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In this update we take a look at the latest set of financial results for the half year ending December 2018. Early in February the group provided earnings guidance and the market was not happy with it, considering that the Lake Charles Chemicals Project experienced massive delays which lead to a expected earnings swing from a positive earnings expecation from LCCP to a loss of at least $165million. The share was punished and traded at R387 odd. It has recovered a bit since. So lets take at the financial results
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About SASOL (SOL)
Sasol is an international integrated chemicals and energy company that leverages technologies and the expertise of our 31 270 people working in 32 countries. We develop and commercialise technologies, and build and operate world-scale facilities to produce a range of high-value product stream, including liquid fuels, chemicals and low-carbon electricity.
Sasol’s new value chain-based operating model came into effect in 2014. Towards this end, the Sasol Group is now organised into two upstream business units, three regional operating hubs, and four customer-facing strategic business units, supported by fit-for-purpose functions as reflected in our new Sasol website. By combining the talent of our people and our technological advantage, Sasol has been a pioneer in innovation for over six decades. As market needs and stakeholder expectations have changed, so too have our methods, facilities and products, driving progress to deliver long-term shareholder value sustainably. The growth and enhancement of our foundation businesses in Southern Africa is complemented by the significant chapter of growth, Sasol has entered in its history.
At Sasol, we recognise the growing need for countries to secure supply of energy and chemicals. For many countries, specifically those with abundant hydrocarbons, in-country conversion of these resources into liquid fuels and chemicals goes a long way to boost national economies. Sasol’s focused and strong project pipeline means we are actively capitalising on the growth opportunities that play to our strengths in Southern Africa and North America. Our focus is creating value sustainably and we are proud to be taking this company, to new frontiers. Sasol was established in 1950 in South Africa and we remain one of the country’s largest investors in capital projects, skills development and technological research and development. The company is listed on the JSE in South Africa and on the New York Stock Exchange in the United States.
Sasol's Operating Business Units comprise our mining and exploration and production of oil and gas activities, focused on feedstock supply.
Sasol Exploration and Production International (SEPI) develops and manages the group’s upstream interests in oil and gas exploration and production in Mozambique, South Africa, Canada, Gabon and Australia. SEPI is driving the development of Sasol’s upstream business to allow the group to meet its strategic objective of accelerating the growth of its proprietary gas-to-liquid (GTL) technology. In recent years we have taken a number of steps to expand our global upstream portfolio, encouraged by the global abundance of natural gas and the rapid development of the shale gas industry, as well as the lower carbon intensity of natural gas.
Sasol’s new value chain-based operating model came into effect in 2014. Towards this end, the Sasol Group is now organised into two upstream business units, three regional operating hubs, and four customer-facing strategic business units, supported by fit-for-purpose functions as reflected in our new Sasol website. By combining the talent of our people and our technological advantage, Sasol has been a pioneer in innovation for over six decades. As market needs and stakeholder expectations have changed, so too have our methods, facilities and products, driving progress to deliver long-term shareholder value sustainably. The growth and enhancement of our foundation businesses in Southern Africa is complemented by the significant chapter of growth, Sasol has entered in its history.
At Sasol, we recognise the growing need for countries to secure supply of energy and chemicals. For many countries, specifically those with abundant hydrocarbons, in-country conversion of these resources into liquid fuels and chemicals goes a long way to boost national economies. Sasol’s focused and strong project pipeline means we are actively capitalising on the growth opportunities that play to our strengths in Southern Africa and North America. Our focus is creating value sustainably and we are proud to be taking this company, to new frontiers. Sasol was established in 1950 in South Africa and we remain one of the country’s largest investors in capital projects, skills development and technological research and development. The company is listed on the JSE in South Africa and on the New York Stock Exchange in the United States.
Sasol's Operating Business Units comprise our mining and exploration and production of oil and gas activities, focused on feedstock supply.
Sasol Exploration and Production International (SEPI) develops and manages the group’s upstream interests in oil and gas exploration and production in Mozambique, South Africa, Canada, Gabon and Australia. SEPI is driving the development of Sasol’s upstream business to allow the group to meet its strategic objective of accelerating the growth of its proprietary gas-to-liquid (GTL) technology. In recent years we have taken a number of steps to expand our global upstream portfolio, encouraged by the global abundance of natural gas and the rapid development of the shale gas industry, as well as the lower carbon intensity of natural gas.
