The market is not happy with Sasol. Its Lake Charles chemicals project has been a thorn in the side of investors since early indications that it would not meet deadlines and that costs would overrun.
Sasol’s long-term price-to-earnings ratio has been roughly 10 and it was initially inferred by the market that if the project was successful it would place Sasol in the league of US chemical peers. Not so, as delay after delay has proven.
Initial pre-feasibility cost indications in 2011 were $5bn-$7bn and the final build estimate in 2014 was $8.9bn to be completed in 2018. The cost estimate then moved to $11bn in 2016 before being revised upwards again to $11.13bn in 2017. It now sits at $12.6bn-$12.9bn.
The project has put strain on Sasol’s balance sheet, driving up debt and breaching internally targeted debt covenants. Its management says there’s no need for a rights issue, which I take to mean that the dividend could be at risk, that assets could be sold and the diversion of smaller capex projects could be the first levers to be pulled to get the debt situation in check.
The management has hit us with even more bad news — a delay in releasing results due to an independent review identifying “control weaknesses” in the project’s execution and technical issues which will defer the ramping up of volumes and beneficial operation dates.
Consequently, the profit expectations from the Lake Charles project are to be 42%-86% of previous guidance. Good grief!
Shoprite
There were some positives to be drawn from Shoprite’s full-year results.
Food inflation has come back, and was 1.2% at full year — this is not nearly as much as the market would have wanted, but it’s growth nonetheless; a better second half; improved sales performance in SA; the liquor business continues to show strength (though still a small contributor).
The negatives were numerous. Shoprite continues to be plagued by the weak non-SA landscape, notably Angola, where costs were disproportionately higher than revenue growth, thus wiping out top-line improvement. Working capital was weak, free cash flows deteriorated, headline earnings per share were down 19.6% and the dividend was slashed by 34%.
Non-SA is still going to face some downward pressure leaving the local business to do the heavy lifting. Fortunately, the first few weeks of domestic trading have been promising.
Italtile
It's not all bad news out there. Italtile, the ceramic tile and sanitary ware retailer and manufacturer, posted pleasing full-year results for the year ended June. It has proven to be a resilient counter. Group turnover expanded by 15.2% (retail store like-for-like growth of 4.2%), breaching the R10bn mark and trading profit grew 18.4%. Manufacturing sales posted more muted growth of 1.4%.
In tough times it is comforting to see a company with an integrated income base growing market share, cost discipline and strong cash generation.
About 90% of stock for CTM and TopT brands is local and is manufactured by Italtile’s own factories. Italtile is an almost pure SA Inc play with the capability to capture the broad spectrum of consumer LSM levels, minimal vulnerability to adverse currency movements and the ability to participate in the upside of SA economic growth when it eventually comes through.
• Sekgabo Molelekoa is a portfolio manager at Umthombo Wealth. Her views do not necessarily reflect those of Umthombo Wealth
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