Shares in Sasol, which is grappling with major cost overruns in the US, are still too expensive despite halving in value in less than a year, says one of the country’s top stockbroking houses.
SBG Securities, which is part of Standard Bank, the biggest bank in SA by assets, also said that the chemicals and energy company may have to cancel its final dividend, sell assets and issue new shares to raise funding as it faces the risk of having its debt downgraded to junk status.
"We think a pass on the dividend is critical and rational," it said in a note to clients this week, adding that a recapitalisation of the balance sheet was needed.
A credit-rating cut could increase Sasol’s borrowing costs by $100m (about R1.52bn) in financial year 2021/2022. The company would probably hold $9bn of debt once its troubled Lake Charles chemicals project in the US was completed.
Sasol shocked the market last week when it delayed the release of its full-year earnings report by a month to provide time for the completion of a probe into cost overruns and start-up delays at its near-R200bn Lake Charles project.
SBG Securities said it had cut its target price for Sasol shares to R240, from R350 previously.
That implies that the stock is still expensive, despite roughly halving in value from a high of about R580 reached less than a year ago. Sasol’s shares were last traded at R280.64 on Wednesday.
The stock briefly dipped below the R240 mark during last Friday’s sell-off.
SBG Securities, which recommends that clients sell the share, said it had reduced its earnings outlook for Sasol on lower projected oil and chemical prices.
The firm said the balance sheet could be bolstered by reducing or cancelling the final dividend, delaying remaining capital expenditure at Lake Charles, selling assets or raising fresh equity.
The stockbroker said up to $1.1bn could be fetched from the sale of Oryx GTL alone. "We think $2bn could be enough" funding, the firm said.
"Given the weak macro outlook, the constraint placed by the credit ratings to further access dollar debt, and debt covenants, we think the balance sheet poses a significant risk to liquidity in the short term, as well as stunting further growth over the next few years as the focus shifts to de-gearing."
S&P Global Ratings said in a statement on Monday that its assessment of Sasol’s financial position "is appropriate for the ratings" it already has in place.
Sasol spokesperson Alex Anderson said on Wednesday that the company would update the market on the details of "balance sheet management" when it presents its results in September.
Following an asset-review process, Sasol was targeting disposals worth more than $2bn in total net asset value, Anderson said.
Sales worth about $200m had already been concluded.
"To be clear, these are actions that we are taking by choice. We will proceed only if there is value for Sasol and we will not sell assets at sub-optimal prices."
Anderson said Sasol’s explosives business was considering a joint venture that could ultimately result in it handing over full operational control of that unit.
The company had also agreed to sell its share of a manufacturing joint venture in Germany.
Meanwhile, Sasol said on Wednesday morning it did not share any new price-sensitive information with certain investors after analysts complained that its private discussions with some shareholders had prejudiced others.
The company held talks with certain investors and analysts who had wanted more information after Friday’s shock announcement. But some market commentators comp-lained that this flouted the JSE’s rules in that these investors may have been privy to price-sensitive information while others were not.
"The JSE has been in continuous engagement with Sasol regarding certain concerns in the market that the company may have selectively shared information with investors," said Andre Visser, the exchange’s GM of issuer regulation.
"The company has now published a Sens announcement to confirm that it has not shared any price-sensitive information," Visser said.
The chemicals and energy company said on Wednesday that "as is normal practice", it had engaged with investors and analysts in response to the announcement that it would delay its results.
"Sasol confirms that no material or price-sensitive information other than that contained in the announcement was discussed in any of these engagements," it said.
Last Friday, Sasol said the delay in its results was necessary as it would "allow for the completion of management’s assessment and remediation of possible control weaknesses followed by the consideration of these assessments by Sasol’s external auditors".
The company estimates that the Lake Charles chemical project will end up costing between $12.6bn and $12.9bn.
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