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Sasol is making headway against its challenges

The good news is that a rights issue won’t be necessary – but no dividends yet.
The group achieved its good set of results during a period of extreme market volatility, with oil prices collapsing, chemical demand falling, fuel sales declining, and the rand strengthening against the dollar. Image: © Sasol – used with permission

Sasol CEO Fleetwood Grobler reassured shareholders in a presentation of the interim results for the six months to end December 2020 that Sasol has (eventually) turned the corner after years of facing huge challenges.

He said Sasol delivered a first rate performance during the six months, despite unprecedented challenges from the Covid-19 pandemic, low oil prices and severe hurricanes on the US Gulf Coast.

“We have repositioned Sasol as a business for robust, resilient and sustainable performance. Sasol 2.0 is very much up and running,” Grobler told his audience when announcing that earnings increased by more than 100% to R15.3 billion in the first half of the financial year compared to the R4.5 billion in the first half of the previous financial year. Headline earnings increased to nearly R11.9 billion (R19.16 per share) compared to less than R3.7 billion or headline earnings per share (EPS) of R5.94 a year ago.

It looks like Sasol has indeed turned the corner considering that it suffered a headline loss of nearly R7.9 billion in the financial year to June 2020.

Market reaction

Investors rejoiced when they first saw the results and the share price jumped around 5% to R212 per share soon after the release of the results.

Unfortunately, the gains evaporated over the next few hours when shareholders took time to read the results in full, noticing that earnings benefitted from non-cash accounting adjustments totalling R12.9 billion.

These adjustments included gains of R4.6 billion on the translation of monetary assets and liabilities due to a 15% strengthening of the closing exchange rate (the last day of December compared to the end of June 2020), gains of R5 billion on the valuation of financial instruments and derivative contracts, and a currency gain of R3.3 billion on the finalisation of a joint venture of part of the Lake Charles Chemical Project (LCCP).

However, the results are good.

Grobler noted that the results were earned during a period of extreme market volatility in which oil prices collapsed, demand for chemicals fell, sales of fuel declined and the rand strengthened against the dollar.

The figures show that the rand oil price and sales volumes were some 23% lower during the six months under review compared to the corresponding six months. Sasol was able to counter the effect of the decline in this all-important matrix for the group by reducing fixed cash costs by 10%, limiting the fall in earnings before interest, tax, depreciation and amortisation (Ebitda) to only 6%.

Balance sheet

At this stage, the overall performance of Sasol – in terms of the profitability of its operations and the restructuring of the group – can be measured by its balance sheet. Both Grobler and group financial director Paul Victor mentioned that the balance sheet looks much healthier.

“Although our cash flows were impacted by low crude oil prices, softer chemical prices, plant downtime and the effects of Covid-19, our cash conservation initiative and asset divestment programme enabled us to repay approximately $2 billion [R28 billion] of our debt. In addition, we repaid our rand banking facilities of approximately R4 billion.

“Net debt to Ebitda declined to 2.6 times, comfortable within the debt covenant of four times,” said Grobler.

The balance sheet shows that net debt declined by R70 billion in the last six months, from R274.6 billion at the end of June 2020 to R204.1 billion at the end of December.

In addition, management reassured shareholders that the selling of non-core and less profitable assets is progressing as planned, reiterating that asset sales amounting to between $3.3 billion and $3.8 billion will be completed before December this year.

Thus Grobler announced that Sasol will not need to come to the market for additional capital.

A rights issue of several billion rand was still a possibility only a few months ago.

Management’s overview of a few key aspects serves as a good indicator of what investors can expect of Sasol going forward.

Grobler said cash fixed cost savings of R3.2 billion were delivered in the period under review and that there is potential for more cost savings. “This was largely attributable to the implementation of our comprehensive response plan focusing on cash fixed cost reduction and enhanced cash flow.”

He again referred to Sasol’s goal of positioning the group as a profitable business in a low-oil-price environment, as he has been doing since taking over as CEO.

That Sasol produced a solid profit and positive cash flow during a difficult period amid low oil prices shows that the goal has been achieved.

Oil price

Victor highlighted that the oil price averaged less than $44 per barrel during the six months to December, compared to $64 per barrel during the first half of the previous financial year.

Despite an average weaker exchange rate of above R16 per dollar, the rand oil price was some 23% lower, while refining margins were a massive 41% lower.

Victor warns of continued volatility in oil prices, the exchange rate and chemical prices for the rest of the year. He forecasts a wide range for the oil price of between $40 and $60 per barrel and sees the rand fairly strong at between R14.50 and R15.50 per dollar.

Chemicals

Grobler assured investors that demand for chemicals is recovering, with prices showing signs of improvement.

Victor said management is expecting a slight recovery in ethane prices (down 24% compared to a year ago) and continued strength in the price of polyethylene.

Grobler also shared the good news that the LCCP is fully operational and the build-up to full production levels – interrupted by not one, but two hurricanes – is on track.

Dividends

But still no dividends. Grobler said Sasol is still cautious and will reconsider dividends later.

Shareholders can hope that the oil price stays at current levels of above $60 per barrel, that demand for chemicals continues to increase, and that the need for jet fuel recovers from the devastation of Covid-19.

As for the share price, the big headline loss of the previous year makes the calculation of a historic price-earnings (PE) ratio nonsensical.

Assuming that Sasol delivers the same headline EPS in the second half of the year would indicate a forward PE of five times. This indicates some caution on the part of investors, considering that Sasol has been sitting on a PE of around eight times during the last few years.


Brought to you by Sasol.

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