Over the past six weeks, Sasol has become a focal point for investors as its shares hit historic lows. Excluding the unprecedented market crash during the Covid-19 pandemic in 2020, Sasol’s stock is now trading at levels not seen as 2004—a staggering two-decade low. On December 30,2024,the share price plummeted to R79.70, marking a notable milestone in the company’s financial journey.
This dramatic decline has left many investors questioning whether sasol is a bargain waiting to be snapped up or a sinking ship. after all, how much lower can it go? Those who purchased shares at R90 just a month ago are already facing a 10% loss, adding to the uncertainty surrounding the stock.
Though, the narrative took an intriguing turn on January 7, 2025, when Morgan Stanley revised its price target for Sasol to R225. This projection suggests a potential upside of 178% from its current valuation, sparking renewed interest in the stock.The declaration led to a surge in trading activity, with nearly 2.3 million shares changing hands on the New York Stock Exchange in a single day—double the average volume over the past three months and the highest since 2021.
A Look Back at Sasol’s Share Price journey
From a valuation viewpoint, Sasol appears to be substantially undervalued. As of June 30, 2024, the company’s enterprise value stood at $7.54 billion, down from $10 billion at the end of its fiscal year. meanwhile, its market capitalization is $2.77 billion, resulting in a price-to-book ratio of just 0.37.
“According to some forecasts, its forward price-earnings ratio is in single digits,”
highlighting the potential for substantial growth.
One compelling theory is that Sasol’s US-based chemicals plant in Lake Charles, Louisiana, is valued higher than the company’s entire market cap. This implies that investors are essentially getting the rest of Sasol’s global operations for free—a tantalizing prospect for those willing to take the risk.
But there’s more to the story.Recent trends in global markets have created a unique opportunity for Sasol. The price of Brent crude oil has been on the rise, while the rand has weakened against the US dollar. This combination has provided a dual boost for the company, as Sasol’s revenues are heavily influenced by dollar-denominated exports. Over the past month, the rand price of oil has surged by 15% to 17%, further enhancing Sasol’s financial outlook.
Yet, it’s crucial to consider the broader context. During its last fiscal year (July 2023 to June 2024), the average price of brent crude was $84.74 per barrel, with the rand/US dollar exchange rate averaging R18.71. The strength or weakness of the US dollar plays a pivotal role in Sasol’s earnings, as its products are priced in dollars but produced in South Africa. This dynamic underscores the importance of monitoring global economic trends when evaluating Sasol’s potential.
For investors, the question remains: Is Sasol a diamond in the rough or a cautionary tale? While the stock’s current valuation and recent market trends suggest significant upside, the company’s challenges cannot be ignored.As always, thorough research and a clear understanding of the risks are essential before making any investment decisions.
Sasol’s Financial Outlook: Oil Prices, Exchange Rates, and Market Risks
Table of Contents
- 1. Sasol’s Financial Outlook: Oil Prices, Exchange Rates, and Market Risks
- 2. Financial Sensitivity to Exchange Rates and Oil Prices
- 3. Market Guidance and Operational Stability
- 4. dividend Policy and Debt Levels
- 5. Looking Ahead
- 6. Investing in Sasol: A High-Stakes Game of Timing and Strategy
- 7. What specific geopolitical developments mentioned in the text pose the most critically important risk to Sasol’s financial stability?
- 8. Key Takeaways:
- 9. Conclusion:
As Sasol navigates the complexities of global markets, its financial performance in FY2025 hinges on two critical factors: oil prices and the rand/dollar exchange rate. The company’s base case assumes an average exchange rate between R17.50 and R19.80,but this forecast is fraught with uncertainty. “Several risks could lead to elevated currency and financial market volatility,” Sasol warns, citing geopolitical tensions, US dollar trends, inflation, and domestic socioeconomic challenges.
“Key is what happens to the price of oil across the next six months.”
For much of the first half of Sasol’s financial year, oil prices have hovered in the low to mid-$70s. However,the election of Donald Trump as US president in early November has injected fresh unpredictability into the market. The dollar has rebounded to its highest levels in 12 months, and the rand-dollar exchange rate has mirrored pre-South African general election jitters seen earlier in the year.
Financial Sensitivity to Exchange Rates and Oil Prices
Sasol’s earnings before interest and tax (Ebit) are highly sensitive to fluctuations in both oil prices and exchange rates. Assuming an average oil price of $82 per barrel,a 10-cent shift in the rand/dollar exchange rate could impact Ebit by R630 million ($35 million). Similarly, a $1 change in the average price of Brent crude would affect Ebit by R850 million ($48 million) in FY2025. These projections are based on an average exchange rate of R17.75, which also underpins Sasol’s capital expenditure (capex) forecast of R28 billion to R30 billion for the year. Notably, every 10-cent change in the exchange rate adds R50 million to its capital costs.
