- Equity holders at risk: The market value of Sasol’s
equity has fallen well below the outstanding debt in the firm increasing the
risk to equity holders significantly.
- Conventional valuations
compromised: Conventional valuation methodologies create problems in valuing the
equity in a distressed business. More
volatile cash flows and lower returns should see a higher discount rate and also
lower multiples on EBITDA and earnings.
We also expect a lower price to book ratio as a result of falling
returns.
- More complications: The value of the firm will
also be impacted by the potential asset sales, the divestment from the LCCP as
well as a potential rights issue.
Lenders also need to waive debt covenants.
- Still burning cash: We showed earlier that the
company remains cash flow negative at oil prices below $40/bbl and that debt
covenants will be breached at the end of FY21 if the average oil price is below
$43/bbl.
- An option valuation: We present a method that
values the equity of the firm as a call option on the value of the assets using
the Black Scholes methodology. At a real
long run oil price of $60/bbl and an exchange rate of R17.00/$ we value this
call option at R153.65/share.
- Rights issue inevitable: We maintain a view that,
unless oil prices rise significantly in coming months, that a $2bn rights issue
is inevitable (link). Subtracting this additional cost to shareholders
from the value we value the share at R79.00/share assuming an oil price of
$55.00/bbl and a rand at R17.50/US$. We
set a target price at R80.00/share.
- Valuation
sensitivity: One could view the share as a call option on the oil price and the
valuation is extremely sensitive to the underlying assumptions. The Sasol investment case should be
revaluated regularly as the volatility in the underlying profit drivers and the
share price remain elevated. We maintain
a Neutral stance on Sasol.
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