Investors in JSE-listed petrochemical group Sasol will find an interesting story if they follow the change in analyst sentiment toward the stock over the last 3 months.
While the base case investment scenario looks solid: The stock trades on a price to earnings multiple of 10 and is highly geared toward a weaker Rand and an oil price boosted by geopolitical tension in the Middle-East, institutional investors appear to be lowering their expectations for the company.
A quick look at analyst consensus forecasts for the share from FT.com shows how analysts are cutting back their forecasts.
Three months ago, the consensus view was that the stock would outperform the market with 2 analysts rating it as a “buy”, 3 rating it as an “outperform” and 9 analysts saying “hold”.
Now only one analyst rates the stock as a “buy” while 11 rate it as a “hold”.
There is similar changes in sentiment reflected on the Moneyweb Click A Company tool for Sasol.
Of particular interest to investors will be the 12-month price targets which the polled analysts have offered.
Remembering that the company will open on Monday at R605 per share, the median forecast of 11 polled analysts is R600 per share while the low forecast is R472.73 per share – a 22% low from current levels.
This change in sentiment already reflects in the Sasol share price with the company falling from R652 in mid-June 2014 to R596 on 7 August 2014.
Sasol received a partial boost on Friday as oil prices rebounded on the back of geopolitical tension in the Middle-East and Russia. However Ole Hansen who heads up the Saxo Bank commodities desk believes that much of this demand for oil will be short-lived.
He believes the oil price increase will be limited to around $108.50 per barrel.
He told clients: “Until we see either refinery demand in Europe pick up or the removal of excess supplies in the Atlantic basin, the upside for Brent crude will remain limited as financial traders will be balking at the prospect of buying a contract which incurs a negative rolling cost.”
While institutional sentiment toward Sasol appears to be turning negative, the team behind the Investec Commodity Fund does however make the point that Sasol does represent something of a safe-haven. They told clients: “With Middle-East tension driving oil sentiment and union unrest weakening the rand against the US dollar, Sasol continues to appear as a relative safe haven. Sasol has had a strong run but it does not look particularly expensive as it trades on a PE of 10x. There is little net debt, plenty of room for further cost savings and some interesting project optionality.”