The latest interim results from Sasol show that management’s dramatic changes of the last few years were successful, with lower debt levels and higher profit putting its finances on a much better footing than a few years ago.
Earnings before interest and tax increased by 12% to R24.3 billion in the six months to end December 2021, compared with the first half of the previous financial year, according to the financial statements. Earnings per share (EPS) increased by 2% to just below R24, although the headline earnings number shows a decrease of 21% to R15.21 per share.
In addition, Sasol was able to reduce its long-term debt – not too long ago a problem that cast uncertainty over the group’s survival – to more manageable levels, while it could still continue its capital expenditure programme.
It was not easy. Massive cost overruns and construction delays at the much-lauded Lake Charles Chemical Project (LCCP) in the US had shareholders worried and saw the share price tumbling to below R100 per share. When Covid-19 hit, management had to plead with its bankers for some leeway in the limits put on its debt ratio.
The figures for the last six months indicate that Sasol is recovering from the financial challenges brought about by the expansion to the US and the pandemic.
Sasol president and CEO Fleetwood Grobler said in a presentation to shareholders that Sasol has benefitted from a recovery in the global economy, which resulted in higher sales volumes at higher prices.
“These factors resulted in a notable gross margin improvement from the prior half year, combined with strong cost and capital expenditure performance. These benefits were, however, partly offset by operational challenges in our South African value chains, which resulted in lower production.
“Coal supply and coal quality were constrained and resulted in lower fuels and chemicals production at our Secunda Operations,” said Grobler.
Mining productivity at the group’s coal mines was 16% lower than the prior period – due to safety incidents, higher than expected rainfall, and slower than expected ramp up of the new full calendar operations integrated shift system.
While Grobler highlighted the production constraints at the SA operations, it is noticeable that the local operations are still very important. The largest part of Sasol’s profits and a big portion of the recovery in Sasol’s profitability still comes from SA, despite the efforts to grow internationally.
In fact, one can argue that Sasol actually dialled back on its international expansion by selling large parts of LCCP and entering into joint ventures, as well as divesting from some of its other foreign businesses – which it had to do in order to reduce its unsustainable debt.
Supplementary figures provided in an addendum to the results disclose that SA operations still deliver nearly 60% of Sasol’s earnings before interest and tax.
Summaries of the performance of different divisions within Sasol show that most of the improvement in profitability also comes from SA operations.
Divisional earnings before interest and tax
|Rm||6m Dec 2021||6m Dec 2020||Difference||Change|
|Mining||2 026||1 732||294||17%|
|Gas||7 619||4 155||3 464||83%|
|Fuels||5 730||1 457||4 273||293%|
|Chemicals Africa||10 567||5 283||5 284||100%|
|Chemicals USA||1 397||– 837||2 234||267%|
|Chemicals Eurasia||2 346||1 538||808||53%|
|Total||29 685||13 328||16 357||123%|
Source: Compiled from figures in the interim results
While the figures from the different divisions would not add up to the earnings figure in Sasol’s official results (due to other items, such as the R5.3 billion mark-to-market loss in hedging transactions), they give a good indication of what is happening where.
The fuel division chalked up the best recovery, with earnings before interest and tax increasing by nearly 300% compared with 2020 – the time when Covid-19 restrictions ruined everybody’s holidays, we worked from home and pubs were closed for weeks on end. Earnings from the sale of fuels (mostly in SA) increased by R4.3 billion.
Earnings from the African chemicals division improved by nearly R5.3 billion and earnings from gas sales by more than R3.4 billion.
The US assets turned the corner and produced earnings before interest and tax of nearly R1.4 billion compared with a loss of R837 million a year ago.
Meanwhile, SA will remain important.
Grobler noted in his presentation that management is focusing strongly on initiatives to address coal quality and supply – by increasing Sasol’s own production and productivity as well as making higher coal purchases to maintain higher stockpile levels.
“As at Friday, 18 February, our coal stockpile was just under 1,1 million tons and we are well on track to meet our target at the end of this month. Higher external coal purchases to replenish the stockpile will continue until the baseline is restored. These purchases are tracking our plans, with procurement processes well in hand,” said Grobler.
“Our Secunda Operations is also on track to achieve the revised target with operational issues largely resolved.”
Good financial year
The interim results conveyed another significant impression: it looks like Sasol is going to have a good year.
While the results show an improvement on the first half of the previous financial year, they are much better than the preceding six months.
Attributable earnings of R16 billion are way ahead of the R10.5 billion of the financial year to June 2021, meaning that Sasol just needs to maintain its achievement for the next few months to post significantly higher earnings.
Investors seem to have discounted this in the share price.
Similar headline EPS in the second half of the financial year will deliver more than R30 per share.
Thus, the current share price of R321 equates to a forward price-earnings ratio of around 10 times, which seems just about right for the share.
Grobler is cautious in his forecast. “On shareholder value delivery, our balance sheet is reset with the focus now turning to dividend resumption.
“We are targeting to increase our return on invested capital for the group to be between 12% and 15% throughout the transition up to 2025, and above 15% leading up to financial 2030, while targeting a 40% dividend pay-out ratio,” he said.
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