Streamlined Operations And Renewable Energy Projects Will Improve Future Efficiency

Key Takeaways

• Streamlining operations, restructuring roles, and focusing on core business could enhance efficiency, accountability, and earnings through improved margins and cash generation.
  
• Commitment to GHG reduction and renewable energy projects, along with increased production in Mozambique, offers sustainable growth and potentially higher revenue.
  
• Sasol faces financial and operational challenges due to weak demand, safety issues, regulatory risks, and potential energy supply constraints.

Catalysts

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

• The streamlining of Sasol's operating model and the restructuring of executive roles are expected to improve accountability and collaboration, potentially leading to more efficient operations and a clearer focus on both current and future business opportunities. This is likely to positively impact net margins and earnings.
  
• Increasing gas production volumes in Mozambique, along with improvements at the Secunda operations focusing on equipment availability and operational stability, should result in higher production and sales volumes. This could lead to increased revenue and potentially better earnings.
  
• The company's focus on improving its core business, including enhancing margins through optimized channel placement and improving the customer value proposition, is expected to improve net margins and cash generation.
  
• Sasol's commitment to a GHG reduction roadmap and pursuing opportunities in renewable energy projects and LNG supply could create new sustainable growth avenues, potentially impacting revenue positively in the long term.
  
• The successful implementation of the Sasol 2.0 program, which targets EBITDA enhancements and cost savings, as well as the introduction of a new dividend policy emphasizing free cash flow generation, is designed to strengthen the balance sheet and improve cash generation, which could lead to higher returns and potentially increased earnings per share (EPS) over time.

Sasol Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sasol's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -16.1% today to 9.9% in 3 years time.
• Analysts expect earnings to reach ZAR 29.0 billion (and earnings per share of ZAR 44.62) by about February 2028, up from ZAR -44.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ZAR33.9 billion in earnings, and the most bearish expecting ZAR17.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.6x on those 2028 earnings, up from -1.1x today. This future PE is lower than the current PE for the US Chemicals industry at 9.2x.
• Analysts expect the number of shares outstanding to grow by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 25.29%, as per the Simply Wall St company report.

Sasol Future Earnings Per Share Growth

Risks

• Sasol's financial results were impacted by operational issues, a challenging macro environment, and a decrease in cash generation and profitability, which could negatively affect earnings and net margins.
  
• Persistent weak demand and global oversupply have led to decreased polyethylene prices by 8%, exerting downward pressure on Sasol's chemicals business revenues and margins.
  
• Safety issues, including tragic fatalities, highlight potential operational risks that could impact Sasol's short-term performance and financial stability.
  
• The anticipated depletion of gas reserves in Mozambique by 2027 poses a threat to Sasol's energy supply continuity, potentially leading to increased costs and reduced profitability.
  
• Regulatory risks in managing emissions and evolving policies may require additional spending and affect Sasol’s operational flexibility and margins.

Valuation

• The analysts have a consensus price target of ZAR150.667 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 ZAR105.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR291.6 billion, earnings will come to ZAR29.0 billion, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 25.3%.
  
• Given the current share price of ZAR78.65, the analyst price target of ZAR150.67 is 47.8% 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.