Once a 40 bn. USD heavyweight, South Africa’s energy and chemicals company Sasol has imploded to a market cap of less than 3 bn. USD. South Africa primarily makes negative news, as the country is coping with political instability, a weak economy, high unemployment, the world’s highest inequality, a fragile energy and electricity supply and even recently announced legally allowed expropriations of white people. In this environment, the currency depreciated strongly. Is now the time to look for bargains in this crisis-ridden environment? A look at South Africa’s (former) giant.
Summary and key takeaways from today’s Weekly
– South Africa is a country in crisis mode. One of its most known companies is its energy and chemicals company Sasol.
– Sasol looks to be at the trough of the cycle, spotting decade-low valuation multiples.
– However, the company faces several challenges and thus doesn’t qualify for an investment. At least not yet.
Crisis investing is about spotting value where high pessimism is the status quo.
Speaking of pessimism and crises, one country that comes to my mind instantly, but is not that much in the spotlights as such on twitter, is South Africa.
I had my first personal involvement in equities from this country with Thungela Resources (ISIN: ZAE000296554, Ticker: TGA). The thermal coal producer was spun-off as a “dirty piece” from the resource conglomerate Anglo American (ISIN: GB00B1XZS820, Ticker: AAL) in 2021.
After an initial sell-off, the stock almost 20x-ed from the bottom to its top amidst the energy crisis in 2021–2022. I exactly remember having received a dividend yielding 133% in just one year on my purchase price – on top I had a four-bagger when I finally sold the stock.
Had I just bought more shares then…
Today’s center of focus, Sasol (ISIN: ZAE000006896, Ticker: SOL) is a much bigger company, with a part of its business also being thermal coal production in South Africa. But it’s more than that. The company has been coping with a myriad of challenges and its stock has fallen to one of the lowest market caps since almost 20 years, measured in USD terms.
Is now the time to have a look at Sasol? As is usually the case, will maximum pessimism lead to a great investment opportunity?
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Is one of the world’s dirties companies a bargain?
Before I take a look at Sasol as a company and its stock, first a brief overview of South Africa, where the company is domiciled and conducting the majority of its business.
South Africa with its 62 mn. inhabitants and twelve official languages ranks as the world’s 41st biggest economy based on nominal GDP. It spots roughly the size of Colombia, but for example less than half of Switzerland. By size, it is the world’s 24th and Africa’s sixth biggest country.
Post-apartheid growth has improved access to education, housing, and welfare, yet it remains the world’s most unequal nation, with a high Gini coefficient (spread between wealthy and poor).
Recent GDP growth was sluggish at only 0.6% in Q4 2024, hampered by structural issues like high unemployment (over 32%, with youth rates exceeding 50%), energy constraints, electricity outages and transport bottlenecks (mainly rail).
Over the last ten years, half of the time GDP growth was negative, often not even little.
Also what made recently the news is a new law that allows for the expropriation of the white population without any compensation (see here). This hardly adds to improve confidence and rather scares capital out of the country instead of pulling it in.
This should be kept at least in the back of the head.
The country’s economy reflects a complex mix of progress on one side and persistent challenges on the other.
South Africa’s political landscape is shaped by the Government of National Unity (GNU), formed after the May 2024 elections when the African National Congress (ANC, Nelson Mandela’s former party) lost its majority. Previously, ANC had ruled South Africa since 1994, when it won the country’s first democratic election, ending apartheid and marking the start of majority rule under Nelson Mandela.
South Africa has vast natural resources. It is the world’s largest producer of platinum and has significant gold and thermal coal reserves. It is the world’s 7th biggest producer of thermal coal. In 2023, it produced ~228.5 million metric tonnes of coal, primarily thermal, making it a significant player globally, though far behind leaders like China and India.
Sasol, offers an interesting mix of a coal and chemicals company.
Sasol was founded in 1950 as the national South African Coal, Oil and Gas Corporation.
The abbreviation stands for “South African Synthetic Oil Limited”. It aimed to produce oil from coal due to South Africa’s lack of crude oil reserves. Initially state-funded, it launched its first coal-to-liquids plant in Sasolburg in 1955, followed by expansions in the 1980s.
Privatized in 1979, Sasol thrived under apartheid-era subsidies, later shifting its focus to petrochemicals and gas-to-liquids technology amid global market changes. Today, the Johannesburg-based company operates globally, emphasizing sustainable chemicals and energy solutions, leveraging its 70-year legacy to innovate and reduce carbon intensity.
Speaking of carbon intensity, its Secunda facility in South Africa is recognized as the world’s largest single-point source emitter, exceeding the total national emissions of over 100 countries, like Norway or Portugal.
That’s mainly linked to its coal-heavy business.
Sasol produces about one sixth of the country’s entire thermal coal.
Sasol has a proprietary process for converting coal into oil, rooted in its expertise with the Fischer-Tropsch (FT) process, which it has refined and adapted over decades. Sasol’s coal-to-liquids (CTL) technology involves gasifying coal to produce synthesis gas (syngas – a mix of carbon monoxide and hydrogen), which is then converted into liquid hydrocarbons like diesel, petrol, and jet fuel via its proprietary FT synthesis.
