The bad news keeps coming for Sasol shareholders. The synthetic fuels and chemicals company had more than R13bn wiped off its market value on Thursday as its share price plummeted more than 6.3%.
It marks the worst one-day fall since 22 May when Sasol said its troubled Lake Charles Chemicals Project (LCCP) had incurred further cost overruns of $1bn, pushing the project to 45% over its original budget.
In Thursday’s trading statement, Sasol said it would write down the value of assets by R18.1bn, owing largely to the significant cost overruns at Lake Charles as well as lower chemical prices.
Further delays
Analysts said the impairment has been expected to an extent, but of greater concern is that the trading statement warned of further delays at Lake Charles as well as an extended deadline for an independent review of the project.
Nic van Schalkwyk, director at Integrity Asset Management said given the issues with the project, the impairments did not surprise much.
"The market was, however, disappointed by the further delays in the ramp-up of critical sections of LCCP as well as the delay in the independent review of the project sanctioned by Sasol’s board," he said.
In the trading statement, Sasol said Lake Charles is still in line with the revised cost estimate of $12.6bn-$12.9bn provided in May 2019 and is "mostly tracking schedule".
While the Ethane Cracker, the heart of the project, was still expected to start production near the end of July, Sasol said it expected a four to six week delay in the start of output at
its Low Density Polyethylene plant, while its Ziegler unit was expected to be delayed by four to eight weeks
An independent review was initiated in May, and management said the report outlining the cause of the Lake Charles overruns was due to be released in 60 days. This has been extended to 100 days, and it is now due at the end of August as it is an "in-depth exercise entailing the review of a voluminous amount of documents and numerous interviews".
Investment analyst at Aeon Investment Management, Zaid Paruk, said the Sasol management’s inability to guide the market accurately on a repeated basis will further reduce investor confidence in the company.
That the independent review requires more time is added cause for concern, he said.
"This could indicate further uncovered issues were found by management and a more extensive approach was required. The market has viewed this [review] as further, unknown costs could be discovered, leading to possible further problems."
In the statement ahead of the release of its annual results in August, Sasol said it expected the impairments would lead to earnings per share for the 2019 financial year decreasing between 46% and 56% — about R6.56 to R7.99 per share.
Meanwhile, core headline earnings per share, which strips out one-off items to reflect the business’s operating profit and which is used in calculating dividends, is expected to increase between 1% and 11%.
Given its financial performance, Sasol said that its gearing was expected to increase above its previous market guidance of 49%. "However, we expect the net debt to ebitda to remain well below our debt covenant level of 3.0 times."
But Paruk said Sasol’s weak outlook on future earnings is a worry as it could result in the dividend being temporarily reduced.
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