• Another disposal   Sasol announced the potential sale of 16 air separation units on the Synfuels site to Air Liquide for a possible consideration of R8.5bn.  Sasol is set to purchase oxygen in future.
  • Largest global oxygen producer:  Sasol consumes in the order of 13 million tons of oxygen each year and uses oxygen to gasify coal and also in its autothermal reformers the produce syngas from natural gas.
  • Well known partner:  Air Liquide guides to future revenues from these units of around €400mn (R7.8bn).  The offtake agreement is for 15 years and the future price of oxygen is estimated at R757/t.
  • All about electricity:  Electricity is the key cost of oxygen production and the air separation units are powered by steam and electricity driven turbines.  The older units require around 490kWh per ton of oxygen produced and the while the newer units (16 and 17) are more efficient.
  • Steady margins:  Based on Eskom’s tariffs we estimate electricity cost of around R469/t implying a contribution margin of 38%.  Industrial gas segments of gas companies generally earn EBIT margins around 20%.
  • Rough valuation:  Assuming a future operating margin of 20%, Sasol foregoes EBITDA of around R1.7bn and the NPV of future net income comes to R9.8bn.  The selling price implies an EBITDA multiple of 5.0x.
  • Well below replacement value:  We estimate that the 16 units are operating below 70% of installed capacity.  The R8.5bn consideration amounts to R296k per daily production ton, well below the capital costs spent on the 16th and 17th oxygen trains.  The first 14 trains have been installed 40 years ago and uses older and less efficient technology.
  • Environmental benefits:  Air Liquide has indicated that it will increase energy efficiency at the units by 30-40% through the use of renewable energy, improved technology and the construction of an 18th train.
  • A rights issue, yes or no?  Sasol continues to make headway in its asset disposal process.  Disposals to date appear to be close to value.  More disposals could impact the need to do a rights issue or decrease the size of a potential rights issue.  We maintain a neutral rating.