Sasol warns of earnings decline
TRADING UPDATE: DROP OF LEAST 20% IN FIRST HALF
Company assures shareholders latest funding activities should not affect its net debt position.
Not only did Sasol warn shareholders that they can expect headline earnings per share (Heps) to decline by at least 20%, it also warned that the results for the six months to December 2019 may be further affected by adjustments due to the closure of its books at the end of the reporting period.
“This might result in a change in the estimated earnings. This trading statement only deals with the comparison to the prior period,” reads the trading update.
“A more detailed trading statement will be published as soon as more certainty has been attained with respect to the range of the decrease in [Heps] and EPS [earnings per share].”
Investors will immediately think of the possibility of more adjustments relating to Sasol’s huge Lake Charles Chemicals Project (LCCP) – and, indeed, Sasol does refer to it again.
Management said it pursued steps to enhance its liquidity position with debt expecting to reach a peak during 2020 with the final completion of the huge project.
Sasol has taken a number of actions to fulfil its commitment to balance sheet flexibility, access to liquidity and maintaining an optimal funding mix, according to the latest statement.
Sasol has reiterated that the LCCP will change the company totally. It is set to grow foreign earnings significantly, as well as increase the contribution by the chemical division to reduce the exposure to the mainly SA fuel-manufacturing businesses.
Management also repeated the message that gearing will peak in 2020 in accordance with the original planning of the project, but will be somewhat higher than estimated.
After final commissioning towards the third quarter of 2020, debt levels are expected to drop rapidly.
While Sasol reassured shareholders in the trading statement that the latest funding activities should not affect its net debt position, management disclosed that lenders have agreed to relax the understanding that Sasol maintain its net debt to earnings before interest, tax and depreciation at three to 3.5 times until June 2020.
This seems to indicate that operating profit is expected to take another hit during the six months to December, and also in the following six months.
A look at Sasol’s figures over the past few years shows that shareholders are well aware of the decline in profits since 2015, when work on the Lake Charles project started in all earnestness.
Debt increased to R127 billion at the end of the 2015 financial year, compared with the preLCCP levels of R69 billion in 2012.
However, one should bear in mind that Sasol also spent capital on its other projects around the world, although LCCP was destined to become the biggest.
When the building of the plant started to gain momentum in 2016 and 2017, debt increased even faster, to R178 billion in June 2016 and all the way to R244 billion by the end of June 2019.
Debt compared to total assets increased from 35% in 2012 to 52% in 2019.
Net finance costs increased as well, from a low of R705 million in 2014 to more than R2 billion in 2018, before easing to R1.55 billion in 2019.
Shareholders are probably waiting anxiously for the halfyear figures to December.
Sasol will announce its results towards the end of February.