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Sasol’s amazing recovery

Why did we miss this opportunity?
Hindsight shows that the market overreacted when Sasol dropped like a stone to a low of just a few cents above R20 per share. Image: Waldo Swiegers, Bloomberg

Sasol has staged a remarkable recovery on the JSE from its low levels of only a few weeks ago – increasing more than 700% from around R21 per share in the last week in March to a high of R172.05 on June 8 (it has subsequently dropped).

This makes it the darling of investors who took a chance and bought the energy and chemical company’s shares at exceptionally low prices.

Sasol share price over four months

Investors who sold their shares at low prices are obviously not happy at all and those who invested in the share a few months earlier are not that happy either, facing losses that are still sitting uncomfortably close to 50%.

Yes, Sasol was sitting at above R300 per share as recently as November and December last year.

The reasons for the sharp fall in its share price from above R300 within a few months (and from more than R600 some 18 months ago) are well documented.

Read:
Sasol: What happened, and what now?
Sasol keeps hurting investors, but management remains positive

Pricey project across the sea

Investor concerns regarding the huge and expensive Lake Charles Chemical Project (LCCP) in the US grew to such an extent that anybody remotely interested in Sasol’s fortunes quickly learnt what the letters LCCP stand for.

The project took much longer to complete and cost several billion US dollars more than originally planned. The problems were so severe that it cost several top executives their jobs and everybody remotely connected to the project whatever Christmas bonus they were hoping for.

Over the last few years, management spent a lot of time convincing bankers that the LCCP was going well and that finances would start to improve – and even more time convincing shareholders of the same.

Just when it looked like things were going to work out, an explosion and fire damaged a part of the Lake Charles plant and the US and China started a trade war that had the potential to inflict even more damage on an already-weak global economy.

Read: More bad news for giant Lake Charles Chemical Plant

Enter the virus and oil price shock

Then the unprecedented happened: countries around the world suddenly shut down their industries in an effort to control the spread of Covid-19.

In addition to reducing the demand for all of Sasol’s products for who knows how long, fuel and chemical prices reached new lows. The oil price, usually an indicator of Sasol’s health, dropped to its lowest levels ever.

Even the fall in the exchange rate of the rand to a record low of more than R19 per dollar – usually good for the Sasol share price – had little effect. Amid the negative market sentiment and perceived risks of the company’s balance sheet, Sasol dropped like a stone to a low of just a few cents above R20 per share.

At that point, Sasol was down more than 90% since the beginning of year, when it was trading at R276. Hindsight shows that the market overreacted.

When the oil price turned, Sasol started its phenomenal run. Not even the rand strengthening to better than R17 per dollar could hold it back.

Read: Sasol’s proactive measures reassure market

The current volatility in the market suggests that timing is now more important than ever for private investors and professional fund managers alike.

In the case of Sasol, comparing the share price with the interaction of the rand and the international oil price would give a rough indication of whether the share is cheap or expensive. The oil price and exchange rate (the rand oil price) determines the profitability of Sasol’s local fuel plants and serves as a proxy for the performance of the other divisions.

Thus, the share price in relation to the rand oil price would indicate whether the share is cheap or expensive.

Sasol vs rand oil price

Source: Calculated from Bloomberg price data

A comparison between Sasol’s share price and the rand oil price for the past 12 months indicates that the share price actually declined in relation to the company’s profit drivers from March to August 2019 – in tandem with declining investor confidence in Sasol. A quick scan of news articles highlighting Sasol’s challenges would probably support the statistics.

The sharp surge on the graph at the end of February 2020 represents the sudden decline in the oil price, with Sasol shares starting to fall thereafter.

The graph indicates that Sasol was way undervalued at the end of March, as the subsequent sharp recovery has shown.

Indications are that the share price is currently close to where it should be relative to the exchange rate and the oil and chemical market. It also looks like the strong run in the share price has petered out for now.

Commentators will say that the market is waiting for fresh direction or new information; investors will either celebrate their good timing or mourn a good opportunity.

