- Another large downgrade: We have once again cut our earnings expectations for FY20, this time from R26.65/share to R15.60/share. This cut comes as a result of the performance in the business, a cut in assumptions for chemical prices as well as a higher expected tax rate.
- Why so weak in 1HFY20? Troubles in the Mining division, a large loss at the LCCP, weakness in the chemicals businesses, the introduction of carbon tax, increased interest expenses as well as a high tax rate impacted earnings negatively in 1H20.
- Why the big downgrade? We have cut our FY20 HEPS by R11.05 (41%) due to the weakness in Mining (R1.55), the downgrade to LCCP profit guidance (R3.60) and weaker chemical prices (R2.43). A higher expected tax rate for the full year will also impact earnings (R2.25). Lower margins increase earnings sensitivity contributing to the changes.
- Mining: Productivity remains a problem in the Mining division and we do not see an improvement in 2H with a gradual improvement in FY21.
- Base Chemicals: Profits are expected to remain under pressure as low prices impact revenues while higher coal costs, higher depreciation and carbon tax subtract from already depressed margins. We do not expect a return to profitability in the next 24-30 months.
- LCCP: We still expect a sizable loss in FY20 as depreciation charges could exceed $240mn. Based on a spot price ethane assumption the facility should beat the guided EBITDA range of $600-$750mn in FY21.
- Balance sheet: Our modelling suggests the oil price needs to decline below $50/bbl for the remainder of FY20 for net debt:EBITDA to breach 3.5x. Oil prices below $55/bbl in FY21 could see a breach 0f 3.0x.
- Dividends: We do not expect a dividend payment until 2HFY22.
- Share price: Sasol is trading on attractive multiples if measured against our earnings estimates but the risk to earnings remain significant if current spot prices are applied. We remain neutral
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