Sasol’s second-half bloodbath

Sasol’s warning to shareholders to expect a loss of between R146.75 and R148.15 per share for the year to June 2020 is more than just a trading update as required by JSE rules and regulations. Shareholders should take note of the implicit warning that the second half of the financial year – covering the difficult period of January to June 2020 – will probably be the worst since Sasol was born in 1950.

This becomes clear when pulling the results for the first six months to December 2019 closer. On the morning of February 24, Sasol reported a drop of 53% in earnings before interest and tax and a decline of 74% in headline earnings per share to R5.94.

The latest warning that shareholders must brace for a headline loss of between R8.72 and R14.86 per share for the full year to June indicates that Sasol suffered huge losses in the second six months. Based on the midpoint of R11.80 of the (unusually wide) guidance, Sasol suffered a headline loss per share of R17.74 in the last six months.

This translates to a total loss of billions of rand.

Sasol announced in its trading update that its financial results for the year to June were impacted by the Covid-19 pandemic and a severe decline in crude oil and chemical product prices, as well as a very weak macro-economic environment.

Although Sasol warns that earnings before interest, tax, depreciation and amortisation (Ebitda) is expected to decline by between 17% and 37% to anything between R30 billion and R39.5 billion compared to the R47.6 billion of the 2019 financial year, it is still a profit.

Reasons

Management blames an 18% decrease in the rand oil price and lower global chemical and refining margins for the lower profit, saying that lower costs actually neutralised the worst of it.

The largest contributors to the big decline in Ebitda and eventual bottom line loss relate to impairments to the value of assets within most of Sasol’s different divisions.

“Aggregate pre-tax impairment charges of approximately R122 billion have been recognised in the 2020 financial year,” according to the trading statement. The value of assets in its base chemicals and performance chemicals divisions in the US have been written down by R99 billion, and that of its energy portfolio by some R12.5 billion.

Normal depreciation, according to Sasol’s accounting policies, has been raised against the big Lake Charles Chemical Project as the different units at the massive plant have all reached beneficial service. Costs, such as depreciation and interest capitalised to date, will be accounted for through the income statement going forward.

Sasol warned previously that income would lag these costs as production starts off low and builds up to economic volumes.

Luister na Ryk van Niekerk se onderhoud met Sasol FD Paul Victor (or read the transcript here): 

The rand

Another important impairment noted in the trading update is the effect of the exchange rate on monetary assets and liabilities due to a decline in the value of the rand, ending the financial year 23% weaker. In Sasol’s case, the effect on debt is much larger than the effect on cash balances until its US assets start to produce the promised big income streams.

Read: Sasol’s debt reduction programme on track

While shareholders seemed unperturbed by the bad news coming from Sasol with the share price increasing by nearly 6% an hour or so after the release of the trading update, tax officials would have dreaded it.

While last year’s results disclosed a tax liability of R1.5 billion for the year to June 2019, the results alluded to in the trading update indicate that Sasol will pay very little tax this year. Its profitable SA synfuels business was severely curtailed during the months-long lockdown, while costs – especially interest charges – stayed largely unchanged.

Sasol will announce its results next Monday, August 17.