We are holding on to our Neutral recommendation on Sasol Ltd. (SSL) over the long term based on the company’s various strategic initiatives, superior technical expertise and compelling investment program. However, these positives are somewhat negated by the effects of exchange rate fluctuations and unfavorable macro conditions.
Based in South Africa, Sasol is an integrated energy and chemicals company that provides liquid fuels within the domestic region. The company – which enjoys business collaboration with Canadian energy explorer Talisman Energy Inc. (TLM) – is also a major international producer of chemicals.
Sasol is a world leader in the unique coal-to-liquids (CTL) technology, owning and operating the largest integrated commercial facility of its kind. The company has been manufacturing synfuels and chemical feedstock from coal for over 50 years.
We appreciate Sasol’s focus on bolstering its chemicals portfolio and the commercialization of its gas-to-liquids (:GTL) technology by constructing GTL plants in gas-rich regions of the world. The GTL technology, an offshoot of Sasol’s years of commercial experience with its South African synthetic fuels operations, plays a critical role in the group’s long-term growth plans.
Additionally, Sasol’s deleveraged balance sheet and strong cash position (operating activities generated R47.9 billion in fiscal year 2012) keep the group well equipped to weather the global economic storm and fund its growth program in tough credit markets.
However, the company’s weaker-than-expected results for the fiscal year ended June 30, 2012, is a concern. Sasol’s earnings per share, excluding one-time items, came in at R42.07 or $5.05, lagging the Zacks Consensus Estimate of $5.74.
The results were impacted by high costs and poor contributions from the Chemical Cluster, arising from the slowdown in the international polymers market and margin pressure in the local polymer industry, partially offset by increased output.
We also expect that Sasol’s difficult operating environment, characterized by a fluctuating domestic currency and weaker refining margins will keep near-to-mid-term earnings under pressure.
Moreover, with operations in various overseas regions, Sasol remains exposed to risks such as embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc.
Taking into account these factors, we believe that Sasol has limited upside potential and will perform in line with the broader market.
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