• Earnings higher and lower:  We have adjusted our earnings estimates to reflect the stronger rand as well as higher commodity prices.  Our HEPS expectation for FY21 has been increased from R7.75 to R13.55 (+75%).  We have not adjusted our commodity prices for FY22 and as a result of a stronger rand we downgrade HEPS from R27.10 to R23.70.
  • Spot earnings:  Spot HEPS for FY21 are now at R18.63 and FY22 spot HEPS are at R30.27.
  • Local fuel prices remain flat:   Fuel prices in South Africa remain under pressure as higher oil prices are offset by weak refining margins and a stronger rand.  For the first seven months of FY21 petrol and diesel prices are 15% and 20% lower than prices achieved in FY20.
  • Commodity chemicals to the rescue:  Base chemical prices have increased significantly in recent months.  Ethylene prices are up 21% (YtD) while LDPE and PVC prices increased by 27% and 22%.  Ethylene prices in the US have increased by 42% and are approaching $1000/t.  Higher propylene prices are also supporting solvent prices.
  • Still weakness ahead:  Plant outages in North America and North East Asia have supported petrochemical prices in 2H2020.  A shortage of shipping containers has increased chemical shipping cost threefold, contributing to recent price surges.  New crackers in Asia should add significantly to supply in 2021 and we remain cautious on prices.
  • Specialty prices on the rise:  Palm kernel oil prices have increased by 108% since the start of FY21.  These increases are pushing detergent alcohol prices higher.  Demand for personal care products remains strong but niche markets such as autos and oil drilling could be weak.
  • Balance sheet out of the woods?  Higher profits coupled with Sasol’s asset disposals should relieve balance sheet pressures.  In the absence of large negative currency of product price moves the net debt:EBITDA should be well below 2.5x at financial year-end.
  • Volatile value:  We have upgraded our target price to reflect higher near-term profits as well as lower risk.  Low margins increase the sensitivity of profits and cash flows to profit drivers and share price volatility should remain elevated.  We maintain an Overweight rating.