• Larger than expected rights issue?   Sasol ended FY20 with $10.2bn of net debt.  If the business is targeting debt reduction of $6bn to $4bn an additional $6bn of cash is required.  After $1bn of cash savings and asset sales of $3bn a further $2bn is required to meet these targets.  In our view, to meet the $4bn debt target, a rights issue of $2bn is needed.
  • Debt covenants breached:  Using our price assumptions and including asset sales of $3bn we estimate that debt ratios will be below covenant levels at the end of FY21 and thereafter.  At spot prices these ratios should breach covenants.  Net debt remains higher than $6bn.
  • Free cash neutral at spot prices:  We expect the company will generate positive free cash flow in FY21 and beyond.  At spot prices the free cash flow will remain close to breakeven however and debt reduction will depend on asset sales and a rights issue.
  • Debt reduction:  Excluding additional asset sales, debt repayments in FY21 could be as high as $1.7bn supported by the consideration received for the ASU’s and the R5bn tax receivable in the US.
  • Profit expectations downgraded:  We have lowered our headline earnings expectation for FY21 from R19.80/share to R13.60/share.  This is predominantly on very low volume guidance for the North American businesses, implying relatively low operating rates at the LCCP.
  • Operating profit rising:  Improved operating profit in FY21 depends on profits generated by the LCCP and reduced losses on hedges.  We expect a significant decline in profits at the Energy business while the chemicals businesses’ profits should improve slightly.
  • Significant earnings volatility:  Lower commodity prices and higher interest charges significantly reduced net margins in the business.  This increases the sensitivity of earnings to external drivers.  Sasol’s earnings at spot rates remain well below our estimates, in FY21 (-48%).
  • Share price: It remains perilous to value the Sasol share until there is certainty on asset sales and a potential rights issue.  We expect announcements on these sales in coming months, but the rights issue is only scheduled for 2HFY21.  We maintain a neutral rating.