R33bn rights issue waits in the wings for Sasol

As its share price continues to plunge, synthetic fuel and chemicals producer Sasol said on Tuesday that a R33bn rights issue could be a measure of last resort as it moved to cut costs and sell assets.

In an investor call on Tuesday afternoon, Sasol CEO Fleetwood Grobler and CFO Paul Victor provided more details of a package of measures, which was first mentioned on Thursday, and is aimed at ensuring that the group can be profitable even in a challenging operating environment.

Sasol plans to generate $6bn (about R99bn) in additional cash through cost-saving measures, asset disposals and a rights issue, if needs be.

This prompted another assault on its share price, which fell 18% to R36.69, bringing its 2020 decline to 88%.

SA’s biggest company by sales is now worth just R23bn, almost R13bn less than retailer Mr Price, in an astonishing fall from grace for a company that was valued at more than R400bn six years ago.

Sasol is trying to bring down its debt levels, which have peaked at R143bn largely due to its troubled Lake Charles Chemicals Project, which has run 45% over budget. In recent weeks this has coincided with plummeting oil prices and the intensification of the Covid-19 pandemic, which drove its share price 72% lower in the past week.

Although Sasol announced to the market on Tuesday that a potential rights issue of up to $2bn had been underwritten on a standby basis by Citigroup, Bank of America, and JPMorgan, Victor said raising equity from its long-suffering shareholders remains a last resort.

He said Sasol was confident it could first achieve $2bn in cost savings over the next 24 months, although this will not involve retrenchments at this stage.

Sasol also aims to raise significantly more than $2bn, which was already targeted in terms of an existing asset disposal programme.

Some analysts are, however, sceptical that sufficient cash can be raised from selling assets in the current, distressed market.

“Your market cap isn’t $2bn,” said Alex Comer, a JPMorgan analyst, on the call.

“I’m struggling to see who is going to help you out in terms of disposals.”

Grobler, however, said Sasol is well-placed to move ahead with a number of asset disposals, which has already progressed. He said Sasol is now also in talks with a potential partner for its US base chemicals assets, which include the Lake Charles project, although he could not divulge further detail at this stage.

Sasol’s continuing asset review process has given the group useful insight into the inherent value of the assets and

will ensure that the sales are fair value, Grobler said. Victor said about $2.5bn in liquidity headroom gives the group optionality to ensure that it secures the right value for its assets.

Sasol said it would not compromise the integrity of its asset base through the disposal. Only “if assets do not increase the competitive advantage of this future Sasol, they may be exited, or selective partnering may be pursued”.

Wade Napier, diversified resources analyst at Avior Capital, said the more Sasol can raise through asset sales the commensurately lower the need will be to raise funds through a rights issue.

“The question management then needs to ask is whether they believe they’ll get better value from selling assets or selling shares in itself — which is essentially what a rights issue is.

“It can be argued that Sasol would get better value – or less shareholder value detruction – by pursuing asset sales instead of a rights issue, given the share price has declined from R320 a share in January 2020 to under R40 a share currently.”

Sasol said the equity raise will be reassessed after it takes stock of its results for the year to end-June 2020, as well as the macroeconomic environment.