Financial overview
The financial results highlights as announced and provided by SASOL:
- Earnings per share up 112% to R23,92
- EBITDA up 10% to R27 billion
- Core headline earnings per share up 18% to R21,45
- Normalised cash fixed costs contained to below inflation target
- Dividend per share: R5,90 (3,6x CHEPS)
Now for the numbers we are interested in:
- Earnings per share up 112% to R23,92
- EBITDA up 10% to R27 billion
- Core headline earnings per share up 18% to R21,45
- Normalised cash fixed costs contained to below inflation target
- Dividend per share: R5,90 (3,6x CHEPS)
Now for the numbers we are interested in:
- Turnover: R102 billion (up 15.7%from 88.15 billion in the prior year)
- Materials, energy and consumables used: R45.9 billion (up 28% from R35.8 billion in the prior year)
- Net profit for the period: R15.9 billion (up 117% from the prior year)
- Net profit margin: 15.6%
- Diluted earnings per share: R23.76 a share (up 111.2% from R11.25 a share in the prior period)
- PE ratio: 8.7
- Interim dividend: R5.90 a share (up 18% from R5.00 a share in the prior year)
- Dividend yield: 2.8%
- Cash generated from operations: R24.8 billion
- Cash generated from operations per share: R39.68
- Net asset value/book value per share: R379.70 (so SOL is trading at 1.08 times its net asset value). This is relatively low for an operating entity generating large amounts of cash and profits
Management commentary on the results
Sasol experienced some challenges with regards to our operational performance in the first quarter of the year, largely due to the extended planned shutdown at SSO which impacted production and sales volumes across the value chain. We did however deliver a stronger operational performance in the second quarter of the year and are maintaining stable operations. Our current production run-rates at SSO support an annualised run-rate of 7,8 million tons. In Europe, our operations maintained their good performance, but were affected by external ethylene supply constraints which impacted sales volumes.
The highlights of our business performance are summarised below:
- Mining's productivity continues to improve although we have not yet achieved targeted productivity levels. Our productivity rate improved by 8% from 1 099 t/cm/s in the prior period to 1 187 t/cm/s in December 2018. Supply to our internal value chain remains sufficient and our stock pile has been restored to levels above our working capital target. We are now planning to reduce external purchases to pre-2017 strike levels;
- Production volumes from our Eurasian Operations decreased by 8% mainly resulting from external ethylene feedstock supply shortages and planned shutdowns;
- ORYX GTL continued to deliver an exceptional performance, with an average utilisation rate of 99%;
- Natref improved its performance by 43% and achieved a production run-rate of 641m3/h;
- The planned Steam Station 2 shutdown at Sasolburg Operations (SO) was completed ahead of schedule and achieved stable operations post the shutdown. A detailed study was undertaken that proved the viability of specific SO assets, which are not gas dependent, to have a useful life beyond 2034. The useful life of these assets was therefore extended to 2050; -
Liquid fuels sales volumes increased 4%, enabled by the strong performance from Natref, and increased sales to wholesale and commercial customers;
- Sales volumes from our Performance Chemicals business decreased by 3%, mainly as a result of a force majeure in Europe triggered by external ethylene supply constraints; and
- Base Chemicals sales volumes decreased by 11%, impacted by the extended shutdown at SSO and lower fertiliser demand. Our 50% joint venture high density polyethylene plant (HDPE) in the US with INEOS Olefins and Polymers USA is ramping up to expectations and delivered 91 kt of saleable product for Sasol for the six months.
Prospects/Outlook
The current economic climate continues to remain highly volatile and uncertain. While oil price and foreign exchange movements are outside our control and may impact our results, our focus remains firmly on managing factors within our control, including volume growth, cost optimisation, effective capital allocation, focused financial risk management and maintaining an investment grade credit rating. We expect an overall improved operational performance for the year ending 30 June 2019, with:
- SSO maintaining post shutdown run-rates, targeting the upper-end of 7,5 to 7,6 million tons;
- Liquid fuels sales volumes of approximately 57 to 58 million barrels in line with our previous market guidance;
- Base Chemicals sales volumes, excluding US produced products, to be 1% lower for the financial year;
- Performance Chemicals annual sales volumes to be between 1% to 2% higher (excluding LCCP);
- Gas production volumes from the Petroleum Production Agreement (PPA) in Mozambique to be between 114 bscf to 118 bscf; - ORYX GTL to achieve an average utilisation rate of 90% due to a leak discovered in December 2018 in the waste heat boiler of one of the reformer reactors. We therefore expect to have an extended shutdown to repair the waste heat boiler;
- Normalised cash fixed costs to remain in line within our inflation assumption of 6%;
- Capital expenditure, including capital accruals, of R52 billion for 2019 and R30 billion for 2020 as we progress with the execution of our growth plan and strategy. Capital estimates may change as a result of exchange rate volatility and other factors;
- Gearing and net debt to EBITDA will be managed within our Board approved levels of between 45% and 49% and 2,0 times and 2,3 times respectively; - Rand/US dollar exchange rate to range between R13,85 and R14,50; and
- Average Brent crude oil prices to remain between US$60/bbl and US$65/bbl.
