SASOL’S BAD CHEMISTRY

t is almost impossible to direct legitimate criticism at a management team that has presided over 18% growth in core earnings and a similar growth rate in dividend payouts. But Sasol has again informed investors of further cost overruns at its

Lake Charles Chemicals Project (LCCP) in Louisiana.

The latest update is that the LCCP, which converts natural gas into vehicle fuel and other chemical products, will now cost up to $11.8bn. The initial cost at the final investment decision stage was given as $8.9bn. “Beneficial operation” was to be achieved last year.

Instead the plant only started production from one of seven units, the linear low-density polyethylene unit, two weeks ago. The only attempt at explanation for the delay was this from joint CEO Stephen Cornell: “While the LCCP fundamentals remain firmly intact, we acknowledge the disappointing cost and schedule overrun. The project was [affected] by several challenges, within and beyond our control, in the fourth quarter of the previous calendar year.”

Even taking into consideration the need to protect trade secrets, I don’t see the company winning any awards for transparent communication with investors. This statement does not even begin to give shareholders comfort as to what these challenges were. So they are left in the dark as to whether further delays or cost increases are possible.

Considering the difference is “only” $2.9bn, a third of the original cost, investors used to the runaway costs of SA’S public sector projects may wonder what I am on about. But that would be missing the point. There can be no comparison, and nor should there be, between Sasol’s management team and those of companies owned by the government. Any government, let alone ours in SA. Tempting as it is to do so, I will not even mention the electricity provider or the national air carrier by name.

IOf course Sasol goes on to give assurances about the business case and viability of the project. “Despite incremental cash flows from the project being deferred due to a schedule delay, we remain confident that the project will deliver the steady earnings before interest, taxation, depreciation and amortisation runrate of $1.3bn in financial year 2022,” says Cornell.

Executives need to earn their pay

The company still aims to grow its dividend payments 40% in the next three years, and 45% thereafter. That is comforting. Particularly as no sensible investor can doubt the business case or the necessity of the LCCP.

But it goes without saying that investors pay top dollar for the best management team money can buy, and hiccups like this are not part of the plan. You only need to look at the total remuneration of R86.26m that went to the three top executives in the year ended

June 2018.

Just to provide context, the $2.9bn difference in the project cost equates to about R40bn. That’s about 15% of the current market capitalisation. Put another way, that is R64 a share. That is three times the interim core headline earnings to December, and 11 times the interim dividend. Enough said.

Sasol was set free from the limitations and disasters associated with state ownership 45 years ago. Exactly so that its managers could take calculated risks and execute like the professionals they are supposed to be.

Ballooning project costs are best left to those entities still under the burden of control by politicians who have priorities other than providing steady returns to investors.

And don’t even begin to contemplate how useful $2.9bn would have been for Sasol’s mooted gas-toliquids plant in Mozambique, the company’s nextbiggest investment after the LCCP.

Investors pay top dollar for the best management team, and hiccups like this are not part of the plan