Tuesday, January 18

Sasol closes the book on his bad years


Sasol shareholders experienced many bad years, starting in 2014 when the share price plummeted from more than 600 rand to less than 400 rand when investors realized that the group, admired at SA for converting coal In gasoline, he bit off a lot more than he could digest when he decided to build a large chemical project in the US At that stage, Sasol’s projects in other countries were not resounding successes, either.

Then things got worse. Construction delays at the Lakes Charles Chemical Project (LCCP) and an increase in costs, coupled with a decline in the value of the rand, caused investors to sell off and the stock to drop just above R200.

Sasol was about to add another digit to the statistic of South African companies that tried, but failed, in the international business world.

It was close. Only common sense, pressure from shareholders, and pressure from banks awaiting repayment of large loans forced a change in management and a change in strategic direction.

A new leadership was appointed and a lot was promised.

Shareholders pretended to believe them, but continued to switch from Sasol to tech stocks.

Analysts improved Sasol from “sell” to “hold”, but mainly because a deterioration in the global economic environment pushed the stock below R200. The Covid-19 restrictions hit hard on Sasol’s only remaining source of profit, manufacturing synthetic fuel from its plants in Vereeniging and Sasolburg. The stock price had a quick visit below R30 – 95% below its 2014 levels above R600.

Currently, the stock is back above R200 as the change in strategy introduced about 18 months ago is taking effect.

Sasol 2.0

Sasol CEO Fleetwood Grobler, appointed in early November 2019, has been pushing the new Sasol 2.0 at every opportunity, and in presenting the results for the financial year ending June 2021, he indicated that the restructuring de Sasol has been successful.

The new strategy morphed into one of focusing on people, planet and profits, which Grobler elaborated in his presentation to stakeholders.

In essence, the program aims to deliver sustainable improvements over the next five years to ensure Sasol is competitive, generates cash, and remains sustainably profitable even in a low oil price environment.

“In the future, we recognize our responsibility to promote [the] decarbonizing our operations and becoming a more sustainable company, ”said Grobler.

He listed some operational goals that the new Sasol aims to achieve by the end of 2025:

  • Reduce fixed cash cost by 15-20% (from R 8 billion to R 10 billion);
  • Improve the sustainable gross margin from 5% to 10% (R6 billion to R8 billion);
  • Achieve a 30% reduction in maintenance capital expenditures.

Management noted in the results comment that the key focus during the last financial year was to complete the initial response plan to longstanding issues and, at the same time, begin the transition to deliver Sasol 2.0 sustainable savings initiatives.

“This began with a complete organizational redesign that began in June 2020 and was completed in June 2021, to achieve a streamlined and focused organization that is fit for purpose and positioned to meet Sasol’s future ambitions,” according to the management. .

“However, the savings achieved in financial year 2021 thanks to the reduction in the workforce of this initiative were offset by severance pay. Sasol will be a business focused on areas where we have competitive advantages, including strengthening our specialty chemical positions in defined market segments and moving towards leadership in the energy transition in South Africa. “

Results show success

Is the new plan working?

The saying that a swallow does not make a summer comes to mind, but the results for the year ending in June show a clear improvement.

Both Grobler and CFO Paul Victor commented on the progress Sasol made over the past year in reducing debt and positioning Sasol for a sustainable future.

The group reduced its total debt by more than 100 billion rand over the past six months, exceeding the limits set by its creditors regarding debt levels. Victor pointed out that the debt-to-Ebitda ratio (earnings before interest, taxes, depreciation and amortization) decreased significantly, from more than four times a year to only 1.5 times.

This was due to significantly lower debt, but also higher income. Profits were 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 announced that total debt decreased to less than R103 billion ($ 7.2 billion) as of June 30, 2021 compared to almost R190 billion ($ 10.9 billion) a year ago.

“Further deleveraging remains a priority to manage any potential future market volatility and execute the strategy to deliver a profitable and sustainable future Sasol,” said management.

The numbers say a lot. While raw material prices and sales volumes increased only a small percentage, Sasol posted a solid increase in earnings in the last financial year.

Overall earnings per share increased to R39.53, compared with a loss of R11.50 in the previous year.

Management noted that earnings before interest, taxes and depreciation increased by more than 100% to R34.3 billion, despite an increase in the price of oil of only 4% in rand per barrel.

“The contribution of business improvement efforts resulted in a net increase in operating cash flows of 6% to R45 billion. Balance sheet strength improved significantly with a net debt to Ebitda of 1.5 times compared to 4.3 times as of June 30, 2020.

“Gear fell to 61.5% from 117% as of June 30, 2020 despite large remeasurement items recorded for 2021 due to softer long-term macroeconomic assumptions,” the administration said in its comment to the results.

It is of interest that the “new” chemicals business in the US is beginning to make a significant contribution.

“Higher prices of the chemical products basket in US dollar terms [17% higher compared to a year ago] it resulted in a 6% increase in revenue compared to the previous year, ”said management.

“Sales volumes were 3% lower compared to the previous year, despite adverse weather events and the divestment of basic US chemical assets. Ebit [earnings before interest and taxes] for the chemicals business increased by more than 100% to R19.8 billion compared to a loss of R95.5 billion in the previous year. “

The future

“Sasol introduced the Sasol 2.0 transformation program to enable the business to be competitive, generate a large amount of cash and can offer attractive returns even in a low oil price environment,” said management. “This program began in fiscal 2021, along with the introduction of a new operating model consisting of a global chemicals business and an energy business in South Africa, supported by a lean corporate hub.”

Grobler, noting that significant progress has been made to date, said: “The transition to this new operating model began on November 1, 2020 and formally concluded on June 1, 2021.

“In fiscal 2021, the key focus was closing the comprehensive response plan and, at the same time, beginning the transition to deliver sustainable savings initiatives from Sasol 2.0. This began with a full organizational redesign that began in June 2020 and was completed in June 2021.

“You have achieved a streamlined and focused organization that is fit for purpose and positioned to meet future ambitions,” he added.

“Sasol will be a business focused on areas where we have competitive advantages, including strengthening our specialty chemical positions in defined market segments.”

Investors

For investors, Sasol remains one of the popular stocks on the JSE. It is liquid, offers protection against currency depreciation, and currently the opportunity to enjoy a continued recovery after a period of high risk.

The latest results place the stock at a price-earnings ratio of less than six times, with an optimistic outlook.

But there is still a lot to do to regain investor confidence: the share price is still only about a third of what it was a few years ago.

Source: Sasol

Download the presentation of results here.

Presented by Sasol.

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