Sasol released a trading statement for 1HFY21 earlier this morning. Production numbers for 1HFY21 were also released.
We attach a spreadsheet that show half year as well as quarterly production estimates and percentage changes.
Sasol guides that:
- Basic earnings will range between R22.76 and R24.07/share (>+100%)
- Headline earnings will be between R18.59 and R19.78/share (>+100%) and
- Core headline earnings will be between R6.94 and 8.79/share (-5% to -25%).
- Adjusted EBITDA is set to be flat to 10% lower at R17.9bn – R19.8bn
Our full year forecast for FY21 is at R13.55/share with the Bloomberg Consensus at R6.82/share (as compared to core earnings). On the face of it, it appears as if our own and definitely the consensus forecasts are too low for the full year.
We note the following, however:
- Sasol strips out losses from projects that are still ramping up, from core headline earnings. We believe the losses from most of the LCCP’s plants in 1H have been stripped from core headline earnings.
- Commodity prices, coal and oil in particular, increased significantly in the half. Sasol holds inventories of purchased oil, white product and coal and higher prices towards the end of the period should see inventory gains, impacting headline and core earnings positively.
- The difference between core and headline earnings are generally the mark to market of hedges as well as currency translation gains. Sasol incurred a loss of R8bn on an inter company loan (not disclosed) in FY20 as the currency weakened. A large portion of this loss would have been reversed in 1HFY21.
From an operational perspective we note (as shown in the attached spreadsheet):
- Volumes and achieved prices were generally lower (1Ho1H, 2QYoY), with a few exceptions.
- Energy: White product sales were 10% lower, while prices were 31% lower.
- Base Chemicals: Volumes were 8% lower but prices declined by 2%
- In Performance Chemicals, volumes in the organics segment declined by 10% and organics prices were 3% lower. Wax volumes however increased by 20%. Overall revenues in in Performance Chemicals increased by 3%. Feedstock costs in the business however decreased by 28% and we estimate a ‘gross’ margin improved from 60% in 1HFY20 to 73% in 1HFY21. Benzene and kerosene prices remain relatively low which could support margins into 2H.
- We note that Sasol hedged an additional 15mn barrels of oil at a cost of ~$37mn. The strike of these hedges are around $40/bbl and the premium paid was around $2.50/bbl.
Overall conclusion:
- The extent of the positive surprise will only become clear when results are reported and the calculations of earnings can be reconciled with our expectations, particularly the contribution from the LCCP to core and headline earnings.
- We would expect a positive EBITDA contribution from the LCCP in 2H compared to a loss in 1H
- Oil prices, refining margins and chemical prices in 1H were well below the current range of prices which suggests that 2H should be significantly better than 1H.
- Our own and definitely the consensus forecast need to move higher for the full year.
The Balance sheet:
- The midpoint of Sasol’s adjusted EBITDA guidance (R18.85bn) suggests EBITDA for the 12 months to December of R34bn. At a covenant ratio of 4x this suggests net debt capacity of R136bn. It is not clear what Sasol’s cash flows in the last six month were but the starting net debt in June was R155bn (ex lease liabilities). Sasol has closed the sales of the LCCP ($2bn) and the Gemini polymers ($404mn) facility in 1H which would reduce debt by R35bn. Excluding free cash in or out flow this would reduce net debt to R120bn, well below the covenant level.
- It is worth noting that the sale of the Air separation units and the CTRG power plants have not been closed yet.
- At current price levels we do not expect a rights issue
Sasol will report results on the 22nd of February after which we will review our estimates. These results and recent movements in product prices suggest our own as well as consensus forecasts are still too low.
We maintain an Outperform rating and our target price is R175.00/share.