Sasol Limited -ADR
/ (SSL-NYSE)/ Equity Research / SSL | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 01/10/2010
Current Price (08/09/13) / $47.79
Target Price / $50.00
SUMMARY
Sasol Ltd. is one of South Africa's largest companies with diversified energy and chemical activities along the energy chain. Sasol has a competitive edge over other industry players, given its highly-developed technical expertise in producing synthetic fuels in commercial quantities from low-grade coal and natural gas. A robust balance sheet and strong cash position are other positives in the Sasol story. However, we remain concerned by the group’s unfavorable operating environment and its expensive growth strategy. These negatives offset the positive factors and are expected to persist in the near future. As such, we see the ADR performing in line with the broader market and rate it as Neutral./ Equity Research / SSL | Page 1
SUMMARY DATA
52-Week High / $47.9252-Week Low / $39.94
One-Year Return (%) / 11.83
Beta / 1.40
Average Daily Volume (sh) / 145,173
Shares Outstanding (mil) / 645
Market Capitalization ($mil) / $30,816
Short Interest Ratio (days) / 2.47
Institutional Ownership (%) / 3
Insider Ownership (%) / 1
Annual Cash Dividend / $0.54
Dividend Yield (%) / 1.13
5-Yr. Historical Growth Rates
Sales (%) / N/A
Earnings Per ADR (%) / N/A
Dividend (%) / 2.9
P/E using TTM EPADR / N/A
P/E using 2013 Estimate / 9.8
P/E using 2014 Estimate / 9.8
Zacks Rank *: Short Term
1 – 3 months outlook / 4 - Sell
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Oil-Intl Intgd
Zacks Industry Rank * / 119 out of 267
OVERVIEW
Incorporated in 1979, South Africa-based Sasol Ltd. (SSL) is an integrated energy and chemicals company. It is the leading provider of liquid fuels in South Africa and a major international producer of chemicals. Sasol is fairly unique compared to other international oil companies as it has limited conventional exploration and production operations and uses a proprietary technology (Fischer-Tropsch) to manufacture synthetic fuels (synfuels) and chemicals from low-grade coal and natural gas. Sasol manufactures more than 200 fuel and chemical products that are sold worldwide. The company also operates coal mines in South Africa to provide feedstock for its synthetic fuels plants. Sasol is the operator of the only inland crude oil refinery in South Africa. It produces crude oil in offshore Gabon, supplies Mozambican natural gas to end-user customers and petrochemical plants in South Africa, and with partners involved in gas-to-liquids fuel joint ventures in Qatar and Nigeria.
The group divides its operations in these segments: South African Energy Cluster, International Energy Cluster, and Chemical Cluster. Sasol's energy clusters (South African and International) is focused on the manufacturing, refining and marketing of automotive and industrial fuels, oils and gas, while the chemical cluster consists of businesses that produce polymers, solvents, surfactants, aluminas, waxes, fertilisers, explosives and phenolics. The group’s chemical cluster markets about 200 products worldwide to customers in more than 100 countries. Additionally, Sasol owns other businesses that include Sasol Technology, Sasol Financing and alternative energy ventures.
REASONS TO BUY
Sasol is the largest oil and chemical concern in South Africa, engaged in diversified and highly profitable activities along the energy chain. In particular, the company is a world leader in the unique coal-to-liquids (CTL) technology, owning and operating the largest such integrated commercial facility. Sasol has been manufacturing synfuels and chemical feedstock from coal for over 50 years.
Sasol’s strategic focus continues to be on growing its chemicals portfolio and the commercialization of its gas-to-liquids (GTL) technology by constructing GTL plants in gas-rich regions of the world. The GTL technology, an offshoot of Sasol’s years of commercial experience with its South African synthetic fuels operations, plays a critical role in the group’s long-term growth plans. With fluctuating crude oil prices and diminishing reserves, countries around the world are looking for alternative sources of energy. As such, there is a compelling case for GTL technology.
Sasol’s deleveraged balance sheet and strong cash position (operating activities generated R47.9 billion in fiscal year 2012) keeps the group wellequipped to weather the global economic storm and fund its growth program in tough credit markets.
With gas prices remaining at depressed levels and thereby diverging significantly from oil prices, Sasol – through itsupstream North American shale gas investments – is looking to utilize the spread by using its GTL technology. This is expected to be more profitable than the company’s traditional business of producing motor fuels from coal.
REASONS TO SELL
While approximately 60% of Sasol’s operations are based in South Africa, about 90% of its sales are either denominated in dollars or are influenced by the global commodity and benchmark prices, which are quoted in dollars. As such, the group is exposed to risks associated with an unfavorable rand-dollar exchange rate.
