Sa­sol in grip of the bear

Share price has shown lit­tle profit for in­vestors since 2005

Finweek English Edition - - Creating wealth - LU­CAS DE LANGE

SINCE SEPTEM­BER 2005 Sa­sol’s share price has been a great dis­ap­point­ment for in­vestors, as its graph in re­la­tion to the all-share in­dex shows. If its share price is com­pared with the value of the re­sources in­dex, the pic­ture’s even drea­rier.

While the two big guns in the in­dex – An­glo Amer­i­can and BHP Bil­li­ton – pro­vided their share­hold­ers with fine prof­its, Sa­sol’s per­for­mance was a let­down. Its price is now scarcely any higher than it was in Septem­ber 2005 and its latest re­sults – for the half-year to De­cem­ber 2006 – were very lack­lus­tre.

Though in­come grew by 22% to R37,6bn – largely thanks to higher oil prices and a weaker rand – op­er­at­ing profit in­creased by only 12% to R12,2bn. The op­er­at­ing profit mar­gin weak­ened to 32,4% (35,1%), while head­line earn­ings per share im­proved by only 7,8% com­pared with the cor­re­spond­ing pe­riod in the pre­vi­ous year. The in­terim div­i­dend rose by 10,71% to 310c.

An im­por­tant rea­son for its unin­spir­ing re­sults was the tem­po­rary statu­tory clo­sure of its syn­thetic fu­els op­er­a­tions in Se­cunda, af­fect­ing the most im­por­tant source of turnover and profit. That re­sulted in pro­duc­tion fall­ing by 7% and the group there­fore not be­ing able to utilise fully the higher rand prices.

It’s likely that Sa­sol’s profit in the cur­rent half-year to June might also not be any­thing to write home about, as lower prices are ex­pected by man­age­ment for oil and re­fined prod­ucts.

The first con­tri­bu­tion by the group’s Oryx gas-to-liq­uid (GTL) project in Qatar is be­ing awaited with in­ter­est. The unit has be­gun pro­duc­tion and, says a Sa­sol spokesman, they’re “ex­cited” about the un­prece­dented re­turn that in­vest­ment should pro­duce.

The pos­si­bil­ity of build­ing a sim­i­lar, but larger, plant in Aus­tralia is cur­rently be­ing in­ves­ti­gated. How­ever, that’s still at a very early stage and a de­ci­sion has yet to be made about con­duct­ing a fea­si­bil­ity study.

Mean­while, of­fices have been opened in China and In­dia with a view to pos­si­ble in­vest­ments in plants for the con­ver­sion of coal to liq­uid fu­els. In­ves­ti­ga­tions into pos­si­ble projects are also un­der way in Al­ge­ria and the US.

Sa­sol is cur­rently in­volved in ap­prox­i­mately 180 projects val­ued at R62bn, which should be fi­nalised over the next seven years. The greater share of the money will be spent in Africa, largely in SA, Nige­ria and Mozam­bique.

The group is there­fore in the midst of the huge po­ten­tial of­fered by an en­ergy-hun­gry world that wants to use Sa­sol’s lead­ing tech­nol­ogy to con­vert gas and coal into liq­uid fu­els.

Sa­sol is gen­er­ally re­garded as an ex­cel­lent com­pany with a fine his­tory and out­stand­ing prospects. So why the poor price per­for­mance on the stock mar­ket?

Var­i­ous fac­tors play a role in that, in­clud­ing the group’s own fore­cast that the cur­rent half-year will be weaker due to ex­pected lower oil prices plus weaker prices for chem­i­cal prod­ucts. Sev­eral of its in­ter­na­tional projects are also be­ing de­layed be­cause of a short­age of skills.

Its in­abil­ity to get rid of Con­dea, the large Euro­pean chem­i­cal group, is also trou­bling an­a­lysts. Sa­sol bought the com­pany from Ger­man util­ity RWE for 1,3bn euro (around R12,4bn) in 2001. Much was ex­pected of the in­vest­ment ini­tially, partly be­cause it was re­garded as a di­ver­si­fi­ca­tion away from the volatile en­ergy in­dus­try. How­ever, high oil prices hit it badly. The irony is that at the same time that caused the fuel di­vi­sion to flour­ish. Cur­rently much is ex­pected of its gas to liq­uid ac­tiv­i­ties.

Then there’s also Gov­ern­ment’s in­ves­ti­ga­tion into the pos­si­bil­ity of in­tro­duc­ing a wind­fall tax. How­ever, most an­a­lysts aren’t overly con­cerned about that, since Fi­nance Min­is­ter Trevor Manuel has a rep­u­ta­tion for act­ing wisely.

Per­haps the main rea­son is that, though the group has such a good record and its prospects are ex­cit­ing, those haven’t yet been con­verted into ex­cep­tional profit growth and sharp div­i­dend in­creases, such as those found at other re­sources com­pa­nies. In other words, there are bet­ter op­por­tu­ni­ties for price growth else­where in the mar­ket.

As the graph of its price:vol­ume trend shows, there’s lit­tle buy­ing pres­sure. Sa­sol’s price graph pat­tern is also neg­a­tive. It’s bro­ken down­wards out of a tri­an­gle, while its long-term mov­ing av­er­age has also turned down­wards, usu­ally a bear­ish sign. It’s cur­rently trad­ing at a his­tor­i­cal price:earn­ings ra­tio of 11 and the div­i­dend yield is 3,01%. That’s not ex­pen­sive for such a top qual­ity com­pany.

Be­cause of its high liq­uid­ity, Sa­sol is pop­u­lar among spec­u­la­tors, who buy it dur­ing down­turns and then sell again when, for some or other rea­son – such as an un­ex­pected spike in the oil price – there’s an up­turn. Nev­er­the­less, it’s also widely rec­om­mended by an­a­lysts for the longer term. Be­cause, as a busi­ness, it is – as CEO Pat Davies puts it – in a ‘‘sweet spot’’.



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