- Key assumption changes: We have adjusted our key assumptions for the remainder of FY20 and FY21
and have lowered our FY20 HEPS estimate by 64% to R3.30/share. We have trimmed the FY21 estimate by 3% to
R19.15 as the weaker rand offsets lower prices. At spot prices the company
generates large headline losses in FY21 and FY22.
- Lower volumes: Sasol has announced that it is suspending
production at the Natref refinery and cutting production to 75% at
Synfuels. Synfuel volume guidance has
been lowered by 5% and fuel sales volumes have been lowered by 12%. We estimate that Natref will be shut for more
than two months as a result (full year utilisation at 70%).
- Cost cutting included: Sasol’s cost
cutting guidance is off a base of previous management plans and cannot be
included in absolute terms. We assume costs
are lowered by around 30% from the FY19 baseline.
- Cash preservation: We have lowered our capital
cost assumptions by R4.5bn in FY20 and R7bn in FY21. While inventory values have dropped, we expect
volumes will increase. Oil inventories
should rise as a result of the Natref shutdown and product inventories should
also rise.
- Losses on hedges: We expect large losses on
hedges in FY20 (realised and mark to market).
and expect losses of R3.2bn and R1.6bn on the currency and ethane hedges,
respectively.
- Asset sales and rights
issue: We
have not included any asset sales or the potential rights issue in our
estimates as there is little detail available.
We believe there needs to be a high degree of certainty on a divestment
from the LCCP before early FY21 to avoid a rights issue.
- Liquidity and gearing: We estimate that
Sasol is close to cash breakeven at spot prices with production curtailed (i.e.
no drain on liquidity). Sasol should
already be in breach of debt covenants in June 2020 but if should comply in June
2021 if oil trades above $45/bbl.
- Valuation: The investment
case depends on a number of events such as the outcome of the OPEC negotiations,
bankers waiving covenants, asset sales, the potential rights issue and the
duration of lockdowns, none of which can be forecast with any certainty. We remain neutral.
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