• 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.