Profit statements

Where Sasol got its improved profit

Sasol’s latest interim results show that the dramatic changes in management of recent years have been successful, with lower debt levels and higher profits, putting its finances on a much better footing than before. a few years old.

Earnings before interest and tax rose 12% to R24.3 billion in the six months to December 2021, compared to the first half of the prior year, according to the financial statements. Earnings per share (EPS) rose 2% to just below R24, although the overall earnings figure showed a 21% drop to R15.21 per share.

Additionally, Sasol has been able to reduce its long-term debt – an issue that not long ago posed uncertainty over the group’s survival – to more manageable levels, while continuing its investment program. .

It was not easy. Massive cost overruns and construction delays at the popular Lake Charles Chemical Project (LCCP) in the United States have worried shareholders and seen the share price fall below R100 per share. When Covid-19 hit, management had to plead with its bankers for some leeway within the limits imposed on its leverage ratio.

The figures for the last six months indicate that Sasol is recovering from the financial challenges posed by the expansion in the United States and the pandemic.

Sasol Chairman and CEO Fleetwood Grobler said in a presentation to shareholders that Sasol had benefited from a recovery in the global economy, which led to increased sales volumes at higher prices.

“These factors resulted in a significant improvement in gross margin compared to the prior half, combined with a strong cost and capex performance. These benefits were, however, partially offset by operational challenges in our South African value chains, which resulted in lower production.

“Coal supply and coal quality were tight and resulted in lower fuel and chemical production at our Secunda operations,” Grobler said.

Mining productivity at the group’s coal mines was 16% lower than in the prior period, due to security incidents, higher than expected rainfall and a slower than expected ramp-up of the new system built-in shifts for full-schedule operations.

SA Recovery

While Grobler pointed to production constraints in SA operations, it should be noted that local operations are still very important. Most of Sasol’s profits and much of Sasol’s recovery in profitability still comes from SA, despite efforts to grow internationally.

In fact, it can be argued that Sasol actually slowed down its international expansion by selling much of LCCP and entering into joint ventures, as well as divesting itself of some of its other foreign businesses – which it had to do to reduce its unsustainable debt.

Additional figures provided in an addendum to the results reveal that SA operations still provide nearly 60% of Sasol’s earnings before interest and tax.

Summaries of the performance of Sasol’s various divisions show that most of the improvement in profitability also comes from SA operations.

Divisional profit before interest and taxes

rm 6m Dec 2021 6m Dec 2020 Difference Change
Mining 2,026 1,732 294 17%
Gas 7,619 4,155 3,464 83%
Fuels 5,730 1,457 4,273 293%
Chemistry Africa 10,567 5,283 5,284 100%
United States Chemicals 1,397 – 837 2,234 267%
Eurasia Chemistry 2,346 1,538 808 53%
Total 29,685 13,328 16,357 123%

Source: Compiled from intermediate results figures

Although the figures for the various divisions do not match the profit figure in Sasol’s official results (due to other factors, such as the market loss of R5.3 billion in hedging transactions), they give a good indication of what is happening where.

The fuels division had the best recovery, with earnings before interest and tax up nearly 300% from 2020 – the time when Covid-19 restrictions were ruining everyone’s vacations, we were working from home and pubs were closed for weeks. Revenue from the sale of fuels (mainly in South Africa) increased by R4.3 billion.

Revenues from the African Chemicals division improved by nearly R5.3 billion and gas sales revenue by more than R3.4 billion.

US assets turned the corner and produced a profit before interest and tax of almost R1.4 billion, compared to a loss of R837 million a year ago.

Meanwhile, SA will remain important.

Grobler noted in his presentation that management is strongly focused on initiatives to improve coal quality and supply – increasing Sasol’s production and productivity as well as increasing coal purchases to maintain coal levels. higher stocks.

“As of Friday February 18, our coal inventory was slightly below 1.1 million tonnes and we are on track to meet our target at the end of this month. The increase in external coal purchases to replenish the stock will continue until the baseline is restored. These purchases are following our plans, with well-managed procurement processes,” Grobler said.

“Our Secunda operations are also on track to meet the revised target with operational issues largely resolved.”

Good exercise

The interim results gave another significant impression: it looks like Sasol is going to have a good year.

If the results show an improvement compared to the first half of the previous financial year, they are much better than the previous six months.

Attributable profit of R16 billion is well ahead of the R10.5 billion in the financial year to June 2021, meaning Sasol only has to maintain its achievements over the coming months to show significantly higher profits.

Investors seem to have factored this into the stock price.

Similar overall EPS in the second half of the financial year will return more than R30 per share.

So, the current stock price of R321 equates to a forward price/earnings ratio of about 10x, which seems about right for the stock.

Grobler is cautious in his predictions. “In terms of creating shareholder value, our balance sheet is being reset, with the focus now on restoring dividends.

“We aim to increase our return on invested capital for the group between 12% and 15% throughout the transition until 2025, and above 15% by financial year 2030, while targeting a rate dividend payout of 40%,” he said.

Click here for a pdf version of the above.

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