Sasol delivers satisfactory results

On Monday 25 January, Sasol Ltd - ADR, released financial results for the 6 month period ending 31 December 2018.

In what was a volatile period, defined by fluctuations in the oil price and the USD/ZAR exchange rate, SASOL managed to deliver a satisfactory set of results, with delays and increased CAPEX on the lake Charles Project overshadowing what was a solid period for the group.

Sasol benefited from a rebound in oil prices during 2018, as well as a relatively weaker Rand/Dollar exchange rate.

In addition to this, Liquid fuel sales volumes increased 4%, driven by improved performance at the Natref refinery, as well as increased sales to wholesale and commercial customers.

Financial and operational Highlights:

• Oil price increased 26% to US$71/bbl
• Average USD/ZAR exchange rate was 6% weaker, or R14,20 to one US Dollar.
• Underlying Cash generation remains solid: EBITDA increased by 10% to R27 Billion
• Core HEPS increased by 18% to R21,45, and HEPS increased 32% to R23,25
• In terms of operational performance, Cash fixed costs increased 4.3%, below Sasol’s inflation target of 6% , owing to a continuation of solid cost control performance in recent years
• Given funding requirements for the Lake Charles Project, more than 85% of Sasol’s debt is now USD denominated. This, combined with a weaker Rand relative to the USD, has increased gearing (Debt/Equity) to 48.9%
• In line with performance, the Board has also declared a interim dividend of R5,90.

Focus on Lake Charles Chemical Project (LCCP):

• “While the Lake Charles Chemicals Project fundamentals
  remain firmly intact, we acknowledge the disappointing cost and
  schedule overrun,” Chief Executive Officer Stephen Cornell said
  in a statement. “The project was impacted by several challenges,
  within and beyond our control.”
• As at end of December 2018, Construction progress stood at 84% and overall project completion stood at 94% and CAPEX amounted to $10.9 Billion.
• Project delayed by at least 5 Months, because of defective carbon steel forgings identified in Q4 CY2018, as well as Late Scope additions for Cracker as a result of incomplete engineering work not timeously identified.
• Further delays also cause by sever weather
• Upwards Revision of CAPEX to US$ 11.8 Billion, which includes a $200 Million contingency and weather provision
• Management has guided for EBITDA loss of US$165-195 in FY19, with expected EBITDA contribution of US$700 in FY20.
• Management is still confident that once operational, the LCCP will deliver steady EBITDA contribution of $1.3 Billion by 2022

It will prove to be a big year for Sasol, as they attempt to complete the LCCP and move aggressively into a space they have not previously operated in. What it could potentially offer, is a diversification in its product offering that will allow Sasol to be less reliant on the oil price to generate earnings growth. On the flip side, the LCCP is a move away from what has been Sasol’s core competencies over the years, and poor implementation or execution in the space could see them struggle with established players in the market.

Based on Bloomberg Analyst recommendations, 8/14 Analysts currently rate the Stock as a Buy, with 4 Holds and 2 Sells . Based on these 14 Analyst recommendations and their price targets, the consensus 12Month price target R497.81.

Analysis provided by Franz Gmeimer, Trading Services, IG South Africa