In June 2014 Sasol’s share price peaked at over R640. In the nearly six years since then, it has fallen over 85%.
This is a remarkable decline for one of the JSE’s biggest companies. Five years ago it was the sixth largest stock in the FTSE/JSE Top 40. Today, it is no longer even in the top 20. Its market capitalisation is now smaller than Old Mutual’s.
The company’s share price has been under pressure for some time due to operational concerns, particularly with regards to the Lake Charles Chemical Plant in the US. Sasol’s interim results revealed earnings per share that were 74% lower for the six months to the end of December 2019.
This week the bad news for the company was compounded by the sharp drop in the oil price. Brent crude prices were off over 30% in the past few days as Saudi Arabia effectively declared a price war in the face of falling demand.
On Monday, Sasol’s share price almost halved.
This decline has now even raised concerns that the company may have to come to the market with a rights offer in order to fund its $8 billion debt. This would place additional pressure on the share price.
These developments have had a meaningful impact on unit trusts and exchange-traded funds (ETFs) that include Sasol in their portfolios. The counter remains one of the most widely held stocks on the JSE by local fund managers, so it will be a big drag on the performance many portfolios.
The biggest exposures to the stock are in South African resources funds. As the table below shows, these unit trusts have as much as 10% of their portfolios in Sasol.
|Resource sector funds exposed to Sasol|
|SIM Resources Fund||11.04%|
|Coronation Resources Fund||9.70%|
|Satrix Resi ETF||9.25%|
|Nedgroup Investments Mining & Resources Fund||8.95%|
|Investec Commodity Fund||7.94%|
Source: Morningstar (as at 31/12/2019)
In the year to date, these funds are down between 10% and 20% as resource stocks more broadly have also not been spared in the market sell-off. Over a one-year period, however, their returns are still positive as they have benefitted from the surging share prices of the big diversified mining companies and platinum stocks in particular.
Sasol does, however, also make up a meaningful part of the portfolios of general equity funds. The table below shows the funds with the highest weighting in the stock.
|Funds exposed to Sasol|
|NewFunds Shari’ah Top 40 ETF||7.43%|
|Counterpoint SCI Value Fund*||7.40%|
|Mazi Asset Management Prime Equity Fund||7.04%|
|Integrity Equity Prescient Fund||6.91%|
|Saffron SCI Large Cap Fund||6.32%|
|Fedgroup General Equity Fund||6.27%|
|Nedgroup Investments Mining & Resources Fund||5.92%|
|27Four Shari’ah Active Equity Prescient Fund||5.64%|
|Allan Gray SA Equity Fund||5.61%|
|Satrix Rafi 40 ETF||5.54%|
|Satrix Rafi 40 Index Fund||5.52%|
|Foord Equity Fund||5.52%|
|Sanlam Private Wealth Equity Fund||5.49%|
|Old Mutual Rafi 40 Index Fund||5.42%|
|Prudential SA Equity Fund||5.35%|
Source: Morningstar (as at 31/12/2019)
*The Counterpoint SCI Value Fund sold out of its position in Sasol before 09/03/2020
Given Sasol’s prominence both on the JSE and in the wider emerging market universe, it is also not just local funds that have exposure to the stock. A significant number of international funds hold it in their portfolios.
These include funds from Japan, Namibia, Australia, Hong Kong, Ireland, the UK and the US.
The question for investors now is what the outlook for Sasol is from here. If there is a reasonable chance of recovery, it could be a bargain trading on a price-to-earnings (PE) multiple of 6.5 times.
Much of that outlook will depend on the oil price. Brent crude is selling for less than $40 a barrel. Although it has recovered a little since the weekend, some analysts still see potential for it to go lower if the market turmoil persists.
At these levels, oil producers will be taking a lot of pain. As Mark Lacey, Schroders’ head of commodities, noted on Tuesday:
“No part of the oil industry works at $30 a barrel.”
There is, however, still an enormous amount of uncertainty in markets – both around how Saudi Arabia and other oil producers will act over the coming months, and the impacts of the coronavirus. That will depress investor sentiment. The question is whether Sasol is now trading at such low levels that it presents a sufficient margin of safety for long-term investors willing to see out the short-term challenges.
*This article has been corrected to reflect that the Alexander Forbes Investments Equity Fund of Funds and Aluwani Equity Funds had decreased their holdings in Sasol before 31 December 2019.
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