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Sasol (SOL) will be the stock in focus: (Price at time of writing: R375.30 (18 Sep 2016))
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Background and overview of SASOL (SOL)
Sasol was established in the 1950's and is actually an acronym for Suid Afrikaanse Steenkool Olie en Gas Korperasie (in English it translates to South African Coal Oil and Gas cooperation. They referred to themselves as an integrated chemicals and energy company. Sasol is active in 36 countries and employ over 30 000 people. They are actively involved in mining, in particular mining of coal that is used on the production of their synthetic fuels. Sasol is also involved in oil and gas exploration (in particular shale gas in Canada). Sasol has the ability to make Coal to Liquid fuels and Gas to Liquid fuels. One of a few companies in the world that is able to do that. Hence Sasol's active involvement in gas exploration as they can turn gas into liquid fuels. They also sell various products that are by products from the main production processes.
Scroll over or click on the funnel chart to get more details of SOL's latest financial results
Financial review:
The net profit margin achieved by Sasol amounted to 8.7%. This is an extremely healthy profit margin achieved considering the drag of the lower oil price on potential profits. Sasol's profits are directly linked to the fortunes of the oil price. Higher oil prices means higher fuel prices which in turn means greater margins for Sasol. Another variable that has a major impact on their profits is the exchange rate. As this depreciates their reported earnings increases as they earn major parts of their profits in other currency denominations (yet their financials are reported in Rands). Thus any Rand weakeness will help their reported earnings.
The pie chart below shows the contribution of SOL's different divisions to their revenue and pre-tax profit earnings.
From the pie chart above it is clear that the majority of SOL's turnover is made from their Energy and Performance Chemicals divisions. These two divisions making up over 70% of their turnover. The same can be said for these two divisions contribution to their pre tax profits, except that the margins earned by their Energy division being stronger than their Performance chemicals division as Energy's contribution to turnover was close to 34% but contribution to pre-tax profits were close to 41%, while the Performance chemicals division contributed 39% to turnover but only 33% to pre-tax profit.
Diluted earnings per share for SOL came in at R21.60 (putting them on a PE ratio of 17.3). Their dividend for the full year amounted to R14.80 placing them on a dividend yield of 3.94%. Both their PE ratio and dividend yield shows that SOL is not trading at the most demanding multiples around. Cash generated per share amounted to close to R89 a share (a whopping R54.7billion generated in cash, although this is down from R61billion the year before). SOL has a very strong balance sheet with assets far surpassing their liabilities. In addition to this they are sitting with R52billion in cash and equivalents on their balance sheet. So while most of what we reported on so far is pretty positive considering their operating environment there are a few negatives.
Diluted earnings per share for SOL came in at R21.60 (putting them on a PE ratio of 17.3). Their dividend for the full year amounted to R14.80 placing them on a dividend yield of 3.94%. Both their PE ratio and dividend yield shows that SOL is not trading at the most demanding multiples around. Cash generated per share amounted to close to R89 a share (a whopping R54.7billion generated in cash, although this is down from R61billion the year before). SOL has a very strong balance sheet with assets far surpassing their liabilities. In addition to this they are sitting with R52billion in cash and equivalents on their balance sheet. So while most of what we reported on so far is pretty positive considering their operating environment there are a few negatives.
And a lot of that has to do with lower oil prices and the impact this has on the viability of Shale gas operations. Shale gas operations requires oil prices at a certain level for it to be economically viable. With current oil price levels most Shale gas operations are not economically viable and therefore significant losses are made on such operations and businesses.
Exploration and Production International (E&PI) division of SOL reported an operating loss of R11.7billion, compared to an operating loss of almost R4billion during the prior period. R9.8billion of this being an impairment on the Canadian Shale gas operations. The question for SOL is do you keep going with the Shale gas project and continue to make significant losses in the short run, in the hopes of making up the losses and more in future?
In essence is SOL busy throwing away good money on "bad money"? Then there are project cost overruns at Sasol's Lake Charles Chemicals Complex to the tune of $2.1billion more than what was initially estimated in October 2014.
Exploration and Production International (E&PI) division of SOL reported an operating loss of R11.7billion, compared to an operating loss of almost R4billion during the prior period. R9.8billion of this being an impairment on the Canadian Shale gas operations. The question for SOL is do you keep going with the Shale gas project and continue to make significant losses in the short run, in the hopes of making up the losses and more in future?
In essence is SOL busy throwing away good money on "bad money"? Then there are project cost overruns at Sasol's Lake Charles Chemicals Complex to the tune of $2.1billion more than what was initially estimated in October 2014.
A few financial ratios to mull over for Sasol (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 0.84 (more than 2 shows high levels of financial leverage).
- Current Ratio: 2.6 (A measure of liquidity. Less than one signals possible trouble in paying off current liabilities). Strong ratio for SOL
- Quick Ratio: 2.03 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 3.85%
- Return on Equity (ROE): 7.07%
- Net Profit Margin: 8.7%
- Dividend Yield: 3.94%
Debt to equity and the current and quick ratios are very solid. The worry for SOL investors is the low ROA and ROE. But this is as we mentioned largely due to their fortunes being tied to the oil price which has not been a stellar performer in recent years.
Valuation:
SOL has been having a tough time recently largely due to lower oil prices. It is the nature of their business, when oil prices increase strongly they earn massive windfall profits from it, when oil prices come down, their profits plummet. The trick for SOL is to ensure that during the good times they build up a solid enough balance sheet to carry them through the bad times.
Based on SOL's current financials and the oil prices, we value SOL at between R372.19 and R373.50. We therefore feel SOL is close to being fully priced (based on current oil price and the misfortunes that's bound to continue for shale gas companies in at least the medium term). Until the average crude oil price starts increasing significantly we feel investors money could be better spent elsewhere where more value can be found. But in saying this, SOL should form an integral part of any long term share portfolio for South Africans.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
Based on SOL's current financials and the oil prices, we value SOL at between R372.19 and R373.50. We therefore feel SOL is close to being fully priced (based on current oil price and the misfortunes that's bound to continue for shale gas companies in at least the medium term). Until the average crude oil price starts increasing significantly we feel investors money could be better spent elsewhere where more value can be found. But in saying this, SOL should form an integral part of any long term share portfolio for South Africans.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.