Read: Sasol starts stake sale in R246bn Lake Charles chemical complex

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Timing the market is tricky – to those who bought at 21 and sold at current market prices..well done. What is more interesting is where to from here ..what is priced in at the current market price in terms of long term sustainable cash flows and risk would be an interesting debate. Maybe the astute investor believes there are materially higher cash flows to materialize over 3 to 5 years that justifies a price of 400 plus??. Why not poll the analyst community and get some bullish and bearish views. Certainly the risks of a rights issue have diminished…

Agreed; I am still very wary of Sasol. Where is its income going to come from going forward, particularly as it dabbles at massive cost outside of the SA area where it has some cosy monopolies.

First of all, who is ‘we’? Because, I did not miss the opportunity. I just could not believe that the share of such a valuable company could go for as little as $1.57. I bought all my shares for the measly average of, sit down now before you faint, $2.91

Since I knew about Sasol, when am upset I kept asking my parents, ‘why did you guys not buy Sasol shares when they were R18 when the were listed in the mid 1970s. Little did I know that that opportunity was coming to knock right at my door, so I figured, I’d be remiss not to grab it with my own two hands.

No need to consult a sangoma on that one.

I did the same. Have held Sasol for years. A great company that got hot by a perfect storm. Smiling all the way. Where too from here?
Sasol is a hold.

Well Sasol has certainly been a Godsend for me. I’m a private investor for over 10 yrs and never did I come across such a fantastic opportunity.. And the timing thereof, taking into account that I’ve been unemployed since last November, could not have been better. I utilized funds from my access bond account and bought 13500 Sasol shares with an average price of R38.20 during March and, well, what more can I say..

Nice one!

I hope you de-risk now? Selling 5000 will put back all you borrowed, plus all the tax on all the shares, plus a bit extra for rainy day.

Matriculant, Johan’s advice is the best you ever going to get as far as investment goes, take it, and watch what unfolds without worry and anxiety!

Yeah, I jobbed it about 4 times between 22 and 90 bucks, made a bit, but didn’t have the staying power due to what I thought was lack of information flow, probably lack of gonads though:)

Congratulations! I hope you sell (bird in the hand and all that)

Based on comments in industry Sasol is selling all kinds of assets and other bits and bobs to get cash.

Think I will sell those I bought at R50.

Let’s face it, the world is still very much addicted to hydrocarbons. Electric cars- too much hype, too early for now, don’t have the traveling distances required, nothing more than an overpriced fashion fad currently. Look at the panic when the truckers had a strike and the delivery of fuel was delayed a few years ago. So, when the JSE had a recent fire sale with specific reference to SOL, where were you?

Sasol is the undisputed king on (one off item write off’s) You can go and have a look.

I don’t think one set of results have been published in the past 20 years that they don’t have some write off.

I’ve made more money off sasol in the last month than I have made with my brokers over the last ten year period……. It’s been insane.
Got in at 57…. Then got cold feet and pulled out at66….. Only to watch it run away up to74…. Beat myself up about it and got in at 77…. And told myself to stop watching every day… I’m gonna hold for atleast the next year….
Now sitting up past 170………
Its still a buy guys…
Is it gonna go back down and back up.. Yes.

Am I gonna hold till it back to 400 – no…. Will I hold till it at 250 – yes…. It’s gonna be months before that is gonna happen…. And a Rocky rd with lots of heart stop moments…. But like I said on another thread here a month ago when I bought…… What else are u gonna do with yr cash right now…. That can give such a amazing return…. And still be seen as one of yr current safest things to do??…. Not often the safest bet is also the one with the biggest return……
…. At the current price its still a deal…..

You could have bought Clicks and got the same results. My average entry price R73.73 current trading price R 225.77 and they are down off their high of R 273.99
So Sasol is not the only gem in the market but it is a good performer – I’m not a holder of Sasol

Sasol’s share price tanked because of the unusual coincidence of the following factors:

– ‘unexpected’ ballooning of Lake Charles project costs
– oil demand collapse due to global lock-downs
– Saudi/Russian attack in price war on US shale producers
– general pessimism about ZA Inc
– maybe ZAR weakness? (don’t know the intricacies personally)
– trader panic and price momentum

It’s subsequent recovery was, and future trajectory is, largely dependent on developments in these factors, IMO.

Dont forget possible Rights offer, Second COVid19 wave.
Market manipulation by FED – SOL NYSE rises for no apparent reason but more liquidity in the market.

agreed – the big thing people need to keep in mind at this point is the recent massive expansion of the money supply by the US Fed.

