SASOL is in a better position to deliver a R400 share price given the recovery in the oil price environment, head of Equity Research at PSG Wealth, Vaughan Henkel said yesterday.
Henkel said the R400 share price was found by multiplying the earnings by 10, which is the historical relationship with the share price over the past 15 years.
The Sasol price is 108 percent stronger than a year ago when the Brent crude oil price collapsed to below $20 (R301) currently a barrel for the first time in 18 years after US oil benchmark prices plunged to below $0 a barrel.
The stock closed 0.36 percent higher at R277.90 on the JSE yesterday,.
“What underpins the share price growth is the oil price. The Brent crude oil is now at almost $80 a barrel. They have hedged against the oil price.
“Even if the oil price declines they are protected from a decline and can generate free cash flow,” said Henkel.
The group’s hedging programme was a cushion against the oil price volatility and had been crucial given the group’s debt levels.
Sasol had oil hedges in place for about 80 percent of its fourth quarter 2020 production of synfuels at about $32 per barrel.
During the year ended June Sasol’s net debt more than halved from R157 billion to R74bn.
The group’s divestment programme that included the sale of 50 percent of its stake in the Lake Charles Chemicals Project has enabled Sasol to repay R81bn in debt.
Net debt/ earnings before interest, taxes, depreciation and amortisation (Ebitda) was down to 1.5 times and, while Sasol has previously said it would consider paying a dividend when that ratio declines to below 2 times.
Henkel said that given the recent strengthening of crude oil and the expectation of continued strength as economic productivity continued to increase post-Covid-19 restrictions globally, he felt it would be advisable to gain some exposure to this sector.
He said on a forward enterprise value to Ebitda multiple of 3.8 times, the group is trading at a 31.8 percent discount to its 5-year average of 5.6 times and a 32.6 percent discount to its FactSet peers compared with a historical average discount of 10.5 percent.
dineo.faku@inl.co.za
BUSINESS REPORT