the weakening rand, while the outlook for car sales from the likes of Imperial and Bidvest means local petrol demand is likely to rise over time.
“A weaker rand is fundamentally good for Sasol because its product is sold relative to global oil prices, which are priced in dollars, yet its costs are priced in rand,” says Tshikhudo. “The only overhang is that it’s spending a lot of money on projects that will only begin to reap profits in five or six years’ time. However, if the oil price remains high, it’ll make a lot of money off of those projects.”
That suggests Sasol is a risky investment if the oil price drops off as it could significantly impact its cash flows in the short term thereby hampering its ability repay debt. That’s not to be underestimated given that the company said in September last year that it plans to issue its first dollar-denominated bonds to help fund the US projects.
Tshikhudo says that if Sasol can’t generate the cash to repay debt, it would need to “come to market” or in other words, do a rights issue and dilute the existing value of its stock. If one is prepared to weather that risk and take a long-term view on Sasol, then it ’s hard not to argue that being in a position to sell fuel in a gas- guzzling economy like the US can’t be bad thing over time.
At R397/share Sasol i sn’t exactly cheap on an absolute basis but on an earnings multiple of 9.38 at the time of writing, it ’s certainly more economical than some other counters on the JSE. It’s also still way off the R506.50 that the share traded at just prior to the advent of the 2008 financial crisis. While those may have been heady economic times, it does give some indication of how much room Sasol has to run should the global economic recovery achieve a more sustainable footing.
Moreover, with the rand hovering near multi-year lows, Sasol could be the ideal hedge against local currency risk.