There has long been speculation that Sasol would attract attention from an international suitor at some point, with two main factors likely to influence the decision:
1. What is fair value for a business which has rapidly changed in structure over the last decade?
2. How would its major shareholders vote in the face of a bid from an international suitor?
Sasol is in value territory but the fundamentals are volatile:
The Sasol share price took something of a beating on Friday falling to R390 per share – down 4.5%. What will be of more interest is looking at Sasol over a five-year period. While the share has been as high as R645 in June 2013, it has actually delivered a five-year return of just 15%.
While much of this can be attributed to the falling oil price, questions are being asked about the ability of Sasol to deploy its capital efficiently. The questions are further fuelled by the weakening rand acting (in theory) as a buffer for the share price.
Sasol has come a long way from when it was formed in 1979 as the South African Coal, Oil and Gas Corporation. It employs 33 000 people in nearly 40 countries across the globe and is expected to invest for more than R135 billion, the majority of which will be offshore.
According to analyst consensus forecast, Sasol is rated to “outperform” its peers.
In July 2015, Tracey Ryniec, stock strategist at Zacks Investment Research, identified Sasol alongside with French giant Total as two value stocks to watch in the sector.
In the past few months, Bank of America upgraded Sasol from “Neutral” to “Buy” while Citigroup issued a similar upgrade in September.
With Sasol trading on a price to earnings multiple of around 9 times earnings, it compares very favourably to the likes of Chevron (16) and Exxon (16.5) and Total (13).
For those who argue that Sasol is not a pure oil play but rather a diversified chemical group, then it would still compare favourably to the likes of Dow Chemicals, which trades on a 14 times earnings multiple.
What about the declining oil price?
The oil price has been a major driver for Sasol and the recent collapse in prices has hurt the group.
The International Energy Agency has pointed out that the market remains oversupplied courtesy of record production from Saudi Arabia, Russia and Iraq. With Iran also coming onboard, this is creating further pressure on the commodity.
However Saxo Bank’s head of commodities Ole Hansen says: “The current negative momentum could see Brent crude trade down to $43.25/barrel, which is not far from the August low at $42.23/b. In WTI crude, sellers could be targeting $40/b. Overall we continue to see rangebound trading over the coming months and the mentioned levels are likely to attract buyers if reached.”
Hansen says that seasonal demand is likely to pick up in the US over the next few weeks and this should support the price.
How would the Public Investment Corp. vote?
One of the long-standing questions, is how key shareholders would vote in the case of a foreign bid.
The Government Employee Pension Fund (GEPF) holds 14.2% of the issued share capital (managed through the PIC) and the Industrial Development Corporation holds 8.2%. They are the 2 biggest shareholders in Sasol.
The SABMiller deal – where the PIC was vocal about its 3% stake in the business – was an interesting litmus test. While the PIC expressed concerns about job losses, their main goal was extracting the best possible price for its shareholders and clients. The PIC presently sits with about 5% of its assets offshore (of a 10% allowance), and with limited opportunities in the local market, it may ultimately see merit in swapping out some of its concentrated exposure in Sasol for one of the international majors.
Another factor is the real ability of current management to unlock value inside of Sasol. While the PIC is a long-term investor, asset management group Allan Gray made the point that Sasol has since 1980 traded on a price to earnings multiple discount of between 20% and 40%, when compared to the JSE All Share.
This despite being able to deliver earnings growth beyond the All Share and being able to match the dividend growth of the index.
Corporate action may be the catalyst for re-rating.
As an institutional shareholder, it will also be hard to ignore the populist statements coming out of the SA Communist Party (SACP) general secretary and Minister of Higher Education Blade Nzimande, who has been making populist statements around the “nationalisation” of Sasol.
While these will be taken with more than a pinch of salt, it may make the PIC more open to opportunities around its Sasol investment.
Source : Money web – http://www.moneyweb.co.za/moneyweb-opinion/columnists/is-sasol-next-in-play/