Given Sasol’s strong balance sheet and net cash positive status, the company can pursue an aggressive CTL and GTL growth program. However, we believe this will stretch Sasol’s medium-term returns significantly, as the company would have to employ a considerable amount of nonperforming capital on its balance sheet until start up (not expected before 2015).
Significant uncertainties remain with respect to the legal and regulatory environment in South Africa, particularly with respect to the government’s Black Economic Empowerment (BEE) initiative. The BEE program mandates companies to sell a certain portion of their business to black investors to include them in the country's mainstream economy after exclusion under apartheid.
Sasol conducts operations in many countries. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc.
RECENT NEWS
Fiscal Year 2013 Results
Sasol plans to release results for the fiscal year ended Jun 30, 2013 on Sep 09, 2013.
Six Month Results
On March11, 2013, Sasol Ltd. announced slightly improved results for the six months ended December 31, 2012, aided by higher sales volumes and a favorable exchange rate, partially offset by lower oil and product prices.The South Africa-based petrochemicals group reported headline earnings per share, excluding one-time items, of R23.89 (US$2.81), up from R23.34 earned during the corresponding period last year.
Segmental Analysis
South African Energy Cluster: Within its South African energy cluster, Sasol Mining's operating income increased 30% to R1.3 billion, buoyed by increased sales prices and favorable currency fluctuations. These were partially offset by reduced U.S. dollar export coal prices and lower output.
Sasol Gas generated an operating profit of R2.0 billion, up 39.0% year over year. The positive comparison can be attributed to higher gas prices and sales volumes.
Sasol Synfuels' operating profit jumped 26% to R12.5 billion, mainly reflecting higher production volumes and positive foreign exchange movements that more than made up for cost escalation.
Sasol Oil reported an operating profit of R907 million as against R1.1 billion in the prior-year period. The decline primarily resulted from reduction in volumes. To some extent, this was offset by higher margins.
International Energy Cluster: Sasol Synfuels International recorded an operating profit of R1.2 billion, up from R1.0 billion earned during the previous half-year period. The improvement was due to stronger performance at the Oryx gas-to-liquids plant in Qatar and favorable currency fluctuations.
Sasol Petroleum International incurred an operating loss of R707 million, as against an income of R121 million a year ago, mainly reflecting depreciation of the company’s Canadian assets on the back of lower North American gas prices. This was partially offset by increased production from Sasol’s Mozambique and Canada operations.
Chemical Cluster: Sasol Polymers dived to operating loss of R2.4 billion, from a profit of R546 million in the prior year comparable period. The segment results were adversely affected by domestic margin pressure and international translation losses, partially offset by better volumes from South African operations.
Sasol Solvents' operating income was down to just R48 million, from the previous year's level of R1.1 billion. Segment results were affected by weak product prices and margins, whose effects were partly mitigated by higher production volumes.
Sasol Olefins & Surfactants reported an operating profit of R1.6 billion, a slight decrease from the income of R1.7 billion during the corresponding period of 2011. The negative comparison came on the back of margin pressure in the company’s European operations, almost offset by low U.S. ethane prices.
Operating Cash Flow & Capex
Sasol generated R21.4 billion in operating cash flows, a 5.7% year-over-year decrease, primarily due to higher working capital, somewhat nullified by higher operating income. The world's largest producer of motor fuels from coal spent R14.4 billion in capital expenditures during the period.
Dividend
Sasol announced an interim dividend of R5.70 per share. The dividend will be paid on April 15 to shareholders of record as on April 12, 2013. The holders of American Depositary Receipts (“ADRs”) will be paid on April 25, 2013.
VALUATION
We like Sasol for its diverse portfolio of assets that produce a wide array of chemical and liquid fuels. The company specializes in GTL and CTL technologies, which convert natural gas and coal to diesel and other liquid fuels. Recently, these technologies have been attracting attention because they provide an alternative to traditional oil. Additionally, Sasol’s deleveraged balance sheet and strong cash position keeps the group well-equipped to weather the global economic storm and fund its growth program in tough credit markets.
However, we believe that the company’s difficult operating environment, characterized by a fluctuating domestic currency and high costs, will keep near-to-medium-term earnings under pressure. As such, we rate Sasol ADRs as Neutral and expect the stock to perform in line with the market.
Sasol’s trailing 12-month P/CF multiple is 10.6 compared to the 5.1 average for the peer group and 13.5 for the S&P 500. The company’s trailing 12-month EV/EBITDA multiple is 6.9, compared to the industry average of 15.8.
Our $50 price objective reflects a multiple of 11.1X trailing twelve-month cash flow.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of SSL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1025 companies covered: Outperform - 15.2%, Neutral - 77.8%, Underperform – 6.1%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Analyst / Nilanjan ChoudhuryQCA
Lead Analyst / Nilanjan Choudhury
Nilanjan Choudhury
Reasons for Update / Routine Update
/ Equity Research / SSL | Page 1