Scepticism of management’s ability to execute on its strategy remains. From Moneyweb.
Sasol’s share price has more than doubled since bottoming below R60 in April, but still remains at a deep discount to fair value – despite returning a net profit of R6.8 billion for the year to June, after a R44.3 billion loss the previous year.
Earlier this year, HSBC and PSG upgraded their price targets to between R184 and R185, considerably higher than the current price of R127. In January, Morgan Stanley raised its target price to R225, suggesting a further 78% upside.
The shares are trading at a price-earnings multiple of 3.6, in part because top-line revenue has declined 14% since 2023, and earnings are down 12% over the same period. It’s a smaller company than it was back in 2022, but still trading at a substantial discount to fair value.
“Sasol remains cheap for a reason,” says Kea Nonyana, market analyst at Scope Prime.
“The reason is the market’s mistrust of the management’s ability to execute on strategy. The chemicals business has seen a rapid decline, and so long as chemical prices remain vulnerable, the share price of Sasol will remain undervalued.”
There is a loose correlation between oil prices and Sasol shares, although Sasol has out-gunned flatlining Brent crude oil prices in recent months on expectations of improvement in its profitability. Last year’s sales were dampened by a 15% decline in the rand oil price.
Listen/read: In a world awash with oil, woe is Sasol?
Headline earnings per share almost doubled to R35.13 over the last year, with free cash flow up 75% to R12.6 billion.
The chemicals business, which accounts for about 30% of its sales, was hit by weaker global chemical prices and reduced demand, contributing to a nearly R75 billion impairment in 2024. Oversupply of petrochemicals from competitors such as China has eroded margins, as shown by the more than 10% drop in international chemical sales since 2023.
Based on discounted cash flows, Sasol shares have a fair value of R242 – roughly double the current price. The shares are up 44% over the last month, so the discount to fair value is closing, but given the strength of recent price moves, there may be some price taking on the horizon. Other measures of fair value are closer to R140.
“I’m not one to put lipstick on a pig, but the headwinds facing Sasol look to be easing,” says Shiven Moodley, CEO of Novaque Research.
“Analysts broadly agree that the stock’s fair value sits around R138 – about 9.3% above the current market price. The surge in buying over the past month has less to do with fundamentals and more with portfolio managers rebalancing into undervalued names, as the JSE All Share trades at elevated levels. Sasol, being cheap relative to the broader market, has been an obvious beneficiary.”
Read: Are institutions falling in love with Sasol again?
Sasol’s long-term debt eased 12% over the last year to R103 billion, which provides some relief on interest. The company is still highly geared, but this now appears manageable in light of some favourable recent shifts in demand for chemicals. The rand’s stability below R18 to the dollar has made it more favourable for risk-on investors, adds Moodley.
“The currency tailwind strengthens Sasol’s rand-denominated earnings and is beneficial for future earnings. Looking ahead, I believe Sasol’s hedging programmes are already capitalising on this environment, taking into account oil supply by OPEC+ and global growth adjustments. That should provide earnings protection into next year and help sustain investor confidence should we see volatility creep back into the market towards the end of October.”
Moody’s Ratings notes that Sasol has a substantial exposure to carbon transition risks, while the company has indicated its intention to step up its purchase of renewable energy to offset pollution before 2030.
Investors have taken comfort from CEO Simon Baloyi’s focus on cost containment, reducing debt, and cutting carbon emissions. The company separated its international operations from its SA business, with Baloyi determined to bolster its earnings while potentially awaiting a more suitable phase in the chemical cycle to possibly list it as a standalone entity or find a suitable merger partner.
Sasol is still paying heavily for its Lake Charles chemical project in the US, which ended up with massive cost overruns, delays, and management issues, forcing it to sell a $2 billion stake in the project and offload assets to get debt under control.