The highlights of our business performance are summarised below:
- Mining's productivity continues to improve although we have not yet achieved targeted productivity levels. Our productivity rate improved by 8% from 1 099 t/cm/s in the prior period to 1 187 t/cm/s in December 2018. Supply to our internal value chain remains sufficient and our stock pile has been restored to levels above our working capital target. We are now planning to reduce external purchases to pre-2017 strike levels;
- Production volumes from our Eurasian Operations decreased by 8% mainly resulting from external ethylene feedstock supply shortages and planned shutdowns;
- ORYX GTL continued to deliver an exceptional performance, with an average utilisation rate of 99%;
- Natref improved its performance by 43% and achieved a production run-rate of 641m3/h;
- The planned Steam Station 2 shutdown at Sasolburg Operations (SO) was completed ahead of schedule and achieved stable operations post the shutdown. A detailed study was undertaken that proved the viability of specific SO assets, which are not gas dependent, to have a useful life beyond 2034. The useful life of these assets was therefore extended to 2050; -
Liquid fuels sales volumes increased 4%, enabled by the strong performance from Natref, and increased sales to wholesale and commercial customers;
- Sales volumes from our Performance Chemicals business decreased by 3%, mainly as a result of a force majeure in Europe triggered by external ethylene supply constraints; and
- Base Chemicals sales volumes decreased by 11%, impacted by the extended shutdown at SSO and lower fertiliser demand. Our 50% joint venture high density polyethylene plant (HDPE) in the US with INEOS Olefins and Polymers USA is ramping up to expectations and delivered 91 kt of saleable product for Sasol for the six months.
Prospects/Outlook
The current economic climate continues to remain highly volatile and uncertain. While oil price and foreign exchange movements are outside our control and may impact our results, our focus remains firmly on managing factors within our control, including volume growth, cost optimisation, effective capital allocation, focused financial risk management and maintaining an investment grade credit rating. We expect an overall improved operational performance for the year ending 30 June 2019, with:
- SSO maintaining post shutdown run-rates, targeting the upper-end of 7,5 to 7,6 million tons;
- Liquid fuels sales volumes of approximately 57 to 58 million barrels in line with our previous market guidance;
- Base Chemicals sales volumes, excluding US produced products, to be 1% lower for the financial year;
- Performance Chemicals annual sales volumes to be between 1% to 2% higher (excluding LCCP);
- Gas production volumes from the Petroleum Production Agreement (PPA) in Mozambique to be between 114 bscf to 118 bscf; - ORYX GTL to achieve an average utilisation rate of 90% due to a leak discovered in December 2018 in the waste heat boiler of one of the reformer reactors. We therefore expect to have an extended shutdown to repair the waste heat boiler;
- Normalised cash fixed costs to remain in line within our inflation assumption of 6%;
- Capital expenditure, including capital accruals, of R52 billion for 2019 and R30 billion for 2020 as we progress with the execution of our growth plan and strategy. Capital estimates may change as a result of exchange rate volatility and other factors;
- Gearing and net debt to EBITDA will be managed within our Board approved levels of between 45% and 49% and 2,0 times and 2,3 times respectively; - Rand/US dollar exchange rate to range between R13,85 and R14,50; and
- Average Brent crude oil prices to remain between US$60/bbl and US$65/bbl.
Sasol (SOL) share price performance
The image taken from Sharenet below, shows the share price performance of SASOL over the last three years. Below a summary of SOL's share price performance over various time periods:
So basically the share price over the last 3 years has remained relatively flat, with the share price return over 3 years being just below 0%. While over a 5 year period the share price has actually declined by 23.3% (or basically SOL lost a quarter of its value).
- 1 week: 2.06%
- 1 month: -1.57%
- 1 year: 5.06%
- 3 years: -0.37%
- 5 years: -23.3%
So basically the share price over the last 3 years has remained relatively flat, with the share price return over 3 years being just below 0%. While over a 5 year period the share price has actually declined by 23.3% (or basically SOL lost a quarter of its value).
Valuation of Sasol (SOL)
So what do we value SASOL shares at based on its current financial results, their expectations of where the crude oil price will be for the next 6 months, their cash generation capacity, their profits and dividends per share and their planned capex in the short term? Well our valuation model places a value of R486 a share. Assuming the second half of their financial year yields the same sort of profits and cash generation as the first 6 months of their financial results. We therefore feel they do offer value at their current price, but with SASOL it is extremely hard to predict their earnings such it is dependent on crude oil and chemicals prices which tend to vary wildly over short amounts of time. And the Lake Charles Chemicals Project might still weigh on them for a while, until it comes online fully and its starts paying back all the capex invested in it.