Renewable Energy Integration And Cost Optimization Will Strengthen Future Operations

Key Takeaways

• Strategic initiatives in chemicals profitability aim for margin expansion through cost efficiency, asset optimization, and market focus, enhancing net margins and earnings.
  
• Efforts in renewable integration and improved efficiency promise operational cost reductions, supporting long-term profitability and enhanced free cash flow.
  
• Volatile markets, restructuring efforts, emission targets, and financial risks challenge Sasol's global competitiveness, cash flow sustainability, and profitability.

Catalysts

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

• Sasol's strategic initiatives to improve international chemicals profitability include cost efficiency, market focus, and asset optimization, with plans for $100 million to $200 million EBITDA uplift, targeting margin expansion which would enhance net margins and earnings.
  
• The execution of the destoning project and enhanced coal quality efforts are expected to improve operational efficiency in the South African value chain, anticipated to support revenue stability and potentially reduce operational costs, impacting both revenue and net margins positively.
  
• Sasol's estimated reduction in capital spend related to its ERR (Emission Reduction Roadmap) could lower future capital requirements, thereby improving free cash flow generation and enabling higher earnings retention for debt reduction or reinvestment.
  
• Accelerated efforts to integrate renewable energy solutions and efficiency improvements could lead to significant operating cost reductions and energy savings, potentially increasing net margins and boosting earnings over time.
  
• Sasol's focus on transforming the business responsibly while optimizing resources in response to evolving regulatory and market conditions (e.g., changes in carbon tax policy) may protect value and enhance long-term profitability, positively impacting future earnings and free cash flow.

Sasol Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sasol's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -18.9% today to 17.9% in 3 years time.
• Analysts expect earnings to reach ZAR 50.1 billion (and earnings per share of ZAR 42.55) by about April 2028, up from ZAR -49.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.3x on those 2028 earnings, up from -0.8x today. This future PE is lower than the current PE for the US Chemicals industry at 9.5x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 26.44%, as per the Simply Wall St company report.

Sasol Future Earnings Per Share Growth

Risks

• The macroeconomic environment remains volatile, with lower oil prices, refining margins, and a chemicals market downturn, negatively impacting revenue and adjusted EBITDA by 15% compared to the previous year.
  
• The restructuring and optimization efforts, including mothballing underperforming assets in Germany, Italy, and the U.S., aim to enhance cost efficiency but also highlight challenges in maintaining global competitiveness, potentially affecting earnings as operations are adjusted.
  
• Challenges in coal quality and gasifier availability, due to geological issues and infrastructure constraints, could impact production volumes and profitability at Secunda operations, delaying potential revenue recoveries until improvements are implemented by financial year '27.
  
• Carbon emission reduction targets necessitate significant capital investments, and any adverse changes in carbon tax policies or failure to achieve cost-effective sustainable feedstock solutions could strain Sasol's financial resources and affect net margins.
  
• The large offshore debt and reliance on currency and oil hedging amidst ongoing geopolitical tensions and market volatility may lead to financial risks, impacting free cash flow and the ability to sustainably lower net debt below the desired USD 4 billion threshold.

Valuation

• The analysts have a consensus price target of ZAR128.556 for Sasol based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR210.0, and the most bearish reporting a price target of just ZAR85.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR279.6 billion, earnings will come to ZAR50.1 billion, and it would be trading on a PE ratio of 3.3x, assuming you use a discount rate of 26.4%.
• Given the current share price of ZAR65.21, the analyst price target of ZAR128.56 is 49.3% higher.
• 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.