Just wait until the party in the West Bank gets started

We miss these opportunities bcos media create hysteria and reiterates a bad situation a point … we all think its doom and gloom. The media is not balanced and mostly one sided, I guess until the story change … which is mostly late.

However I am glad, I still got in at good price

Last Fridays jump in the price was cos its US price increased.
No other reason.
Even a bankrupt company like ‘Hertz’ increased on Friday.
US market increased all round … thank the ‘FED’ for market manipulation.
Lets wait and see Sasol Balance sheet.

Tut tut. Who missed the opportunity? Not me.

Been through cycles like this before and after missing out on Capitec post-2008, I decided I ain’t missing this one.

I’ve made 300% since March.

I’m really happy for the ones who made a killing, but it was nothing more than luck. There were no quantifiable information that could indicate a buy and, sadly, you didn’t suddenly become a genius. You went with your gut and took a chance and were lucky. Enjoy it, for luck will turn against you… and hopefully you won’t have a lot of $$$ in the game when that happens. It is very unsatisfactory when sentiment has such an impact on movements in price. Sentiment is the worse possible bed mate when you’re trying to invest, yet here we are, having to role the dice.

Batman, not that sure that I agree with you when it was R21.00, a lot more reason to quantify a buy then, other than it closing shop::) IMO.

Also need to get my head around the influence of the shorters here!?

But do agree, a lot of luck involved thereafter!

The people that had it before and bought more in 20’s to average down : well done.

The people that bought it as a punt, you really should consider de-risking. Say you bought 5000 at 30 = R150k. Share now 150 or R750,000.

Sell 2000 = R300k. Allocate R150k back to your portfolio and invest it in something entirely unrelated. Put 5000 * 120 * 40% * 45% = R108,000 in your bond to cover your realized and unrealized capital gains tax. Blow the R42k left over on something you need or deserve.

You still have 3000 = R450k value that is now free or ‘risk-free’. Set yourself a crash target such as R100 where you sell. and yourself next exit points. Say sell 1000 at 250, 1000 at 400, etc

I have seen FAR too many people that go up with a pure punt, and then back down with it. It is not your child or wife, you don’t owe it loyalty, it won’t cry if you sell it.

Excellent advice! Someone – perhaps Buffet had Rule No.1 – don’t lose any money.

Is it too late to buy a small handful of shares (now at 139(, and sell them at 250/300? I realise it’s quite late, I didn’t have funds when it was in its 20s. I’m new to investing so really looking to dip my toes in at the moment without losing my life’s savings haha.

…..It is not your child or wife, you don’t owe it loyalty, it won’t cry if you sell it.

What a perspective, I will remember that!

why is it down R28 today?

because the US markets dropped, and the oil price pulled back

because it is starting to become “speculative” to by shares ??

I just hope that all these funds that people invest in (with ridiculous fees) managed to take advantage of this, that is their job at the end of the day. Any idea which funds got it right?

The oil price has been kept artificially low by US money printing & Shale oil. Shale oil is a bad idea on many levels (not just environmentally). The only thing that keeps those shale oil companies afloat is printed money that finds its way into their pockets. With the insane amounts they are printing at the moment its better to be in stocks or gold. (Just not cash). SASOL share will go higher than this.

Which of the market commentators, fund managers and brokers said buy at R21?

I think they were tooo shy…. They lost out big time when the share fell from above R300

investors are weird!

This share was 500-ish not that long ago.

Now, it comes back from losing 480/500 to losing 360/500 and investors applaud and shoot off champagne corks. I imagine these investors thought Steinhoff was cheap at 17. 17 rand not cent.

I take with a huge pinch of salt the claims of massive gains by some here. Human nature dictates that in a highly volatile and risky environment one would bank gains fairly quickly. I simply do not buy the claims of riding the Sasol wave from R30 to R160. Those that got in at R30, probably cashed in at 100% profit and those that got in at R70 were just thankful getting anything back at R80 after seeing it go to R30.

I had the fortune, to buy in at R150, on the Friday, before the oil shock…. Woke up that Monday down 50%… shat myself and turned off pc, walked away….

It was doing so well till you wrote this article and alerted investors. Two days later and we down R40. Write another article letting everyone know it’s cheap and lets see what happens.

hahaha.

Should have been titles – “Sasol’s amazing fall”

End of comments.

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