Elephant Book: Playing catch up
Drivers: Sasol's most important profit drivers include the levels of the ZAR/USD exchange rate, crude oil prices, fuel product prices (and refining margins), chemical prices (and margins), and growth in fuel and chemical product demand. Sasol's South African domestic sales of fuel and chemical products are based on international fuel and chemical product prices. Operationally, Sasol is expected to perform well on balance with the key projects (Oryx and Aria) reaching planned utilisation rates. Synfuels is expected to marginally outperform guidance with plant availability and stability key themes.
Earnings are expected to be supported via the Power Purchase agreement with Eskom as well as a continuation of strong margin performance from the un-integrated Olefins and Surfactants division. Additionally, we see upside optionality via the synthetic fuel expansion projects (China CTL and Uzbekistan GTL) and anticipate positive investment decisions in CY11. The group is well positioned to exploit the decoupling of oil and gas prices particularly in the North American market via its proprietary GTL technology. We anticipate further, longer term GTL expansion as sentiment towards GTL continues to improve combined the recent gas acquisition in the Montney Basin, suggesting GTL economics are supported at commercially priced resources. Globally GTL is expected to be favoured over LNG where resource holders are dependent on significant volume sales into spot gas markets. Sasol is one of two companies with proven GTL technology.
Outlook: Sasol is an integrated liquid fuel and chemical company with upstream coal, gas and oil assets. It leverages value from coal and gas feedstock through its proprietary CTL and GTL technologies in the production of liquid fuels and chemicals. Management is actively seeking expansion opportunities created by its technological positioning. We forecast strong medium-term cash generation through high leverage to improving oil fundamentals. The expected margin expansion is supported by rationalisations predominantly in the Chemicals cluster and an expected curtailment of cost inflation through reduced dependence on Eskom-sourced power. We expect additional volume contributions from project ramp-ups, improved operational performance, and volume stability in existing assets from committed capex programmes into FY12. The strong expected cash flows should allow the group further expansion opportunities while maintaining dividend yield levels (c.3.6- 4.0%).
Eoin Treacy's view South Africa is often viewed by investors through the lens of how the economy
performed prior to the dissolution of the apartheid regime, rather than how
likely it is to improve from its current standing. Corporate, political and
economic governance are topics close to the hearts of everyone living in South
Africa. All of these factors will need to improve if the country is to fulfil
its medium to long-term potential. The strength of the Rand is one measure of
how the country is viewed by investors.
Interest rates have been trending lower for the last decade and are currently near 5.5%. With inflationary pressures building in most countries, the likelihood of significant additional cuts seems less likely. The Rand was one of the stronger currencies over the couple of years and more than unwound its credit crisis deterioration. The Dollar found at least short-term support near ZAR6.5 in late December and has now rallied to break the 7-month progression of lower rally highs. A sustained move below ZAR7.1 will now be required to question potential for some additional upside. An advance above ZAR8, held for more than a week or two, would be needed to question medium-term investor confidence in the Rand.
BHP Billiton occupies approximately one quarter of the Johannesburg All Share and its continued relative strength has helped support the Index. Sasol, which remains the world leader in gas-to-liquids and coal-to-liquids is the fifth largest company at a 3.5% weighting. The share broke out of its base in October, consolidated briefly above it and has moved into a relatively consistent medium-term uptrend. Following last week's surge, it has become somewhat overextended but a sustained move below ZAR34,000 would be required to question medium-term upside potential. (Also see Comment of the Day on December 29th).