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Sasol: Value, or value trap?
After decades of diversification, huge investment and building state-of-the-art chemical plants, Sasol is still where it was 10 years ago. Exchange rates and oil prices still determine its fortunes as more than 90% of earnings still come from the SA energy businesses, mainly synthetic fuels.
The stock attracted a lot of attention on the Johannesburg Stock Exchange last week, with JSE data vendors flagging that investors were watching the share price and reading up on its prospects.
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While most analysts say that Sasol offers value at the current price of below R180, a few remain sceptical and relate the bane of value investors: “Buy them low and sell them lower.”
There is little disagreement that the share is cheap.
Sasol fell 47% from its high of R320 at the beginning of 2023 to a low of barely R170, before staging a slight recovery to R177.
2024-01-15, 4:39:19 a.m.
The share price represents a price-earnings ratio of only 3.3 times and offers a dividend yield of 10%.
Fund managers are happy to stay invested and collect the 10% yield every year, with the hope of a rerating of the share on some good news.
Concerns
There are some concerns. Sasol is suffering an onslaught from environmentalists. Its last AGM was disrupted when a loose grouping of protesters stormed management and prevented the conclusion of legal governance requirements.
Sasol announced that a new AGM will be held on 19 January 2024, on an electronic platform to prevent a repeat of the chaos – the idea being that people who want to proceed with the business at hand can mute the protesters if their only aim is to disrupt the meeting.
“Shareholders were informed that the annual general meeting which had been convened to take place on 17 November 2023 at Sasol Place, Sandton, South Africa could not take place due to disruption by protesters,” Sasol announced in a Sens statement.
“Notice is hereby given that Sasol’s AGM will be reconvened and held electronically by means of Sasol’s electronic meeting platform on Friday, 19 January 2024 at 14:00 to transact the business stated in the notice of AGM.”
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The pressure by environmentalists is not necessarily a bad thing, but it can create unreasonable expectations and add to operating costs. At the very least, it affects investor sentiment.
Another big problem is the ongoing load shedding, slow economic growth and weak demand in SA and abroad.
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The gyrations of the rand and the oil price also add to the uncertainty.
What the analysts are saying
Analysts are singing from the same hymn sheet, saying that Sasol is cheap but also outlining its problems.
Seleho Tsatsi, investment analyst at Anchor Capital, says the recent fall in the share price follows another downgrade of Sasol.
“The sell-off in the share price on Wednesday [10 January] appears to have been triggered by a downgrade in earnings expectations from a prominent sell-side house.
“Speaking more broadly, the share’s forward earnings multiple has contracted significantly over the past year or so,” Tsatsi adds, saying that the share is indeed cheap – but with reason.
“A few factors have driven this. Firstly, the oil price has come under pressure. Secondly, there has been pressure in the chemicals market, which will be challenging for the company’s chemicals business.
“Finally, investors may perhaps be cautious around short-term earnings given the continued threat of a looming global recession,” he says.
Casparus Treurnicht, analyst at Gryphon Asset Management, says the downgrade by JP Morgan last week to underweight caught investors off guard.
This is the second downgrade in a few months. In September last year, JP Morgan changed its view from a buy to neutral.
“I cannot remember if JP Morgan ever rated Sasol as underweight; [it seems to] believe the problems in the sector [are] larger and wider than people might think,” he says.
“World economic growth is decelerating. It is the hangover from the end of quantitative easing and the effect of higher interest rates working through the global economy.
“Subsequently, the demand for oil and chemical products [is] in a declining trend. It is noticeable that the supply of oil is being limited from more than one source, but it does not seem to be helping the oil price,” says Treurnicht.
He points out that the ESG issues at Sasol aren’t helping either.
Value trap
“This has been a classic case of a value trap and is still one. On a technical basis, Sasol might go as low as R150,” he says.
In a poll of eight analysts from CNN Business, five rated Sasol as a buy and three as a hold.
As for the share price, US analysts think the share will be between $10 and $30 on the New York Stock Exchange a year from now. This means increasing only slightly from current levels, running back up to closer to R600.
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The next formal announcement by Sasol will be the publication of its interim results for the six months to December 2023, probably out within a few weeks.
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