Analyst recommendation

                                                                                                           As at 04 November 2024

Executive Summary

1. In this report we look at the 2024 full-year results and provide further insights to Sasol valuation.
   On 20 August, Sasol released its FY24 results, which were characterised by the following:
   1. Turnover decreased by 5%, driven mainly by a decrease in the chemicals average sales basket price due to a combination of weak demand and the impact of lower oil, feedstock and energy prices.
   2. Core headline earnings per share decreased by 16% mainly due to lower chemical prices. However, earnings per share (EPS) decreased from a profit of R14 per share to a loss per share of R70 per share due to impairments with the largest relating to the US ethane value chain impairment of R59 billion.
   3. Sales volumes were slightly higher with higher chemical sales volumes offset by lower energy sales volumes, with total volumes growth contributing R721 million to earnings before interest and tax growth.
   4. The new dividend policy allows dividends to be paid on 30% of free cash flows provided that net debt (excluding leases) is below $4 billion. Net debt which increased by 7% to $4.1 billion and the interim dividend being based on the previous policy led to no final dividend being declared.
   We decreased our intrinsic value by 31% from R279 to R192 while maintaining a buy with the main reasons being:
   1. Even though we anticipated that the chemical margins might take longer to recover, we now expect margins to be structurally lower due to the increased competition from China (graph 5 and 6), similar to sectors such as the solar panel and vehicle industry. We expect margins to recover, but not to the previous highs it might have reached historically (graph 4).
   2. We are concerned about the oil price outlook as it seems OPEC might not have the same influence it used to have as non-OPEC countries such as the US have gained market share (graph 7), and production is expected to increase while demand growth is soft.
   3. To incorporate the above views, we updated our valuation. Refer to the valuation and assessment section for more details. 

Analyst thesis

1. Attractive valuations with deep discounts outweighs the concerns.
   This being reflected in in our probability weighted intrinsic value upside of 83% and its discounts relative to commodity price relationships (graph 8 and 9), peer multiples where it is trading at a 77% discount to peer LyondellBasel (graph 11) and its own historic price to earnings ratio (graph 12) trading at a discount of 59% to its 5-year average price to earnings ratio.
    Various catalysts that should drive a recovery in its valuation.
   Recovery in chemical industry margins will lead to significant increase in profits although it might take a couple of years as supply first needs to decline through significant closures to rebalance with demand which we expect will take longer than a year. 
2.  Reduction in debt to reduce financial risk uncertainty.
3.  Clarification in regulations such as carbon tax should remove uncertainty around profitability and its path to reducing carbon emissions. 
4. Increase in the rand oil price, although only to an extent as Sasol’s share price relationship to the oil price has disconnected (graph 8). 
5. Return of capital to shareholders through asset disposals at these low share price valuation multiples or Sasol being acquired at a share price premium.

Results

Table 1: Results summary

Valuation

Table 3: Valuation

Table 6: Valuation multiples

Source: FactSet