• Sufficient liquidity:   Sasol has sufficient liquidity to complete the capital spend on the LCCP as well as continue running the business.  Available liquidity could be impacted slightly by the ability to place commercial paper in South Africa, however.
  • Cost savings in FY20:  Our analysis of Sasol’s working capital and outstanding capital spend suggest cash savings could be achieved as guided.  The $200mn cost saving in the last three months of FY20 is however paramount in lowering the net debt: EBITDA ratio below 3.5x at the end of June.
  • More difficult in FY21:  Working capital savings will be harder to come by in FY21 but there could be opportunities to avoid or postpone capital spending.  If the business can save $200mn on non-essential spending in the last three months of FY20 then we would expect significantly higher savings in the full year of FY21.  Even if all these savings are achieved, in the absence of other measures we see the net debt:  EBITDA greater than 4x at the end of FY21 at $30/bbl oil.
  • Asset sales needed:  If the asset sales are concluded at a total value of $2bn and cost savings as mentioned above could be achieved net: debt: EBITDA would decline below 3.5x at the end of FY21 but remain higher than 3x (at oil prices at $30/bbl).  Sasol’s ability to execute on these sales would be impacted by moves in oil prices, however.
  • Rights issue inevitable:  An underwritten rights issue of $2bn could significantly reduce the balance sheet risk in the company.  Execution risk remains as a result of the conditions to ensure the banks underwrite the issue.  We do not expect the raise will be below $2bn however.
  • Share price:  We expect the share will remain volatile will be driven by oil price movements which are difficult to predict in the short term.  There remains significant adversarial event risk (internal or external).  We see no compelling reason to increase exposure to the share until (i) there is clarity on new lender covenants (May) and (ii) the terms of a rights issue are known (mid-year).  We set a target value close to the current share price and maintain a neutral rating.