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Dramatic changes to fix Sasol

Group takes drastic action after disclosing another 40% drop in earnings.
The chemicals giant will not pay a final dividend for the 2019 year and may also skip the interim dividend for the six months to December. Image: Waldo Swiegers, Bloomberg

Sasol’s board of directors took notice of criticism regarding its lacklustre financial performance, the alarming increase in debt and, in particular, the management of the construction of its Lake Charles Chemical Project (LCCP) in America.

Together with the release of its results for the year to June 2019, Sasol announced the decision to relieve both its joint CEOs of their duties.

The chemical company said in a statement that Bongani Nqwababa and Stephen Cornell agreed to a mutually-amicable separation with Sasol. Their services will be terminated at the end of October.

Fleetwood Grobler, executive vice president of Sasol’s chemical division, will take over as CEO from November, according to the announcement posted on the JSE’s Sens service early on Monday morning.

It is telling that Grobler handled the announcement of Sasol’s annual results a few minutes later, with all documents and presentation material bearing his new title.

Listen to Grobler’s interview with SAfm’s Market Update with Moneyweb on Monday:

Sasol went further to address its problems areas once again, particularly those at the LCCP. The executive officer of the project was replaced and another three senior vice presidents with roles in the project were shown the door.

The joint CEOs also forfeited their short-term incentive bonuses, as did all members of the group executive committee.

Anybody at Sasol who was involved in or close to the LCCP saw their bonuses cut.

Grobler says the steps taken by Sasol’s board of directors aim to deliver a clear message of assurance and change.

The board of directors issued a blunt statement: “It is a matter of profound regret for the board that shortcomings in the execution of the LCCP have negatively impacted our overall reputation, led to a serious erosion of confidence in the leadership of the company and weakened the company financially.

“Sadly, the LCCP challenges have tarnished the entire company.”

It also said that Sasol will ensure a culture of accountability and consequence management, hence the steps against all individuals connected with the troublesome project.

Read: Special report: Sasol’s lack of accountability

Sasol Chair Dr Mandla Gantsho says key remedial actions are already under way. “Sasol is now focused on restoring trust and ensuring that it delivers value for all its stakeholders.”

Investors should be glad to hear this, as they were also on the receiving end of the Sasol directors’ remedial steps.

Read: The funds most exposed to Sasol

Grobler announced that Sasol will not pay a final dividend in respect of the 2019 year and will consider skipping the interim dividend for the six months to December 2019 too.

Brutal step

The reason for this brutal step is to reduce Sasol’s debt, which increased to R245 billion at the end of June 2019, compared with R210 billion a year ago.

Grobler says that gearing at 56% is too high and will peak only in the 2020 financial year, to finance the last work at the Lake Charles plant. Another R13 billion has been budgeted to finish LCCP, which is now 98% complete. Everything should be completed this financial year.

Then hopefully shareholders will start to enjoy the benefits and see a turnaround in Sasol’s fortunes.

The decline in profitability is glaringly obvious when looking at the latest results. Attributable earnings declined by 40% to R6.1 billion in the year to June, compared with R10.2 billion the previous year.

As per usual, Sasol published figures for three years in its annual report, which show that earnings also took a hit in the 2018 financial year – coming in 50% lower than in 2017.

Digging out the 2016 annual report yielded figures for another three years. This shows that earnings have fallen by 80% since 2014, while headline earnings per share (Heps) halved from more than R60 to only R30.72 in 2019.

Sasol financial performance – 2014 to 2019

R million 2019 2018 2017 2016 2015 2014
Turnover 203 576 181 461 172 407 172 942 185 266 202 638
Change 12.2% 5.3% -0.3% -6.7% -8.6% -9%
Operating profit 9 697 17 747 31 705 24 239 46 549 45 818
Earnings 6 074 10 146 21 513 15 027 31 162 30 417
Change -40% -53% 43% -52% 2% 1%
Heps R30.72 R27.44 R35.15 R41.40 R49.26 R60.16
Change 12% -22% -15% -16% -18% -17%

Source: Compiled from Sasol annual reports

The decline in profitability over the last six years seems even worse than the figures suggest if one takes into account the weakening exchange rate, as most of Sasol’s products are effectively priced in dollar.

Not surprisingly, the share price also lost half its value. It actually declined by 54% from a high of R650 in 2014 to the current R300. It was lower a few weeks ago – falling to R234 – when Sasol warned shareholders that it was delaying the publication of its results, to ensure that previous years’ results did not need adjustments due to its reporting problems at LCCP.

Sasol share price down from R650 in 2014

That the share recovered somewhat will give investors hope of further recovery.

