Growing Climate Regulations And Stranded Assets Will Crush Prospects

Key Takeaways

• Over-reliance on coal and fossil fuel operations exposes Sasol to mounting climate regulation, asset impairment, and declining profitability as the world transitions toward renewables.
  
• Costly transformation projects and intense global competition threaten operational margins, limit earnings growth, and undermine the company's financial stability and shareholder returns.
  
• Strategic focus on specialty chemicals, deleveraging, operational efficiency, and sustainability initiatives positions Sasol for improved profitability, resilience, ESG appeal, and growth in evolving global markets.

Catalysts

Operates as a chemical and energy company in South Africa and internationally.

• Accelerating global climate regulations and the rapid advancement of renewable energy technologies will continue to undermine Sasol's core coal-to-liquids and gas-to-liquids segments, resulting in long-term contraction of Sasol's addressable market, intensified regulatory costs, and growing risk of asset write-downs, all of which will severely depress future revenue and earnings.
  
• Persistent over-reliance on coal-based production exposes Sasol to stranded asset risk, as global decarbonization efforts and ESG-driven capital constraints escalate; this heightens the likelihood of large, non-cash impairments and structurally depressed net margins over the long term.
  
• The mounting cost of compliance with increasingly stringent emissions standards-including carbon taxes and environmental liability provisions-will steadily erode Sasol's net margins, offsetting operational improvements and jeopardizing the economic viability of existing facilities.
  
• Intensifying international competition from low-cost, integrated producers in regions like the Middle East, China, and the United States will continue to squeeze Sasol's pricing power, further limiting the profitability of its commodity chemical and fuels portfolios and constraining earnings growth, despite any incremental operational efficiencies.
  
• Major execution risk surrounds Sasol's large-scale transformation projects towards renewables and specialty chemicals; capital overruns, delays, and uncertain demand for transitional products threaten to drain free cash flow and limit deleveraging, resulting in sustained financial fragility and limited upside for shareholders.

Sasol Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Sasol compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Sasol's revenue will grow by 4.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.7% today to 9.6% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 27.2 billion (and earnings per share of ZAR 42.36) by about August 2028, up from ZAR 6.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 3.1x on those 2028 earnings, down from 10.9x today. This future PE is lower than the current PE for the US Chemicals industry at 10.8x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 23.2%, as per the Simply Wall St company report.

Sasol Future Earnings Per Share Growth

Risks

• Sasol's ongoing strategic shift towards specialty and performance chemicals, combined with a focus on market-aligned product mixes and commercial excellence programs, is starting to improve EBITDA margins, which may support a sustained increase in net margins and long-term earnings.
  
• Management's disciplined capital allocation and significant deleveraging-reflected in reduced net debt levels and improved free cash flow generation-strengthen the company's financial resilience and provide the foundation for future dividend reinstatement, which could attract investors and support a higher share price.
  
• Continued progress on operational efficiency programs, including capital excellence, supply chain optimization, and rolling maintenance innovations, is expected to keep costs below inflation rates, potentially improving profitability and underpinning earnings stability over the coming years.
  
• Sasol's investments in renewable energy projects and the execution of its emissions reduction roadmap (ERR), targeting 2 GW of renewables by 2030 and a 30% reduction in greenhouse gas emissions, position the company to access low-carbon markets and expand into ESG-focused capital pools, sustaining revenue growth and lowering long-term compliance costs.
  
• Global trends of population growth, urbanization, and ongoing demand for energy, chemicals, and advanced materials, especially in emerging markets, present opportunities for Sasol's diversified portfolio to benefit from rising demand and improved revenue streams, particularly as infrastructure investment in Africa and globally accelerates.

Valuation

• The assumed bearish price target for Sasol is ZAR70.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Sasol's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR180.0, and the most bearish reporting a price target of just ZAR70.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ZAR282.1 billion, earnings will come to ZAR27.2 billion, and it would be trading on a PE ratio of 3.1x, assuming you use a discount rate of 23.2%.
  
• Given the current share price of ZAR115.05, the bearish analyst price target of ZAR70.0 is 64.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.