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.
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.
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.
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.
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
|Turnover||203 576||181 461||172 407||172 942||185 266||202 638|
|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|
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.
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.