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Mark Ingham's Fun-damental analysis
EPS of below 3000 cents on the cards for 2018
Share price: SOL:SJ 36000 cents
Recommendation: A Trading Buy, with caveat maintained of selling rallies in to strength, and Portfolio Buy maintained.
Fair value and target price: maintained in the region of R400 on longer run considerations.
My last note on Sasol was dated 22 March 2017 (see “Energy outlook improves for Lake Charles project”). At that time, the share price was R358 – much in line with the current share price of R360. My recommendation was that “I continue to believe that a stock price closer to R350 is too cheap based on current earnings variables” and that “whilst it may be a bit early to call a rerating, I still see value in the region of R400 and retain Sasol as a Trading Buy, with the caveat of selling the rallies into strength”.
That has not been a bad call as the stock price subsequently traded back up to over R400.
In that last note, Brent crude had slipped to $50,64/bbl with the rand strengthening to $12,70/$. I observed that “neither of these developments are earnings positive on a short-term forward view”.
As of today, Brent is $45,50/bbl and the currency is R13,00/$ - so, Brent is 10% lower than in March, a negative, but the currency 2,4% weaker, a positive. The ZAR price of Brent has fallen from R635,80/bbl on 22 March to R591,63/bbl, a fall of 7%.
Brent crude oil in USD/bbl
Brent crude oil in ZAR/bbl
As a reminder, I guided that a $1/bbl move in the annual average crude oil price in F2017 compared with F2016 would affect EPS by almost R1 per share whilst a 10 cent move up or down in the annual average rand/ dollar exchange rate would have a roughly 70 cents per share effect on earnings. However, I also mentioned that as time goes by there is a good reason to at least start present valuing some earnings and value from Lake Charles, the US chemicals project.
EPS for Sasol will start to be assisted by Lake Charles from F2021 onwards and in the forthcoming years it is feasible to look at a scenario of Group EPS of 5000 cents to 6000 cents, roughly double where EPS is likely to be in the short term. Naturally, that scenario is some way off and subject to external variables.
Given that the price of crude today has slipped to the mid-forties, the share price has in fact been relatively resilient. A reason for this is that some investors will partially factor in Sasol’s earnings diversification as old earnings-driver correlations change.
There has been a close relationship between the ZAR price of a barrel of oil and Sasol earnings for many years – roughly a 5x multiple. Earnings trend in line with the changes in oil, be that in ZAR or USD. Similarly, the share price tends to move in a ratio of 50% to 60% to the movement in the ZAR price of a barrel of oil.
EPS of around 1000 cents per share remains realistic for Lake Charles in F2022. On a net present value basis, I have a value of R65 per share for Lake Charles with a payback of fifteen years.
F2017 earnings are pretty much in the bag now, regardless of recent Brent wobbles, and I have EPS of 3470 cents, down 16%. That may be a bit weaker in reality but not by much, say by around 5% or closer to 3200 cents. The average Sasol oil price for the twelve months ended 30 June 2017 will be approximately $50/bbl with the currency in the region of $13,80/$.
The real question is F2018. I still believe the consensus earnings estimates are too bullish, with broker consensus EPS at 4000 cents. This is also affected by the “house view” on oil that brokers have and we are likely to see downward adjustments.
My EPS number for F2018 is 2858 cents, down 18% on my F2017 estimate. I am holding that forecast for now, which is in any event 29% lower than the broker consensus for F2018.
I had EPS in F2019 projected at 3016 cents, again much lower than consensus of over 5100 cents. Time will tell but we could still see EPS below 3000 cents and conceivably closer to 2500 cents.
But I’d rather have a realistic view based on very conservative assumptions than take a bullish view. By way of example, EPS at prevailing spot would be in the region of 2250 cents in F2018 whilst EPS in F2019 could be even lower, at closer to 1700 cents – i.e. 50% lower than my F2017 EPS estimate.
For F2017 I have a full year dividend of 1200 cents, down from 1480 cents in F2016, with the F2018 dividend falling to 1000 cents.
At the current share price of R360, this puts the F2018 forward dividend yield at 2,8% with the forward PE ratio to F2018 at 12,5x. These are probably more realistic gauges to use than the historic or the F2017 figures.
That said, there is no reason to deeply discount Sasol simply on short term earnings-driver trends. Share price volatility is a given and further downside pressure on Brent oil or rand strength will accentuate this. In the last three months, the stock has traded within a 15% band. But anything much below R350 per share offers fundamental value, barring a collapse in oil to below $40/bbl on a sustained basis.
Sasol share price in ZA cents
Wishing you profitable investing, until next time.
Mark N Ingham
Glossary:
caveat - Essentially a proviso or a warning attached to a trading buy that it has to be entered into advisedly and within parameters - in this case pocketing gains, however small, in what could be a choppy journey.
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