Market Guidance and Operational Stability
Despite these challenges, Sasol’s market guidance remains largely intact across most of its business segments. The exception is Natref, a relatively minor operation where production growth has been revised downward. Meanwhile, the company’s gas operations in Mozambique appear stable, even amid regional unrest.
For further reading:
- Total set to back Mozambique LNG Terminal to boost gas imports [Oct 2024]
- Mozambique election unrest is costing SA R10m a day in trade disruption [Dec 2024]
- Tesla-supplier closure shows rising fallout of mozambique unrest [Dec 2024]
dividend Policy and Debt Levels
Last year, Sasol revised its dividend policy, committing to pay out 30% of free cash flow, provided net debt remains below $4 billion (excluding leases) on a sustained basis. As of June 2024, net debt stood at $4.1 billion, prompting the company to forgo a final dividend. Given current financial pressures, it would be surprising if Sasol declares a dividend for this fiscal year.
Looking Ahead
the next six months will be pivotal for Sasol. Oil prices and exchange rate movements will shape its financial trajectory, while external factors like US policy under Trump and regional instability in Mozambique add layers of complexity. Investors and stakeholders will be watching closely as the company navigates these turbulent waters.
Investing in Sasol: A High-Stakes Game of Timing and Strategy
When it comes to investing in Sasol, timing is everything. Over the past two decades, fortunes have been made—and lost—by those who dared to bet on this energy and chemical giant. The company’s stock has been a rollercoaster, with investors often left wondering whether it’s a golden opportunity or a risky gamble. As one financial commentator humorously put it on X, “Sasol is a screaming buy ….. every time you buy you scream.”
“Sasol is a screaming buy ….. every time you buy you scream.”
Allan Gray, a prominent investment firm, has shown significant confidence in sasol. As of June 2024, the firm held 7.7% of Sasol’s shares, making it the third-largest shareholder behind the Government Employees Pension Fund and the Industrial Advancement Corporation. By the end of September 2024, Allan Gray had increased its stake by purchasing an additional 2.2 million shares across its funds. This move stands in stark contrast to M&G Investments, which sold off more than 3.2 million shares during the same period.
“Allan Gray remains a significant holder of Sasol shares on behalf of its clients.”
This divergence in investment strategies highlights the polarizing nature of Sasol’s stock. For some, it’s a diamond in the rough, poised for a comeback. For others, it’s a cautionary tale of volatility and risk. The key, as always, lies in timing. Investors who can navigate the market’s ebbs and flows may find Sasol to be a lucrative opportunity. But for those who misjudge the moment, the consequences can be costly.
As the financial world watches Sasol’s next moves, one thing is clear: this is not a stock for the faint-hearted. Whether it’s a “screaming buy” or a scream-inducing gamble depends entirely on your perspective—and your timing.
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What specific geopolitical developments mentioned in the text pose the most critically important risk to Sasol’s financial stability?
prices, exchange rates, adn geopolitical developments will play a significant role in shaping the company’s financial performance. Investors will need to closely monitor these factors, and also Sasol’s ability to manage its debt levels and operational challenges.
Key Takeaways:
- Share Price Volatility: sasol’s share price dropped to R79.70 on December 30, 2024, marking a significant decline. however, Morgan Stanley’s revised price target of R225 on January 7, 2025, suggests a potential upside of 178%, sparking renewed investor interest.
- Undervaluation: sasol appears undervalued, with a price-to-book ratio of 0.37 and a forward price-earnings ratio in single digits. The company’s US-based chemicals plant in Lake Charles, Louisiana, is valued higher than its entire market cap, indicating potential for growth.
- Oil Prices and Exchange Rates: Sasol’s financial performance is highly sensitive to oil prices and the rand/dollar exchange rate. A $1 change in Brent crude prices impacts Ebit by R850 million, while a 10-cent shift in the exchange rate affects Ebit by R630 million.
- market Risks: Geopolitical tensions, US dollar trends, inflation, and domestic socioeconomic challenges pose risks to sasol’s financial stability. The election of Donald Trump as US president has added further unpredictability to the market.
- Dividend Policy: Sasol revised its dividend policy to pay out 30% of free cash flow,provided net debt remains below $4 billion. As of June 2024, net debt stood at $4.1 billion, leading the company to forgo a final dividend.
- Operational Stability: Sasol’s gas operations in Mozambique remain stable despite regional unrest.However, production growth at Natref has been revised downward.
Conclusion:
Sasol presents a compelling investment chance for those willing to navigate the risks associated with volatile oil prices,exchange rates,and geopolitical uncertainties. The company’s current undervaluation and potential for significant upside make it an attractive option for risk-tolerant investors. However, thorough research and a clear understanding of the associated risks are essential before making any investment decisions.
For further insights, consider reading the linked articles on Mozambique’s LNG terminal, election unrest, and its impact on trade and Tesla’s supply chain. These provide additional context on the broader market dynamics affecting Sasol.