Grobler says the LCCP will produce earnings before interest, taxes, depreciation and amortisation (Ebitda) of between $100 million and $200 million in the 2020 financial year, increasing to $1 billion by 2022.

This translates to Ebitda from the LCCP of between R1.46 billion and R292 billion this financial year, at the exchange rate of R14.60 per dollar that Sasol uses to forecast its capital expenditure.

If things go well, $1 billion a few years down the line will push Sasol’s operating profit to a truly astounding figure, which might make the current share price and price-earnings ratio of 9.8 times look surreal.

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Grobler says the LCCP will produce earnings before interest, taxes, depreciation and amortisation (Ebitda) of between $100 million and $200 million in the 2020 financial year, increasing to $1 billion by 2022.

This translates to Ebitda from the LCCP of between R1.46 billion and R292 billion this financial year, at the exchange rate of R14.60 per dollar that Sasol uses to forecast its capital expenditure!

Did Grobler do these translations himself personally with his own hands and mind? I quake for the shareholders if the new CEO is this Jacob Zuma in mathematics

$100m x R14.60 = R1460m. Did I make a mistake?

Hi @AdriaanK,
@New York is referring to the R2(,)92 billion… Just a typo obviously, but a good opportunity for a negative comment never goes lost…

I don’t see why shareholders should accept this.

This is a design and build fixed price fixed term contract that was awarded to FLUOR.

Who pressed the green button for the project to go ahead? Then CEO David Constable.

Why does this raise an eyebrow? Before he joined Sasol as CEO he spent his entire 29 year career with FLUOR. Was he sent there on purpose?

There are people that should go to jail for this.

FLUOR does this all over the world and it seems the Sasol board etc. are still being protected.

How do you see his fellow CEO Bongani Nqwababa’s role in this?

Well this seems to be a classic case of “Corporate Capture” and not easy to say.

Funny enough I think he served on the board of Sasol as non executive director for nine months or so that ended at about the time the final investment decision for Lake Charles was publicised in 2014.

Did they need numbers to push the decision through?

even with glaring failures by white managers, someone will always cast aspersions about the only black guy at the table. If he was smart Bongani should’ve never accepted this co CEO BS.

Shaokhan, why bring race into this?? Where in any of the comments or replies were there any reference to race? Go play your racist games on twitter.

Bongani Nqwababa & Stephen Cornell should have been FIRED, but the Board issued the following statement: “To be clear, the Board has neither identified misconduct nor incompetence on the part of the joint CEO`s.”
Not ONLY their (and all members of the group executive committee) short-term incentive bonuses should be forfeited! Appropriate actions should also be taken against the previous CEO, Dave Constable under whose watch the Lake Charles Project was given the go-ahead. And what role did the CFO & Executive Director played in this troublesome project?The executive and senior management teams at Sasol have come off far too lightly.
With the Lake Charles Project, Sasol finds itself in the same boat as Eskom with the Medupi/Kusile power stations. As a result of gross negligence and incompetence, all concerned should be severely punished.

HAVE NOT MAKE MUCH OF A STUDY OF THE SASOL CIRCUS, BUT WHAT IS STANDING OUT TO ME IS THE BOARD’S FINDINGS OF: “To be clear, the Board has neither identified misconduct nor incompetence on the part of the joint CEO`s.” – TO ME THIS LOOKS MORE LIKE: “AS SASOL BOARD WE PROTECT THE CEO’S TO SAVE OUR OWN BACK SIDES”

HOW INDEPENDENT CAN THE BOARD OF SASOL BE WHEN IT COMES SUCH OPINIONS???

It seems SA has become a magnet for dishonest individuals.

We really need to start putting some of them in jail to make sure the wannabees get the right message.

While the steps taken possibly don’t go far enough at least there have been some consequences to the poor performance, unlike Eskom, and other SOE and government departments where the chief alleged looters get off with a golden handshake.

yes, incredible the foresight of people with intellect early identifying problems and taking steps to rectify while others just keep on planning and hoping problems will disappear.

Good time to buy at a discount perhaps? Especially for the long term.

Did they give guidance on forward revenues and operating cashflow? I would imagine ramping up Lake Charles will eat serious working capital?

with the completed cost of Lake Charles and the delays, its subsequent amortization and interest will likely be big numbers. I would imagine the bottom line (not EBITDA) will be negative for a while? Hence they should be giving guidance on cash flow as they can hardly afford more debt to fund working capital and ramping? People might have a heart attack when they read $200m profit now and next year the reported loss is $200m

EBITDA has never really meant anything in Sasol terms.

For years now if not decades they have some sort of one off item to write off everytime they publish results.

Just got sick of it. Luckily.

See how the board protects its own at the expense of the company?

End of comments.

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