• Higher near-term earnings:   We raise our FY21 headline earnings per share estimate for Sasol from R30.20 to R36.65/share (+21%) and we increase our FY22 estimate from R32.65 to R36.10 (+11%). Closing rates of currencies and oil could still impact these estimates.
  • Core earnings much lower:  Sasol incurred large losses (~R11bn) in FY20 as the rand weakened.  These losses should reverse in FY21.  Stripping these gains from earnings we estimate core headline earnings for FY21 at R22.68/share, 53% higher than FY20.
  • Fuel price lower:  Despite a significant recovery in oil prices in 2HFY21 petrol and diesel prices were 7% and 14% lower than prices in FY20.
  • Recovery driven by chemicals:  Sasol’s polymer price index in FY21 is 27% higher than in FY20.  Solvent prices are 29% higher.  It is not clear from the new disclosure if Sasol is achieving these prices though.  We expect prices will moderate from FY22 on weak fundamentals.
  • Essential Care prices mixed:  Palm kernel oil prices for FY21 are 51% higher than FY20 and mid cut alcohol prices in the US are 15% higher.  The feedstock prices for LAB are lower, however suggesting that LAB prices could be lagging alcohol prices.
  • Looking further into the future:  We have rolled forward our sensitivity tables and risk indicators by a year to show FY22 and FY23 estimates.
  • More guesswork required:  Sasol’s new disclosure require additional assumptions which creates ambiguity and forecast risk.  Product group revenues can no longer be compared against published prices.  There is no history to test new assumptions and analyse margin cycles.
  • Value unlock from unbundling:  The business is now set up to unbundle the US and European chemical businesses. A peer group, multiple based, sum of the parts valuation comes to almost R400/share, illustrating the potential value unlock from an unbundling.
  • Share price: Higher prices are driving profits and accelerating the degearing of the balance sheet.  Long term uncertainties will continue to impact the investment case, however.  While we raise our target price to R250/share we lower our rating for Sasol from Overweight to Neutral.