Sasol Limited Stock: Energy Transition Key To Future Growth Prospects (NYSE:SSL)

South Africa’s largest energy company by revenue, Sasol Limited (NYSE:SSL) is set to welcome the rein of its new CEO, Simon Baloyi who will take over from Fleetwood Grobler in April 2024. In his letter to stakeholders on November 29, 2023; Mr. Grobler reiterated Sasol’s goal of attaining its 2030 greenhouse gas emission targets including its 2050 net zero campaigns. Over the decades, Sasol has sustained its main activities in South Africa which are the Secunda coal-to-liquid operations and the Sasolburg gas-to-liquids operations. Q4 2023 also saw marginal growth in productivity especially due to increasing internal gas prices despite a drop in the chemical business across Africa, the Americas, and Eurasia.

Thesis

Sasol’s management is focused on strengthening its pipeline initiatives including GHG emissions in the long term while bolstering productivity in mining and its chemical business. The company also augmented its capital expenditure towards its green transitioning projects, a move that saw it yield the first green hydrogen output.

Management upgrade

First of all, Sasol’s board announced the appointment of Simon Baloyi, its energy and technology executive as its new CEO to replace Mr. Fleetwood Grobler whose term officially expires on April 1, 2024. Mr. Grobler has been at the helm of the company since November 2019 (a 4-year tenure) with over 40 years in the management sphere. However, I see the entry of Simon as a strategic move by the company to acquire a fresh mind to guide the company through its energy transition to a net zero carbon/ GHG emission future.

Sasol will require strong leadership to have a successful transition since as we know, it is a high-GHG emitting company not just in South Africa but in the world. For instance, in 2021; it was reported that its Secunda operations were responsible for an emission of 57,352 metric tons of GHGs. In August 2023, Bloomberg reported that it took a $1.9 billion (or 35 billion rand) write-down due to GHG emissions at one of its plants as a result of flaring and fuel-gas activities. At the time, the company set a goal of a 30% GHG emission reduction in 2030. It will therefore be imperative for Mr. Simon to use this climate action to not only guide the transition but also generate shareholder value.

Sasol Limited had more than 29,000 employees in 2023 with the mining sector taking up 30% of the workforce. Notwithstanding that it is among the highest taxpayers in South Africa, Sasol has been a victim of climate activist action with the latest being the cancelation of its AGM by “Extinction Rebellion” in November 2023.

Valuation

Sasol’s market capitalization stands at $5.57 billion against an enterprise value of $10.44 billion. The company’s available cash is $2.87 billion against a total debt of $7.47 billion. There was a 5.4% (QoQ) reduction in borrowing from $7.9 billion as of March 2023 to $7.47 billion in June 2023 indicating a slight increase in capital management initiatives.

In the 1-year to June 30, 2023; Sasol’s EV/EBITDA was 2.6X with the metric averaging at 5.5X since July 2019.

With the EV/EBITDA ratio hitting a 5-year low of 2.6X, it appears that the company is gaining traction since it is potentially undervalued by the market. Sasol’s management has consistently made it clear that the energy transition is inescapable which will in turn improve financial sustainability in the long term. As an investor, it will be my role to ensure the company sticks and implements the GHG-emission reduction plan.

Dividend growth

Sasol’s annual dividend rate currently stands at $0.91 yielding 10.47%. The 4-year average dividend yield of SSL is 2.78% against the sector average of 2.13% (a difference of 30.14%). The forward annual yield is forecast at 12.09 which will be about 440% more than the sector average. This slight growth may be a result of increased cash flow as the company complies with international industrial policies governing energy production.

Quality interventions

In its Q4 2023 earnings transcript, Sasol gave its coal production guidance at the range of 7.1 million to 7.3 million (in its Secunda mines). While Simon explained that the guidance could hit 7.5 million tons by 2025, he emphasized the need to have coal-quality interventions.

I will briefly assess Sasol’s decarbonization strategy where the target was set at 30% by 2030. In its Q4 2023 earnings transcript, Sasol explained that it was planning to lower the consumption of coal using innovative feedstock transitions in the future. The company stated that a huge portion of this reduction also involved fine-coal briquetting (about 25%) and sourcing for biomass- a process it stated, was already in the first assessment stages.

For the fine-coal briquetting process, Sasol in my view will need to convert it into a coal feedstock (mainly coarse in texture) to help in the energy process. Research also shows that the bio-coal briquettes are not only eco-friendly but also efficient ways to “curb deforestation, utilize agricultural waste and lower carbon emissions.” What we will be looking at now, is a step-down in production especially at the Secunda coal mines, from 7.5 million tons to 6.7 million tons of coal (about 10.7% decrease) into 2030.

