David Shapiro from Sasfin Securities said Sasol is facing a big challenge because it is not making enough money to reinvest in its productive plants.

“If you don’t reinvest in your productive assets, like your plants, you will eventually need to write them off. This is what we are seeing,” he explained.

“With each half-yearly update, there will be more impairments. You are forced to keep writing these assets down.”

He said the only way to maintain your valuation is to make good profits from your assets and keep investing in them. However, Sasol is not doing this.

“You will see in all the results that it is becoming more of an issue. If you want to keep Sasol profitable, you need to spend a lot of money,” Shapiro said.

His comments followed Sasol’s trading statement for the six months ended 31 December 2024, released this week. It was not good.

• Adjusted earnings before interest, tax, depreciation and amortisation (adjusted EBITDA) is set to decrease between 11% and 22%.

• Earnings per share (EPS) are expected to decrease by between 47% and 61%.

• Headline earnings per share (HEPS) are expected to decrease by between 26% and 36%.

The company blamed the decline in the average rand per barrel of Brent Crude Oil,  a decline in refining margins, and fuel price differentials.

It added that it experienced a 5% decrease in sales volumes associated with lower production and lower market demand.

Sasol highlighted a net loss of R6.2 billion from remeasurement items, mainly due to the Secunda and Sasolburg liquid fuels refinery cash-generating units remaining fully impaired.

“These negative financial impacts were partially offset by an increase in average chemicals basket prices, stringent cost management and efficient capital expenditure,” it said.

Over the last year, Sasol’s share price declined by 45%, and the company is trading at a relatively low valuation.

It raises the question of whether there is a turnaround story where the share price decline created an investment opportunity.

Chantal Marx from FNB Wealth and Investments is not convinced. She said Sasol is a risky investment, which does not appeal to her.

“Sasol’s valuation is very low because the risk associated with the company is very high,” she told Business Day TV.

“You have a valuation based on expected earnings, and if you can’t accurately forecast your earnings, the valuation comes under pressure.”

She added that Sasol faces numerous challenges, including gas supplies, the poor state of their coal mines, and low oil and chemical prices.

“Every market update from Sasol has something new for investors to be concerned about. It is chaotic,” she said.

“I am staying away from Sasol. There may be a long-term opportunity, but the risks are why the share price looks so cheap.”

source:Sasol has a big problem – Daily Investor