Is there still gas in Sa­sol’s tank?

Finweek English Edition - - KILLER TRADE - FIN­WEEK: MONEY MAT­TERS BY MOXIMA GAMA

De­spite the mas­sive drop in the price of Brent crude oil, which is down to be­low $50 f rom more t han $100 a bar­rel a year ago, I be­lieve it’s a good time to buy Sa­sol.

While prices are ex­pected to re­main un­der pres­sure in 2016 – Vi­tol Group, the world’s largest in­de­pen­dent oil trader, is pre­dict­ing $40 to $60 a bar­rel into next year due to over­sup­ply in the mar­ket – Sa­sol con­tin­ues to per­form well op­er­a­tionally. The petro­chem­i­cal group, whose share price is down more than 30% since its peak in June 2014, has grown liq­uid sales vol­umes by 5% to 61.5m bar­rels in the year to end June, con­served cash to the tune of R8.9bn in the first six months of the year, and re­alised cost sav­ings of about R2.5bn, that is R1bn more than planned.

The cost sav­ings formed part of Sa­sol’s restruc­tur­ing, which saw 2 500 em­ploy­ees take early re­tire­ment or vol­un­tary re­trench­ment pack­ages and led to a sim­pler busi­ness model. Im­ple­mented in 2012, CEO David Con­sta­ble said at the time the plan aimed to “fix the roof while the sun was shin­ing”. On­go­ing cost sav­ings of at least R4.3bn a yea r (com­pared with 2013 num­bers) are tar­geted by t he end of t he 2016 f inan­cial year. Over­all, the group re­ported a 17% de­cline in head­line earn­ings per share, lead­ing to a 14% cut in its div­i­dend for the year to R18.50 (also see page 14). On av­er­age, Brent crude prices were down 33% for the fi­nan­cial year to end June, com­pared with the pre­vi­ous year.

Its chem­i­cal oper­a­tions were the star per­former, with base chem­i­cals (prod­ucts like fer­tilis­ers and poly­mers) grow­ing profit from oper­a­tions by 51% to R10.2bn, and per­for­mance chem­i­cals (which in­clude wax) im­prov­ing 7% to R12.7bn. Its Ex­plo­ration and Pro­duc­tion In­ter­na­tional (EPI) busi­ness, which in­cludes its Mont­ney shale gas as­sets in Canada and gas as­sets in Mozam­bique, cut its losses to R3.17bn from a loss of nearly R6bn in the pre­vi­ous f inan­cial year.

The fu­ture seems bright for Sa­sol, as man­age­ment re­mains metic­u­lous and res­o­lute. De­spite putting a few projects on ice, it re­mains on track to com­plete

ON its $8.9bn eth­ane cracker in Louisiana in the US in 2018, and also plans to ex­pand pro­duc­tion in Mozam­bique. How­ever, one needs to keep a close eye on the oil price in rand, which is the most im­por­tant driver of Sa­sol’s earn­ings. To put it into per­spec­tive; a 10c move in the rand against the dol­lar over a year can af­fect the bot­tom line by R650m. Go­ing for­ward, Sa­sol should be a good in­vest­ment, pro­vided that the rand oil price re­mains close to, or ex­ceeds, R600 a bar­rel. In ad­di­tion, it’s out­per­form­ing all its peers on the Resi10 In­dex. EV­ERY FRI­DAY

AT 1PM.

Sa­sol i s po­ten­tially form­ing a dou­ble-bot­tom pat­tern at R360/share, which would be con­firmed above R500/share. It re­cently breached the re­sis­tance trend­line of its short-term bear trend (formed within its huge con­sol­i­da­tion pat­tern), and up­side above R455/share would make a good en­try point. How­ever, this po­si­tion should be re­vised at R500/share, as Sa­sol has en­coun­tered re­sis­tance there be­fore. Oth­er­wise, con­tin­ued up­side would war­rant an ag­gres­sive reload above that level, as up­side to the ob­jec­tive of the dou­ble-bot­tom pat­tern at R640/share would be pos­si­ble.

POS­SI­BLE SCE­NARIO:

A LT E R N AT I V E S C E N A R I O :

Medium-term con­sol­i­da­tion would per­sist be­low R383/share. How­ever, sup­port must hold at R360/share, or else Sa­sol could fall to the down­side tar­get at R220/share.

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