Sasol posts profit after a ‘watershed’ year

Sasol announced a return to profitability in what CEO Fleetwood Grobler described as a watershed year for the group. Sasol met and exceeded its short-term targets, and also completed most of what it set out to do to ensure long-term sustainability.

The ambitious Lake Charles Chemical Project (LCCP) – that nearly sank the company – has been competed and all units are in beneficial production. Parts of the plant that were shut or damaged due to hurricanes are also back in production. Grobler noted that it was the worst hurricane season in the US in more than 50 years.

In addition, asset sales of $3.5 billion have been concluded to reduce debt to well within parameters agreed to with creditors. Earnings recovered to R10.5 billion in the year to June 2021 compared to the loss of R91.9 billion in the previous financial year.

Sasol posted headline earnings per share of R39.53, a huge improvement on the loss of R11.50 in the previous year.

Summary of annual results and share price performance

12m to June (Rm)	2021	2020	% change
Revenue	201 910	190 367	6.1%
Ebitda	48 420	34 976	38.4%
Earnings	10 532	-91 917	>100%
Headline EPS	R 39.53	-R11.50	>100%
DPS	R 0	R 0	–
Share price	R 208.57
12m high	R 266.54
12m low	R 71.22
PE	5.27624589
DY	0.0%

Source: Sasol announcement and JSE data

Grobler says that the overall financial performance was underpinned by a strong cost, working capital and capital expenditure performance which delivered approximately $2.4 billion in savings, compared to a target of $1 billion.

“More broadly, the chemicals business benefited from higher chemical prices and stronger demand, particularly in the second half of the year with a notable increase in the gross margin. In the energy business, the easing of lockdown restrictions in SA contributed to stronger demand for liquid fuels, supported by higher Brent crude oil prices.

“Building from this stronger base business and balance sheet, we kicked off our new operating model on June 1, 2021. The programme is expected to deliver sustainable improvements over the five-year implementation phase to ensure the company is competitive, highly cash generative and sustainably profitable even in a low-oil-price environment,” says Grobler.

“We also significantly strengthened the balance sheet and mitigated the need for a rights issue due to excellent progress across our self-help initiatives and the asset divestment programme alongside an improved macroeconomic environment,” Grobler announced to shareholders.

Paul Victor, chief financial officer, commented in a presentation to shareholders, analysts and reporters that Sasol’s programme of asset sales has been largely completed and that $3.5 billion of the $3.8 billion in projected asset sales have been concluded. “The proceeds have been banked,” says Victor.

The asset sales and the return to profitability made it possible to reduce debt further. “The balance sheet has been de-risked,” says Grobler.

The financial statements show that gross debt has been reduced by more than R100 billion since a year ago. Non-current liabilities decreased from R225.5 billion at the end of the 2020 financial year to R150.7 billion at the end of June 2021 and current liabilities decreased from R87.6 billion to R53.9 billion – amounting to a total decrease of more than R100 billion.

Victor notes that the group is well within the debt covenant of 3.5 times debt to earnings before interest, tax, depreciation and amortisation (Ebitda). The ratio fell to 1.5 times compared to 4.3 times at June 30, 2020, when Sasol had to ask creditors to allow the higher ratio.

This puts Sasol on a more secure footing for the future, as the group also issued new bonds to the value of $1.5 billion. A benefit of the new bonds is that it allowed a balancing of future debt maturity dates.

Thus, Sasol announced that a rights issue will not be necessary.

However, management says that the board decided not to declare a dividend yet. “The restoration of dividends is a key priority, but in the context of the high level of macroeconomic uncertainty the directors believe it is prudent not to declare a dividend at this stage,” says Grobler.

Despite the absence of a dividend, shareholders should be pleased with their investment over the last year. The share price recovered from its intra-day low of R77 at the end of October 2020 to the current R208 per share, although investors knocked 5% of the price after they had read the results this morning.

The new positive headline earnings per share places the stock on a low price/earnings (PE) ratio of 5.3 times compared to the around 8 times that investors were used to in the past.

The PE also looks reasonable if one considers management’s forecast for the new financial year. “We expect an overall solid operational performance for the year ending June 30, 2022,” says Grobler.

This is based on a recovery in mining volumes, the noted increase in crude oil prices, a recovery in liquid fuels volumes in the absence of more Covid-19 lockdowns and further growth in production and demand for chemicals from LCCP. As a consequence, management expects the debt-to-Ebitda ratio to remain stable or decline further, to between 1 to 1.8 times.

Who knows, a dividend might even be possible next year.