Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
Sasol’s Lake Charles:
are cracks starting to show?
Jun 13, 2019
Since we last wrote about our investment case for Sasol in March, the company has dropped yet another bombshell to leave investors reeling – in an operating update on 22 May, Sasol indicated that its Lake Charles chemicals project, which is 94% complete, will now cost a total of US$12.9 billion. It’s the fourth time the project cost has been increased, and the second time in four months. The cost of the venture is now 45% above its original budget of US$8.9 billion announced in 2014.
In general, it’s not uncommon for projects of this scale to go over budget. The world-scale cracker, which essentially breaks down ethane into ethylene, and six downstream units, are set to transform Sasol from a predominantly South African energy company to a global chemicals company. The particular reasons given for the latest overrun of US$1.1 billion do point towards poor management and execution, however.
In the update, the increases have been broadly divided into three categories:
On a slightly more positive note, a further two of the downstream manufacturing plants have started production ahead of the revised schedule (the linear low-density polyethylene plant came online in February). The ethane cracker, which is the main component of the project feeding its output to the downstream facilities, is still expected to be up and running by July. Of the three remaining downstream units, only the Ziegler plant is expected to see its schedule delayed by one month.
Sasol’s balance sheet will be stretched in the near term, and management therefore aims to cut all non-essential capital expenditure in the 2020 financial year. Overall, should there be no further cost overruns and/or a collapse of oil prices to below US$50 per barrel, there’s still sufficient liquidity to fund the remaining stages of the project with existing cash flows. The dividend is also unlikely to be cut.
In the update, Sasol’s management announced the sale of US$2 billion of non-core assets within the next 12 to 18 months. This doesn’t amount to a fire sale – it forms part of a larger capital review programme initiated two years ago. The sale estimate has, however, increased from the US$1 billion announced in February.
The management team also lowered its medium-term EBITDA guidance for the project from US$1.3 billion to US$1 billion in 2022. This is a result of the price forecasts used by external consultant IHS and is based on oversupplied near-term chemicals markets. The long-term view of US$1.3 billion remains intact, however.
The financial impact of the latest cost increase translates to around R21 per Sasol share. In addition, cutting near-term chemical price expectations to reflect the views of management further reduces the value by R15 per share. The market response was more brutal in the aftermath of the update, however, with the share down by R55 (-13%), dropping to R375 per share at the close of day on 23 May. This reaction is understandable, given that the market may have been worried about further negative surprises. It does seem that further increases of this magnitude are unlikely, however, and that this time management really did throw the kitchen sink.
In our view, the update points towards a serious disconnect between executive management and what’s happening on the ground at Sasol. As our clients’ representatives, we’ll do everything in our power to keep management accountable and to make sure appropriate action is taken against those at fault.
The company’s update was disappointing, to say the least, but our long-term investment case remains intact. The cost of the Lake Charles project has far exceeded initial management estimates and has led to the expected internal rate of return decreasing further from 7.5% to 6–6.5% (depending on price assumptions used). However, this large capital outlay is now largely a sunk cost and has been included in the current price paid for the company.
Even with depressed chemical prices expected in the medium term, Sasol’s cracker project is expected to make US$1 billion EBITDA by 2022 – and similar cash flow as a result of tax rebates – translating to cash flow of around R23 per share. We anticipate Sasol will make around R65 per share overall in free cash flow by 2022. In our view, despite all the negative news, the risk-reward equation for investors remains skewed to the upside, and we’ll therefore maintain our exposure to the share.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
South AfricaSouth Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStar
Rest of AfricaSanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth Mauritius
GlobalGlobal Investment Solutions
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.