Why Sasol is never going back to R500

With Sasol having survived a near-death experience, it’s understandable that CEO Fleetwood Grobler described the annual performance this week as "nothing short of outstanding".

Earnings before interest, tax, depreciation and amortisation (ebitda) of R16.6bn for the year to end-June were more than 100% higher than the year before, while deep cost cuts and painful asset sales helped the overstretched company slash its debt to R102.9bn from R189.7bn a year ago.

That means Sasol’s net debt to ebitda is now 1.5 times — well below the three times stipulated in its banking covenants. This time last year, that figure was 4.3 times.

"I’m delighted that we not only met our short-term targets, but indeed exceeded many of them," said Grobler. "Our balance sheet is deleveraged, with notable early wins … our achievements have enabled us to establish a strong foundation and progress a credible pathway to [the] future."

But at R205 a share, Sasol’s stock is still well below the R250-R400 range where many pundits believe it should trade at, especially considering its reforms and positive new trajectory.

And for those with long memories, the stock is laughably far off the R550 it hit three years ago.

The bad news is that it’s unlikely to reach those heights again.

Back then the market was gung-ho about the earning prospects of the Lake Charles Chemicals Project (LCCP) in the US which, once online, would be a veritable cash cow for the company.

As it turned out, the ill-fated megabuild ran into severe delays and billions of dollars in cost overruns, causing the share price to plummet as update after update revealed what a disaster it really was.

It meant Sasol’s already overstretched balance sheet couldn’t weather the Covid storm when oil and chemicals prices fell off a cliff.

Sasol’s asset sales included a 50% stake in the Lake Charles base chemicals business (it kept the whole specialty chemicals business) which raised $2bn, helping it avert a dreaded rights issue. "Our balance sheet is now substantially derisked from where we were a year ago," Grobler said this week.

Old Mutual Investment Group analyst Meryl Pick says: "The balance sheet recovery is highly encouraging for a company that was priced for a rights issue a year ago."

For the financial year to end-June 2021, the LCCP delivered on its promise and contributed meaningfully to Sasol’s earnings.

But in selling off a chunk of the project Sasol’s investment case has diminished, says FNB Wealth & Investments’ Wayne McCurrie.

"It had no option at the time," he says, adding that the group must regret selling it now that chemicals prices are soaring. "But that’s life. That’s what you’ve got to do to survive at any one particular time, given any one particular set of circumstances."

Sasol CFO Paul Victor says that, strategically, the decision remains the right one.

McCurrie says the Sasol share price, unavoidably, remains highly dependent on oil prices. "If the oil price stays at $70 a barrel and the rand stays where it is, then Sasol probably is slightly undervalued and maybe the upside for Sasol, everything else being equal, could be about R250."

He believes, however, that there is a good chance of oil price weakness over the next six months as a result of disappointing Chinese growth data.

"If oil goes to $50, Sasol’s falling," he says.

Not everyone is as bearish. Daniel Sacks, portfolio manager for Ninety One’s Commodity Fund, says that while there has been a structural adjustment on Sasol, there is still money to be made. "Maybe it won’t go to R600. But I think R300 or R400 is the right number."

Another major factor keeping the share price at current levels is Sasol’s sizable carbon footprint as investors become increasingly attuned to climate-related risks.

"There’s a big discount already there in the share over the emissions issue," McCurrie says.

After Eskom, the group is the second-largest emitter of carbon dioxide in SA and indeed Africa, while its Synfuels plant in Secunda — which produces fuel from dirty coal — is the largest single-source emissions point in the world.

As Sacks puts it: "What does it do with its 67Mt of carbon?"

Next month, Sasol will present an emissions reduction plan to investors at its capital markets day and has promised "substantially higher" decarbonisation targets.

Victor, who recently announced his decision to leave the company, says Sasol would like to see the share price trading higher than the book value of the company (it is on par at present), but this will take time as the market sees how cash-generative the business is.

"The capital markets day, I think, will be the last piece in the puzzle to see how we are effectively going to become more sustainable and greener, [but] not at the expense of our investment case," he says. "That will probably change investors’ minds for the long term."

Presenting a credible plan for a business such as Sasol is an unenviable task. For now, Sacks says, the market doesn’t believe that, despite some pilot projects, Sasol can convert to a business producing green hydrogen as a feedstock, for example.

The other problem is that any proposal to deal with Secunda’s emissions will require co-operation with a number of third parties, including the government.

However, Sasol today is far less reliant on Secunda, with the majority of earnings derived from its chemicals business, Sacks says. Sasol produces everything from base oils and bitumen to surfactants and industrial lubricants, whose uses are legion: detergents, cleaning agents, personal care, construction, paints, inks and coatings, to name a few.

Revenue in the chemicals business was R133.3bn for the year against R65.6bn for the energy side of the business, while earnings for its combined African, Eurasian and US chemicals divisions came to R19.7bn, with the fuels unit losing more than R18bn.

Says Sacks: "We’d rather they sort of stripped the business and ran Synfuels down, but the country can’t do that. Where would inland SA get its fuel from?"

Meanwhile, says Pick, operationally "it is encouraging to see the Lake Charles cracker utilisation up".

However, she’s concerned that "feedstock quality and supply issues" have surfaced at the SA operations, "which raises concerns about whether cost-cutting is taking a toll on the ‘cash cow’. This is something to monitor."

Still, Pick and her team — who swooped on Sasol shares around their worst levels of less than R30 last year — say that at prevailing oil and chemical prices, "Sasol still offers an attractive return".