Chemicals group Sasol’s share price slumped almost 12% on Friday after it warned that its embattled mega-project in the US, Lake Charles, would earn only half what it had previously expected in its 2020 year.
Following a fire and explosion at Lake Charles in January, the project is expected to contribute between $50m (R744m) and $100m to earnings before interest, taxation, depreciation and amortisation (ebitda) in the group’s year to end-June 2020.
The group has also warned of a fall in profit for its half year to end-December 2019, citing weak margins amid weakening demand for chemicals.
In its results to end-June 2019, released in October, Sasol expected an ebitda contribution from the project of between $100m and $200m in its 2020 financial year.
Headline earnings per share (HEPS) for the six months to end-December are expected to fall by between 69% and 79%, the group said, citing weaker oil prices and softer global chemical and refining margins.
Earnings were further hit by R1.7bn in additional depreciation charges, and about R2bn in finance charges as Lake Charles units become operational. The company said it expects net debt to remain below three times ebitda, while gearing will remain within previous market guidance.
The market was expecting a decline in performance due to the start-up costs of Lake Charles and weaker oil and chemical prices, but the extent of the decline is a surprise, said portfolio manager for Kagiso Asset Management Abdul Davids.
The earnings guidance on the Lake Charles plant was an additional negative, with management guiding for much lower earnings from the plant compared with their already-lowered guidance only five months ago, Davids said.
While earnings appear to have missed analyst expectations, it is encouraging that Sasol is managing its debt better, said Zaid Paruk, portfolio manager and analyst at Aeon Investment Management.
The explosion at the Lake Charles facility is the latest setback for Sasol, with cost overruns at the mega-project prompting the firing of its co-CEOs in 2019, and causing the group to twice delay its financial results. The overruns have cost the company dearly, with its share price falling more than 28% in 2019, making it its worst year since 1998.
Sasol is unlikely to get a decent return on its Lake Charles investment, similar to its other forays, such as its wax business in Europe, said RECM chair Piet Viljoen.
Since 2002, the company’s return on equity has dropped from about 30% to 2% now, and the company has badly allocated its capital, said Viljoen. Return on equity is a measure of how efficiently a company allocates shareholder’s capital.
In afternoon trade on Friday, Sasol’s share price was down 6.63% to R239.49 — its weakest level in more than a decade. Earlier it fell as much as 11.88%.
Update: January 31 2020
This article has been updated with share price information and analyst comment.
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