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.
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.
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.
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.
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
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.