- Price weakness: Many of Sasol’s
product prices are at multiyear lows, impacted by lower oil prices and broad
demand destruction.
- Fuel prices: Sasol’s fuel prices in South
Africa have declined to the lowest levels since 2005 as oil prices declined and
refining margins moved negative. We estimate that the South African Synfuels
business currently consumes in the order of R500mn per month.
- Outlook still weak: The near-term
outlooks for fuels prices and chemicals remain negative as demand remains weak
in oversupplied markets. Inventories for
some products are at historic highs.
- Liquidity and cash
burn: We
estimate that the company has around R22.5bn of availably liquidity. After including the cost saving and cash
preservation measures this should be sufficient for the next 12 months. Asset sales of $1bn would extend the period
to 25 months.
- It is all about the oil
price: Cost and
cash savings, asset sales and a large rights issue will not lower Sasol’s debt
and balance sheet ratios to acceptable levels if product prices do not improve in
the next 12-18 months. Asset sales should
only postpone the need for a rights issue, and it is only higher product prices
that can save the balance sheet.
- Near term earnings: We have lowered
our earnings estimates to reflect announced cost saving as well as update
guidance for the LCCP. If the rand
remains at current levels the company will incur large losses (~R7bn) on its currency
hedges, and we expect a HEPS loss for FY20.
- Spot earnings: We expect the company could
lose as much as R30bn in FY21 if spot prices remained. Cash burn could be as high as R38bn.
- Share price: Sasol offers value but only under a certain set of key
assumptions: (i) Lenders waive debt
covenants until oil prices and refining margins recover, (ii) Sasol can execute
on asset sales to extend the liquidity window, (iii) Sasol can successfully
execute a large rights offer if required and the long run oil price assumption
exceeds $40/bbl. We remain cautious and
on the sidelines for now.
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