Sasol reports sharp earnings decline amid operational headwinds

Sasol operational update

Sasol's interim trading statement shows significant deterioration across all key financial metrics, with particularly notable disparities between EPS decline (47-61%) and HEPS decline (26-36%), highlighting substantial non-headline items affecting the business. The adjusted EBITDA decline (11-22%) is less severe than EPS/HEPS, indicating the impact of non-operational factors affecting the company's performance.

Sasol faces multiple operational challenges, both from external market factors and asset performance issues. External challenges include a weaker Rand/Brent crude oil pricing environment (-13%), compressed refining margins, and lower market demand affecting sales volumes (-5%). Asset performance concerns are evidenced by continuing impairment of key assets at Secunda and Sasolburg refineries, with full impairment of R5.6 billion in capitalized costs suggesting ongoing concerns about asset recovery values. Additionally, currency translation and derivative positions have shifted from prior gains of R2.7 billion to current losses of R0.1 billion, indicating increased financial volatility.

Despite these challenges, the company has identified some mitigating factors, including improved chemicals pricing, cost management initiatives, and efficient capital expenditure. However, the severity of the declines suggests structural rather than cyclical challenges, and the full impairment of capitalized costs raises important questions about future capital allocation strategy.

Sasol looks to be shifting focus to operational efficiency and cost management, with the upcoming February 24 results presentation being crucial for understanding strategic responses and concrete turnaround initiatives.

Sasol – technical view

The long-term trend for Sasol remains down. In the short term the price is trading within a range between levels 8030 (support) and 10445 (resistance).

Despite the soft operational update, we are seeing a rebound off range support and from oversold territory. The rebound suggests that a lot of the negative news may already be in the price.

The reversal off range support suggests a move towards resistance at 10440. Range traders who are long might consider using a close below support at 8030 as a stop loss indication.

The long-range trade is not our preference in lieu of the prevailing downtrend still in play. Our preference is to wait out near term strength and see how far it takes the price. Should the move take the price back above range resistance a longer-term trend reversal might be in play and then we would consider buying into pullbacks.