of the Company’s Chief Executive Officer and six new directors, including Lisa Hammitt, Intelsat’s Chairperson.
“For more than 50 years, Intelsat has led innovation in our sector and delivered high-performing services for customers,” said Intelsat’s CEO, Stephen Spengler. “Now that our financial restructuring has been completed successfully, we are driving Intelsat’s future development and growth from a position of even greater strength. We have significantly less debt as well as new financing to support our innovation and network plans, complementing our unparalleled global orbital and spectrum rights and strong operating model. We are positioned better than ever to fuel the success of our customers and partners, achieve our strategic objectives, and accelerate our growth. Building the world’s first global 5G satellite-based, software-defined, unified network is just one of Intelsat’s many ground-breaking projects well underway.”
Spengler continued, “Today’s emergence is the culmination of the hard work, collaboration, and vision of many. I especially want to thank our talented and committed Intelsat team members for their unwavering focus on customer service – and thank our valued customers, vendors, and other partners for their trust and support. With a focus on innovation, reliability, and high-performing service, we will advance our business for the benefit of all and continue onward as the leader in satellite communications.” (Source: Satnews)
25 Feb 22. Austal posts record half-year EBIT. Austal posted a record EBIT for the second half of 2021, with CEO Paddy Gregg lauding the company’s innovation in enhancing shipbuilding procedures.
Australian shipbuilder Austal had posted a record six-month earnings before interest and tax (EBIT) over the second half of 2021, 1 per cent higher than the previous record.
Despite revenues dropping by 14 per cent, the company nevertheless achieved a record EBIT due to streamlined business processes.
The company hopes that their recent growth will continue, with large scale shipbuilding opportunities available in both the US and Australia in the not-so-distant future.
“We have delivered our highest interim EBIT figure, bettering the record result in the prior corresponding period despite the expected decrease in revenue. The earnings result affirmed Austal’s ability to continuously enhance our shipbuilding processes to efficiently achieve key milestones and successfully deliver shipbuilding and sustainment programs across our US and Australasia operations,” Austal chief executive Paddy Gregg said.
Despite the record EBIT, earnings per share dived by 15 per cent but maintained a 4 cent per share interim dividend.
“Our guidance of a minimum EBIT of $107m for FY22 reflects our confidence in the efficient delivery of our ongoing shipbuilding programs. There is more upside this year and a strong basis for future years if we secure additional orders, a goal we are intent on achieving,” Gregg said.
“The company increased its shipbuilding margins in the USA offsetting a decline in revenue that stemmed predominately from COVID-related impacts on shipbuilding throughput and the maturity of the littoral combat ship (LCS) shipbuilding program.
“Additionally, with 37 vessels under sustainment contracts by the end of the half; Austal is establishing a sustainable, substantial and geographically diverse revenue base.
“Pleasingly, we’ve retained a strong cash position, even amid enhanced capital expenditure relating to our San Diego expansion and USA steel transition, giving us the optimal platform for growth.”
Austal USA recently delivered its second Independence Class LCS to the US Navy over 2021, with an additional four still under construction.
(Source: Defence Connect)
25 Feb 22. Additional R3bn for Denel is to settle debt. The R3bn National Treasury has allocated to Denel in the 2022 budget is only to cover capital and interest payments on guaranteed debt, and will not go towards salaries or operations. In the latest national budget tabled by Finance Minister Enoch Godongwana in Parliament on Wednesday, it emerged that the R3 bn allocated to the loss-making state-owned defence company will be used to settle interest payments. This amount is inclusive of the R2.9bn for Denel announced in the medium-term budget policy statement in November 2021.
Treasury noted that Denel cannot meet its obligations as they fall due and so for this financial year government is allocating R3 bn to cover interest.
“Broader alignment is required between the Department of Defence, the Department of Public Enterprises, the National Treasury and other relevant stakeholders to agree on Denel’s future. This will enable Denel to implement its strategic plan to consolidate operations, dispose of non‐core assets and move ahead with identified strategic equity partnerships,” the budget document stated.
It added that Denel’s guarantee facilities declined to R3.4bn after R2.5bn lapsed following the cancellation of the Egyptian missile contract and the maturity of R1bn of its debt.
African Defence Review Director Darren Olivier notes that the Egyptian contract probably would have saved the company and prevented short-paying of salaries, “but government let it fail.”
In November, Godongwana pledged ‘tough love’ for state-owned entities, which he said are a fiscal risk. Not every SOE will be rescued by the state and “some will have to fall.”
Government provided recapitalisations to Denel of R1.8bn in 2019/20 and R576m in 2020/21, and extended a R5.9bn guaranteed debt facility to Denel.
Denel owes staff R650 m in outstanding salaries, and suppliers R900 m. This week it was ordered by the Johannesburg Labour Court to pay R90 m in outstanding salaries to Solidarity union members within ten days.
Olivier maintains that Treasury and the Department of Public Enterprises’ delays regarding reviving Denel are “incomprehensible and infuriating. Treasury wants more discussion and ‘alignment’…It’s been three years of unending crisis without improvement. And while Treasury and the DPE dither and treat Denel as an inconsequential small SOE that can be rescued at leisure at some later point, more strategic capabilities both within Denel and within the SANDF are collapsing and being lost. There’s no longer the luxury of time.” (Source: https://www.defenceweb.co.za/)
TCI International, Inc., is a wholly-owned subsidiary of SPX Corporation. TCI provides turn-key solutions for spectrum management and monitoring, direction finding, geolocation and communications intelligence to civilian, government, military and intelligence agencies as well as antennas for communications and high-power radio broadcasting. TCI is headquartered in Fremont, California, USA. For more information, visit www.tcibr.com.