• Earnings downgrades:  We have reviewed our earnings estimates for Sasol to reflect the most recent product prices, the recently published first quarter production numbers and updated guidance as well as the impact of the disposal of 50% of the Base Chemicals business of the LCCP.  We have downgraded our estimate for FY21 from R10.75/share to R7.75/share (-28%).
  • Fuel prices lower:  Fuel prices for FY21 (YtD) are between 13% and 19% below prices achieved in FY20.  Refining margins remain particularly weak and are 44% below the levels achieved in FY20.
  • Chemical prices:  Sasol’s commodity chemical prices have increased in recent months and the polymers basket price is 5% higher than prices achieved in the previous year.  The solvent price basket is 10% higher driven by higher acetone (+34%) and ethanol (+18%) prices in particular.  Prices in the Performance Chemicals segment continue on a downtrend, however.
  • LCCP:  Sasol has lowered the guidance for the EBITDA at the LCCP for FY21 to $50-120mn after the proposed disposal as well as the shutdown due to hurricanes.  This is well below our expectation.  Sasol’s guidance of steady state EBITDA of $600-$700mn are in line with our estimates.
  • Rights issue:  Unless product prices increase significantly, we estimate that Sasol would require an additional $2bn of debt reduction to achieve a targeted net debt:EBITDA ratio of 2.5x in June 2021.  This could be achieved through a combination of additional asset sales and a rights issue.  We assume the company proceeds with a rights issue of $1.5bn.
  • Risks:  There remain many risks impacting the Sasol investment case.  These mainly relate to emissions and depleting gas reserves.  We believe these risks are adequately reflected in the share price and the proposed disposal of a share in the LCCP reduces balance sheet risk.
  • Share price: We value Sasol in a range of R120-128/share.  While we downgrade our target price from R160 to R120/share to reflect the lower earnings as well as the risks in the business, we upgrade our rating from Neutral to Overweight following the recent decline in the share price.