It must have stung like Mercurochrome in a fresh wound to check Sasol’s share price after the chemical group announced its interim results on Monday.
The share price fell to less than R200 within minutes of the market opening – a level last seen in 2005. The new annual low is 60% down on its 12-month high of R490.
Jordan Weir, equities trader at Citadel Wealth Management, says it’s not hard to see why. “While somewhat expected, Sasol’s interim results were disappointing, owing to a perfect storm created by the combination of a slowing macroeconomic environment, delays and cost overruns at the Lake Charles Chemicals Project [LCCP], and the extensive reshuffling of its management team.
“Poor results were further exacerbated by a 9% decrease in the price of Brent crude oil in rand terms, which negatively impacted on earnings,” says Weir.
Sasol warned shareholders a few weeks ago that earnings for the first six months of its financial year would be between 68% and 78% lower than the corresponding period in 2018. The actual figures show a decrease of 73%. Earnings fell to R4.5 billion in the half-year to December 2019 (2018: R15.9 billion). Basic earnings per share (EPS) fell to R6.56.
Results for the six months to December (Rm)
|Dec 2019||Dec 2018||Change|
|Mining||1 374||2 661||-48%|
|Exploration & Production International||1 023||764||34%|
|Performance chemicals||1 294||3 599||-64%|
|Base chemicals||-1 488||3 076||-148%|
|Energy||6 743||9 565||-30%|
|Group functions||907||1 126||-19%|
|Earnings before interest and tax||9 853||20 791||-53%|
|Earnings||4 506||15 902||-72%|
Source: Sasol interim results
The results show that just about all the divisions within Sasol struggled during the last six months. The segmental analysis shows percentage decreases in earnings before interest, taxes, depreciation, and amortisation (Ebitda) of between 30% and 64% and that the big base chemicals segment posted a loss of R1.5 billion, compared with a profit of more than R3 billion a year ago.
Volatility and uncertainty
In a fairly short presentation to investors and fund managers, CEO Fleetwood Grobler said the first half of the financial year was characterised by volatile macroeconomic factors, as well as an uncertain global political environment that affected demand for products.
“Financial results were impacted mostly by a weak macroeconomic environment, which resulted in lower margins, and the LCCP being in a ramp-up phase,” he said, mostly repeating the message from six months ago when discussing the final results for the 2019 financial year.
He added that oil prices were 12% lower, the prices of base chemicals were 15% lower and those of performance chemicals were 14% lower between the comparable reporting periods.
Chief financial officer Paul Victor added that higher production volumes did not make up for the lower prices and losses from the LCCP.
Sasol attributed losses of R2.8 billion in the production of base and performance chemicals at LCCP, as sales income is still lagging cost due to the accounting of all operational costs while the project is ramping up to full production capacity.
LCCP on track
Grobler also repeated his message that the huge LCCP is on track and within the revised total cost estimates, and that it will make a positive contribution to Ebitda in the second half of the financial year.
LCCP will reach what Sasol refers to as the “cash inflection point” in the current six months. This refers to the point where the project starts delivering the big bucks, covers its costs, and starts paying back debt.
The balance sheet indicates that LCCP being able to start helping with the debt burden won’t come a day too soon. Total debt increased to nearly R258 billion at the end of December 2019 (2018: R230 billion).
Grobler says LCCP will contribute between $50 million and $100 million to operational earnings in the current six months and between $600 million and $750 million in the next financial year. He should have translated it to rands – R9 billion to R11.2 billion – to give shareholders a bit of courage.
We’re talking about a lot of people when mentioning Sasol shareholders. The 631 million shares are still found in most portfolios – ranging from pension funds and unit trusts to private portfolios.
In aggregate, shareholders lost more than R250 billion in value when the share price slumped from its high of close to R600 during last year to less than R200 per share during Monday.
“LCCP remains critical for Sasol,” says Grobler, adding that production at the huge new plant has reached more than 80% of its design capacity and that the construction work is now 98.4% complete.
Sasol is looking ahead, addressing short-term challenges to restore stability and becoming fit for the future.
Grobler ended the results presentation with a simple plan:
- Ramp-up of production at LCCP and its contribution to Ebitda (which is set to transform the portfolio);
- Deleverage the balance sheet and protect Sasol’s investment rating;
- Preserve asset integrity to deliver safe and reliable operations; and
- Build resilience for the future.
Christiaan Bothma, an investment analyst at Sanlam Private Wealth, says the striking feature of the results is that the market’s concerns about the balance sheet and near-term liquidity were probably overdone.
“Sasol is at the point now that LCCP starts producing cash, which will go towards reducing debt.
“In addition, Sasol secured $1.25 billion in liquidity for the next 18 months and debt covenants were renegotiated until the end of the financial year.”
Sasol’s figures show that the net debt to Ebitda ratio of 2.9 times is well within the higher debt covenant of 3.5 times agreed to by its creditors, and in fact below the previous limit of three times. Management also pointed out that more than 25% the announced asset sales of $2 billion will be completed by June.
Bothma says that even if investors think that spending so much capital on the Lake Charles project was a bad decision and destroyed a tremendous amount of value, the share offers investment potential.
“A new investor is not paying for the company’s past mistakes at the current share price, nor [are they] paying for the increased cash flow that will come from the project.”