Sasol: Buy, Hold, or Sell? Part3/3

Part 1: Sasol 101 Part 2: Sasol's business model and value drivers Part 3: What is Sasol worth?

3. What is Sasol worth?

To my mind, any companys value is equal to or closely related to the sustainable cash flows its likely to generate in the future, discounted to the present at a discount rate appropriate to the uncertainty and timing of those flows. Sasol is no different. What makes its valuation tricky is the fact that its fundamental economics and hence its value is so sensitive to the largely unpredictable ups and downs of so many different commodities prices. As such, my Sasol valuation should be seen as illustrative of what I think the company could be worth if commodity prices were such and such, or so and so, rather than what it would be worth based on predictions of what commodity prices will be.

My base case was to assume Sasols most recent four-year performance (commodity pricing and operational performance) is a decent representation of the companys sustainable economic powers, at least in the medium term. Where I think its not, I made some slight adjustments up or down, mostly down. Herewith, my most important 2023-plus assumptions (I think theyre pretty conservative but thats for you to decide):

1. (Real) Brent Oil price = $65 per barrel.

2. ZAR/US$ = R17 spot (depreciating at 4.7% per year on average).

3. Sustainable growth rate (46%).

4. Sasol doesnt achieve any sustainable fixed cost savings.

5. Sasol manages to achieve half of its 2030 carbon emission reduction goals and (real) carbon taxes of $10/per ton.

6. Sustaining capital expenditure = R25 billion per annum in real terms.

The result: I think Sasol is worth a conservative R296 per share. At current levels of R289 per share, I therefore rate it a solid hold, as far as commodity companies ever are. In fact, with a bit of luck, I wont be surprised to see it north of R350 before the end of the year.

The recommendations in these Buy, Hold, or Sell articles should not be construed as financial advice, but as the opinion of the author in his capacity as investment analyst. Always do your own research before making investment decisions. The author is Charl Botha CFA. Note that he owns shares in Sasol shares.