While the basic FT process was developed in Germany in the 1920s by Franz Fischer and Hans Tropsch, Sasol has customized it with proprietary catalysts and reactor designs (see here).
Sasol’s flagship Secunda plant (the dirty one) is the world’s largest coal-to-liquids facility. It produces diesel, petrol, and jet fuel, while also yielding petrochemicals like polymers and fertilizers. The company operates globally, having gas-to-liquids plants in Qatar and Nigeria, and some chemical production in the U.S. and Europe.
Facing pressure to decarbonize, it’s investing among others in green hydrogen or sustainable aviation fuel and aims for a 30% emissions cut by 2030, balancing its coal-reliant legacy with sustainable innovation.
Due to high energy costs, the company has been critically evaluating its European presence. Besides potential closures, the company prefers to invest and repurpose, respectively convert them into “greener” sites like e.g. in Germany’s Brunsbüttel (see here).
The stock of Sasol is listed in Johannesburg and trades in South African Rand (ZAR).
The chart (in ZAR) clearly shows that the company is in a downwards spiral. Being down by ~50% over almost 20 years is barely a sign of strength. From the 2008 high, the stock is down some 80% and from its 2014 all-time high even more than 85%.
Sasol’s market cap during this timeframe dropped from a high of almost 40 bn. USD (converted from ZAR) to now even less than 3 bn. USD.
While it does not look so dramatic in ZAR, keep in mind the ZAR has strongly devalued against the USD, hence the huge drop in USD market cap.
Usually, I take a look at valuation parameters towards the end of my Weeklies.
In this case, however, I am posting the respective charts now, to show that multiples look quite low. We are having a deep-deep value play in front of us.
First, the tangible book value which sits at below 0.4x:
Followed by price to sales, as earnings and cash flows fluctuate much over the cycle.
Being a resource and chemicals company, Sasol is highly cyclical, thus looking at book value and sales makes more sense for a more balanced overview.
Of course, these figures have their flaws, too. But they are more suitable for a first quick overview.
Are we having an incredible bargain in front of us? Likely you already guessed it.
There’s a catch. Or two.
The first is the cycle and tough business environment. In the last 12–18 months, Sasol faced a challenging operational environment as well as financial pressure, with a sales and earnings drop due to low oil, coal and chemical prices, which were only partially offset by operational gains in South Africa.
It is even worse than that.
While sales are on a comparatively higher level, though below the last two years, operating earnings are lower than a decade ago.
For FY 2024 (ended June 2024), Sasol reported significant asset write-downs totaling 55.8 bn. ZAR (~3 bn. USD or its current market cap).
These impairments affected multiple assets, but primarily its big hope, the Lake Charles Chemicals Project in the U.S., due to prolonged low chemical prices. Sasol invested 12.8 bn. USD into this plant between 2014 and its completion in November 2020.
At the same time, the company took on quite some debt.
In FY 2015, Sasol even had net cash. Now, net debt is roughly 4 bn. USD – much more than the current market cap. Even thought the company managed to reduce leverage through an asset sale and a capital raise in 2020, what’s left in debt is still substantial.
Unfortunately, Sasol is primarily generating sales in ZAR, respectively outside the US, but its debt is predominately in USD (more than 80%). A further depreciating ZAR against the USD would stress finances. Even though the drop seems to be pausing, this is clearly a big risk down the road. The more so, if the world economy remains weak and South Africa’s government continues to make more negative than positive news.
In the meantime, the company has changed its CEO and there were also rumors about a separation and listing of the US business (see here) to shore up the balance sheet.
The problem is that this does not make much sense at a low point of the cycle and the CEO confirmed that during the last call. The Lake Charles plant continues to underperform, contributing only 60% of expected capacity due to market conditions, keeping an achievable sales price rather low. Even though Sasol expects gradual recovery as U.S. demand stabilizes, this is far from certain.
Financially, Sasol expects flat earnings in 2025 unless oil and chemical prices rebound. With negative free cash flow and debt being above the company’s target of less than 4 bn. USD, per the latest half-year results, Sasol was forced to suspend its dividend.
So, all in all, this is definitely a troubled company.
It seems valuations have priced that in. Multiples are at historically low levels, commodity prices are low, too. Looks like the trough of the cycle or at least close to it.
I remain hesitant, though. This story hasn’t convinced me. At the very least, I will have a look into their coming capital markets (sometime in May or June) day where a business update will be given with plans for the turnaround.
For me, there’s no time to rush in, as there are no signs of a business or sector stabilization. On top, we have the political and currency risk which can make matters much worse. Also, as more assets could be written down, I would not rely too much on the seemingly low book value. Any new environmental intervention or regulation can easily lead to an impairment.
Low multiples alone don’t make it. This is a very tough and uncertain turnaround.
What look cheap can become (much) cheaper still.
Conclusion
South Africa is a country in crisis mode. One of its most known companies is its energy and chemicals company Sasol.
Sasol looks to be at the trough of the cycle, spotting decade-low valuation multiples.
However, the company faces several challenges and thus doesn’t qualify for an investment. At least not yet.
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