Further, there was a new Power Purchase Agreement (PPA) ratified by Air Liquide- wind/ solar power company, and Sasol in late November 2023 for the long-term supply of about 97.5 MW of renewable energy to the Secunda site. It was also noted that Air Liquide also operates (at the Secunda site), “the world’s largest oxygen production center. One remarkable achievement for Sasol is that it was able to produce its first green hydrogen fuel in Q4 2023. Since oxygen, is an oxidizer for fuels (such as hydrogen), I believe Sasol may cooperate with Air Liquide to harness this resource to expand the production of its green hydrogen.

Overall, we are looking at a replacement of the coal waste with up to 1.2GW of renewable energy (courtesy of Air Liquide since the two have already signed 3 PPAs for procurement of about 800MW) regarding its Secunda operations. Another solution that I think will also come in handy is the integration of steam-using power equipment that will lower the energy requirements at the Secunda site. The use of steam power will balance the pressure requirements of the power plants while transferring heat using less energy than coal. According to the “global energy transitions outlook, the energy-related emissions gap” is estimated to reach 34 Giga tons by 2050.”

Increased CapEx

In its Q4 2023 earnings report, Sasol stated that its total capital expenditure for FY 2023 hit ZAR 31 billion (about $1.7 billion) exceeding its previous guidance range of ZAR 27 billion to ZAR 28 billion. The company plans to spend up to ZAR 34 billion in FY 2024 in line with its operational efficiency and attainment of its GHG reduction goals.

To counter its $3.8 billion net debt balance, Sasol explained that it had a liquidity headroom (or an undrawn amount) of almost $6 billion. This above exceeds its target of $1 billion indicating positive future financing prospects as it seeks to transition into green energy.

Risks to the business

Sasol’s revenue as of Q4 2023 declined 22% (YoY) to $3.7 billion while its gross profit also fell 32% (YoY) to $1.63 billion. The most affected was the chemical business which decried a slowdown, especially from the Chinese-related petro-chemical businesses. There were also economic challenges in the European chemical market.

In its Q4 2023 earnings transcript, Sasol decried the adverse effect of the US Inflation Reduction Act (IRA) coupled with the carbon-border adjustment mechanism (CBAM) policies of the EU that lowered trade relations due to the complicated importation policies. Under the EU’s CBAM, companies such as Sasol have to adhere to reporting obligations about the importation of high-GHG-emitting products into the EU. The rules became applicable by November 2023 and they essentially place a carbon price on products such as coal that are imported into the EU from countries such as South Africa.

The International Monetary Fund (IMF) recently gave South Africa a downward revision of 0.2% points for 2024. The downgrade was attributed to growing logistical headwinds that would also affect the mining industry in 2024. This rating, however, did not prevent the lender from giving a 3.8% economic growth forecast for the year.

Production and sales overview in H1 2024

In the 6 months to December 31, 2023 (H1 2024), Sasol noted that pricing pressures and weak global growth had negatively impacted its South African business portfolio. In particular, mining productivity declined 8% (QoQ) in Q2 FY 2024 as compared to Q1 2024, but this was offset by a 6% (YoY) mining production growth in H1 FY 2024 as compared to H1 2023.The company however, noted a 10% (YoY) growth in gas production in Mozambique in H1 2024 to 60.5 billion sq. feet.

Sasol has operated in Mozambique since 2006 and even had their field development plan approved in 2020 at a project valuation of $760 million. This move is commendable considering the economic headwinds in South Africa are being offset by production growth in other countries including Mozambique. Further, while revenue from chemical business in H1 2024 declined 21% (YoY to $3.78 billion, its total external volume sales surged 4% due to ethylene-related sales in the US. The company remains optimistic that it will meet the production and fiscal sales guidance for FY 2024.

Bottom line

Sasol’s planned new management is working to implement a new climate strategy as part of its energy transition process. The disruption of its 2023 AGM by climate activists was also a wake-up for the company to enact an energy-efficient production mechanism that has been outlined in this article. Further, the transition process may not be linear for the new management owing to the logistical constraints and other industrial policies that may affect business performance such as the EU’s CBAM. Still, the company has a mass of engineering expertise coupled with strategic partnerships and business expansion metrics (outside South Africa) that will see it grow its renewable energy production into 2025. For these reasons, I recommend a hold rating for the stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.