Look­ing good due to oil price and US project

Financial Mail - Investors Monthly - - Analysis - Lisa Steyn

The 2019 fi­nan­cial year will be a defin­ing one for syn­fu­els and chem­i­cals pro­ducer Sa­sol, and al­ready it’s off to a good start.

The com­pany share price had in­creased 41% in the past six months on the back of the oil price ris­ing from $70 to $80 a bar­rel since Jan­uary. This puts a strain on SA’s petrol con­sumers, but it is a bonus for Sa­sol — which pro­duces syn­thetic fu­els from coal from its Se­cunda plant at a breakeven price of $40 a bar­rel. Though global oil stocks are in deficit, Opec (the Or­gan­i­sa­tion of the Pe­tro­leum Ex­port­ing Coun­tries) has in­di­cated it has no in­ten­tion of in­creas­ing oil out­put any time soon. This will keep oil prices high, if not push them higher.

The oil price is not the only thing go­ing for Sa­sol. The worst ap­pears to be over for its Lake Charles Chem­i­cals Project in the US, which had been hit by cost over­runs of $2bn and had dam­aged in­vestor sen­ti­ment.

Now 88% com­plete, the $11.3bn project is on track to start com­ing on­line be­fore Christ­mas, when it can start pay­ing off.

It’s ex­pected the project will con­tribute between $250m and $300m in cash flows in the 2019 fi­nan­cial year.

In a note, an­a­lysts from JPMor­gan said Sa­sol con­tin­ues to head in the right di­rec­tion.

Do­mes­tic costs ap­pear un­der con­trol and the chem­i­cals project is ap­proach­ing ben­e­fi­cial op­er­a­tion.

“Im­por­tantly, af­ter years of heavy in­vest­ment … capex looks set to fall ma­te­ri­ally and we be­lieve Sa­sol is on the cusp of a sig­nif­i­cant turn­around in free cash flow — the best we can find of any ma­jor oil/ chem­i­cal stock in our uni­verse,” the note said, la­belling this a “cash moun­tain”.

Next year, the bal­ance sheet will be geared to between 40% and 44%, but from 2020 it will be­gin delever­ag­ing rapidly. Sa­sol teams con­tinue to lay the ground­work for po­ten­tial ac­qui­si­tions so that when sig­nif­i­cant free cash flow starts to pour in, it can be well spent. The com­pany has, how­ever, promised not to spend more than 10% of its mar­ket val­u­a­tion on cap­i­tal ex­pen­di­ture in any given year, and has said it will never again em­bark on projects as large as Lake Charles with­out a part­ner.

Sa­sol has com­mu­ni­cated its clear in­ten­tion to in­crease in­vestor re­turns too. JPMor­gan an­a­lysts fore­cast div­i­dends could dou­ble in three years.

And it’s not in the price, they said. “Sa­sol’s share price has ral­lied with the higher oil and weaker rand. How­ever, we still do not be­lieve the stock is dis­count­ing spot — in fact, it looks cheaper than it has done for a while, in our view.”

A num­ber of one-off items hurt the com­pany earn­ings for the year ended June 2018,

The scrap­ping of the com­pany’s gas-to-liq­uids plant in the US and di­vest­ing from Cana­dian shale as­sets, for ex­am­ple, were large im­pair­ments. A R2.9bn share-based pay­ment to its Khany­isa em­pow­er­ment scheme also hit prof­its.

In­ter­rupted elec­tric­ity sup­ply had hurt pro­duc­tion and sales and the com­pany is in the process of rem­e­dy­ing this with the as­sis­tance of state-owned power util­ity Eskom. The strong rand also af­fected Sa­sol’s Chlor Vinyl busi­ness, which makes plas­tic pip­ing, and it suf­fered a R5.2bn im­pair­ment. The cur­rency has since weak­ened — not just be­cause the coun­try has slipped into a re­ces­sion, but in the medium to long term it is weak­en­ing in line with other emerg­ing mar­kets which have fallen out of favour as the US con­tin­ues to hike in­ter­est rates.

One risk to the out­look, which will show it­self soon, is a strike by trade fed­er­a­tion Sol­i­dar­ity. Its mem­bers, mostly white and highly skilled Sa­sol em­ploy­ees, have em­barked on in­dus­trial ac­tion in protest against be­ing ex­cluded from Sa­sol’s new em­ployee share scheme, which is in­tended to boost the com­pany’s black own­er­ship.

The in­dus­trial ac­tion was or­ches­trated to co­in­cide with a three-week planned main­te­nance shut­down at Sa­sol’s Se­cunda and Sa­sol­burg plants. Ac­cord­ing to Sol­i­dar­ity, de­lays in restart­ing op­er­a­tions will come at sig­nif­i­cant fi­nan­cial cost to the com­pany.

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