Sasol is clearly not for the faint of heart. The company's shares traded at R142 on Monday, down two-thirds from the all-time high of R436 recorded in June 2022. By the close of trading on Monday, it had recovered to above R143.
The consensus view among analysts is that the stock is a buy at this price, despite the potential for further decline.
Prior to Monday's publication of the group's half-year results to 31 December 2023, its price-to-earnings (PE) ratio was below 4x, both historical and forward, and its dividend yield was above 11%.
For most books, this is a relatively attractive proposition, except that the latest results are bleak.
Sasol announced an interim dividend of 200 cents, down from 700 cents for the previous six months to December 2022.
This is a significant reduction in the amount paid from retained earnings, resulting in an annualized dividend yield of less than 3%.
Shareholders will likely have to hold onto cash for now, as the company will need cash to sustain operations next year. The graph below shows that there is a fairly strong correlation between Sasol and oil prices (in Rands), but that correlation has broken down over the past six months.
Sasol share price (blue) vs. Brent crude oil equivalent (purple)
The biggest hit to the earnings column came from mining, gas and chemicals operations in Africa and the Americas. Group sales decreased by 9% to R136.3 billion (2022: R149.8 billion), mainly due to lower chemical prices.
Earnings before interest and tax (EBIT) decreased 34% year-on-year to R15.9 billion as lower revenues and margin pressure were reflected in the profit and loss account. The decline was partially due to lower valuations of financial instruments and derivative contracts, but this was offset by lower prices for chemical raw materials in Europe, Asia and the United States.
This performance was further hit by a R5.8 billion impairment in the Secunda liquid fuel refinery cash-generating unit and the chemicals business, primarily due to lower chemicals selling prices, a deteriorating fuel macro environment; This is due to the rise in electricity prices.
“This has been a tough time for us financially,” said Celejo Tsatsi, an investment analyst at Anchor Capital.
“The mining business was struggling in terms of productivity. Poor free cash flow generation led the board to reconsider the dividend policy, which is expected to be announced in June 2024. [full-year] result. Sasol expects free cash flow to be positive for the full year, although its chemical business is currently a major drag on profits. ”
As for whether Sasol is a buy at these prices, Tsatsi said some of the share price decline was due to economic cycles and some due to structural issues.
Uncertainty in capital allocation and questions around the long-term effects of climate change are likely weighing on valuations, with large-scale coal-to-gas conversion projects and legendary carbon emissions likely to be weighing on valuations. As one might expect, environmental groups are targeting Sasol with the intensity of its laser beams.
The gas business struggled due to soaring gas prices from Mozambique. “From a broader perspective, commodity prices, especially chemicals and energy prices, will be the main drivers of earnings,” Tsatsi said.
“Feedback from Sasol today [Monday 26 February] That meant that while chemical prices were stable, they remained lackluster in major markets. Stock buyers will probably need to take a positive view of these markets. ”
natural gas pressure
Terence Hove, chief market analyst at Exness, added that Sasol's monopoly as South Africa's natural gas supplier creates a rather unique position for a country without natural alternative supplies.
“Mr. Sasol advised that there is another impending energy crisis, a natural gas crisis. In mid-2026, they plan to stop supplying from their fields in Mozambique. The fields of Pande Tomane are depleted. and approximately 20 to 22 months of remaining supply.
“This reality has had a negative impact on Sasol's prospects and is reflected in the share price, bearing in mind that Sasol has enjoyed a good economic climate to date.” [local] This market has been dominated for decades. ”
Outlook
Earlier this year, JPMorgan lowered Sasol's price target from R248 to R184, causing the share price to plummet.
In a note to investors, the company said it found it difficult to value Sasol due to uncertainty surrounding its long-term cash flows, while lower chemical prices forced it to lower its earnings forecast. Ta. There are also concerns that the country will struggle to repay its debt unless chemical prices recover.
In Sens' latest announcement, the board said the company is liquid, solvent and has sufficient capital after paying a 200 cent dividend to sustain operations this year. He says he is satisfied.
Sasol derives around half of its sales from SA and has been trying for decades to reduce this concentration risk by entering overseas markets.
In 2023, around 55% of investments will be in the US (which accounted for 16% of revenue last year), 26% in SA, and the rest mainly in Mozambique and Europe.
Sasol is not alone in facing weak demand in some of its key markets. Earlier this month, Shell reported a 29% drop in profits in 2023 to $28.25 billion (R546 billion), after reporting record profits in 2022.
Chevron reported fourth-quarter 2023 profits of $2.3 billion (R44 billion), almost a third of the same quarter in 2022, primarily due to lower upstream realizations; It cites a decline in profit margins and impairment charges.
At such a low price, Sasol has attracted the attention of investors and analysts, many of whom were on board just a month or two ago when prices were much higher.
For R143, this may be an overshoot to the downside, but the road to recovery is likely to be long and difficult.
Listen to Jimmy Moyaha and Sasol CFO Hanré Rossouw discuss the interim results in this SAfm Market Update podcast from Moneyweb.
You can also listen to this podcast on iono.fm here.
Result announcement
View or download the PDF above here.