Sasol FY numbers

Sasol released numbers for the full year to end June 2013, and they were pretty good. HEPS up 25 percent to 52.62, total dividend up 9 percent to 19 ZAR a share, post 15 percent dividend tax that is 16.15 ZAR. EPS increased 11 percent to 43.38 ZAR. The stock has traded over 490 ZAR this morning, simple metrics suggest that the stock is still fairly cheap. BUT, and this is something that you must always take into consideration when buying the company, the sector always trades at a discount to the rest of the market. Exxon Mobil trades on an 11 multiple, last week we pointed out that the S&P 500 forward was less than 14 times. Chevron trades on a less than 10 times earnings. Royal Dutch Shell around eight and a half times earnings. So...... you get the point that I make often enough here, Sasol trades at a discount because all of the stocks globally trade at a discount, in the associated industry.


Although if you even dig under the hood, you would be hard pressed to see similarities between Sasol and all of their peers in the broader sector, and by broader sector I mean "Energy". Sasol has a market cap of 32.6 billion Dollars, their ADR as of Friday. If you scrolled down the list ordering from the big daddies down, Sasol would find themselves in 30th place by market capitalisation. And that puts the company in the top leagues. BUT!! Exxon Mobil is 12 times the size of Sasol, by market capitalisation. At the same time, in the broader energy sector (which includes a whole host of service providers) 8 have a market cap in excess of 100 billion Dollars.


Why is that important? Because if your business was to be acquired by someone, in the future, you can't be too chunkier a size that someone can't "afford". Strangely Sasol trades under Basic Materials, sub sector commodity chemicals. Praxair, an industrial gas supplier commands a bigger market cap on double the rating, whilst LyondellBasell, a chemicals business is 50 percent larger than Sasol and only commands a slight premium, in terms of the market rating. If anyone were to sniff around for Sasol's business, they would have to be sure that the company were for sale, at least some parts of it. It is not inconceivable that the business could become two separate entities. That is a long way away.

First, the numbers of Sasol, we dealt with valuations above. The group recorded turnover of 181.269 billion Rand, with profits of 27.182 billion Rand, this is a very profitable business, thanks mostly to the Synfuels business. The group has an operating profit margin of 22.4 percent. Because of those high margins, the company is able to continue to invest, they hold "assets under construction" at a value of 41.244 billion ZAR. Wow. That is bigger than Truworths, which if you needed reminding is inside of the Top 40. Sasol Synfuels operating profit jumped 30 percent to 28.624 billion Rands (out of a total of 40.6 billion ZAR), the segment still contributes 70.5 percent of all operating profits. It is still very much a South African Synfuels business.


Once offs totalled 8.5 billion. That is a big number to swallow. Ayra in Iran was around half of that, the Fischer-Tropsch wax expansion project in Sasolburg around one quarter, as well as a very expensive 440 odd million ZAR as a result of an unsuccessful exploration process in Mozambique. The reasons for each well documented, but less pleasing was the wax plant reasons: "Due to the volatile macroeconomic environment and increased costs relating primarily to construction delays and poor labour productivity, we recognised a partial impairment of R2 033 million at 30 June 2013 in respect of the project. All efforts are being made to monitor and mitigate the risks identified on the project and to improve the economics thereof."


Wow. And no wonder the company has decided to proceed with what looks like a changing event, to build an expensive plant in North America. That is still key to investing in this company over the rest of the next decade. Together the ethane cracker plant (capacity of 1.5 million tons of ethylene per annum) and the US GTL facility (production of 96 thousand barrels a day, as much as 10 percent more) the maximum cost is 21 billion Dollars. A minimum cost is 16 billion Dollars, so somewhere between the two is 18.5 billion Dollars, at the current exchange rate of 9.95 (yes, that is where it is today) the cost of the two projects is in the region of 184 billion Rand. Or roughly 58 percent of the current market capitalisation, it has in recent times, as a result of the surging Sasol share price, become a little more palatable.


The decision to go ahead on the ethane cracker plant (whether the money will be forthcoming of course) will be decided upon during the next 12 months. The GTL facility 18 to 24 months after that. So by the end of 2016 we should know whether or not these projects will go ahead. We still think that in terms of the business evolution of Sasol, this is the single biggest and most important investment that the company can and will make. It is the single biggest investor in the US. Yes, read that part again. So hang tight for three years and you will find out what transpires. If the company does go ahead and execute correctly, the re-rating could be substantial. In the introduction of this piece, I told you that Praxair has DOUBLE the rating that Sasol has, because they are based in the US and supply local customers. You could get a massive uplift without seeing earnings race ahead. We continue to add to the stock and recommend it as a core holding.