Sasol in grip of the bear
Share price has shown little profit for investors since 2005
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’’.