Sasol published an action plan to protect its balance sheet and also re position the company to withstand lower oil prices for longer.  The company is targeting to generate $6bn by the end of FY21, much higher than our earlier estimate of $5bn.  Key points are below:

  • Liquidity intact:  Sasol highlights that it has around $2.5bn of liquidity available  and that it can maintain the liquidity headroom at $1bn at oil prices as low as $25/bbl for 12-18 months  Debt repayments commence in FY21. (link)
  • Saving $1bn in FY20:  The company aims to generate savings of $1bn over the next three months through working capital optimisation, cutting or postponing capital spending as well as cost savings which will place limits on all discretionary spending in the business.  No headcount reductions have been announced.  The company believes these measures will allow it to remain within its net debt:  EBITDA covenant of 3.5x.
  • They might need more to remain below 3.5x:  A quick calculation suggests the company might need to save more to fall within the covenant.  Sasol reported adjusted EBITDA of R19.6bn in 1H and with falling prices, EBITDA in 2H should be lower than 1H.  EBITDA for the full year should therefore be below R40bn which points to a net debt capacity of less than R140bn.  At half year the company had net debt of R143bn which included $9.3bn of dollar denominated debt.  Assuming a year end exchange rate of R16.5/$ we estimate a minimum net debt of R167bn at year end in June, suggesting Sasol should achieve savings of at least R26bn, much more than the R16.5bn targeted.
  • Accelerated Asset disposal:  The company has extended its asset disposal programme to realise proceeds ‘significantly’ higher than $2bn.  It is also in negotiations with potential partners for the Base Chemicals portion of the LCCP.  If some of these disposals are concluded in FY20 it could contribute to achieving the target debt covenant ratio.  It is not clear to us which legacy assets can realise >$2bn if disposed of.
  • More cost savings in FY21:  Sasol targets an additional $1bn in savings in FY21 also through saving on capital costs, working capital and business optimisation.
  • The last resort is a rights issue:  The company is also preparing for a rights issue, if required,  early in FY21.  The maximum value of the rights issue is set at $2bn (R53/share at an exchange rate of R16.5/$).  The issue is set to be underwritten by a number of large US banks and the issue could still be done below the maximum $2bn.
  • More cost savings after FY21:  The company is also targeting additional cost savings in later years, R2.5bn in FY22 increasing to R3.0bn in FY23.
  • Balance sheet fixed?  Applying these measures, the company is targeting a net debt:EBITDA  ratio of 1.5x by the end of FY22.
  • Hedging oil now – a little too late:  Sasol is putting an oil hedging programme in place to protect it from further oil price volatility.  The company is doing this through the purchase of put options.  The cost of the programme has not been disclosed.
  • Engaging with lenders:  Sasol mentions that it is engaging with lenders about additional flexibility on covenants but there is no indication if lenders will provide this flexibility.
  • We will review Sasol’s plans in order to assess the viability.  If Sasol can effect the savings mentioned, a worst case scenario could still be a $2bn rights issue.  Shareholders would be required to pay an additional R53/share over and above the current R50 share price.  We will review the investment case in order to assess weather there is value at R103/share at various oil price scenarios.