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Sasol Ltd. (SSL - Analyst Report) announced weaker-than-expected results for the fiscal year ended June 30, 2012, as costs rose. The South Africa-based petrochemicals group reported headline earnings per share, excluding one-time items, of R42.07, or $5.05, lagging the Zacks Consensus Estimate of $5.74.
However, Sasol’s earnings per share improved significantly from the year-ago level of R33.72, while operating profit was up 22.7% to R36.8 billion on account of higher crude oil prices and a favorable exchange rate.
South African Energy Cluster: Within its South African energy cluster, Sasol Mining's operating income more than doubled to R2.3 billion, buoyed by increase in sales prices to Sasol Synfuels (the unit that manufactures synthetic fuels). This was partially offset by a dip in U.S. dollar export coal prices and unfavorable currency fluctuations.
Sasol Gas generated an operating profit of R3.0 billion, up 15.8% year over year. The positive comparison can be attributed to higher gas prices and sales volumes, somewhat negated by the adverse impact of exchange rate movements on gas purchases.
Sasol Synfuels' operating profit shot up 45.5% to R22.1 billion, mainly reflecting higher average oil prices and a slight improvement in production volumes. To some extent, these factors were offset by increase in feedstock, energy and maintenance expenses.
Sasol Oil reported an operating profit of R1.6 billion as against R1.2 billion in the prior-year period. The improvement primarily resulted from exchange rate fluctuations, better marketing profitability and higher product prices, whose effects were slightly negated by decreased sales volumes.
International Energy Cluster: Sasol Synfuels International recorded an operating profit of R1.9 billion, up handsomely from R1.2 billion earned during the prior-year period. The upside was due to higher production at the Oryx gas-to-liquids (GTL) plant in Qatar, rise in crude oil prices and higher product prices. These were partly negated by the company’s spending spree on study costs in North America.
Sasol Petroleum International incurred an operating loss of R1.9 billion, as against the year-ago profit of R382 million, mainly reflecting depressed North American gas prices that adversely impacted the group’s Canadian properties.
Chemical Cluster: Sasol Polymers reported an operating profit of R716 million, as against R1.6 billion in the prior-year comparable period. The segment results were negatively impacted by a slowdown in the international polymers market, margin pressure in the local polymer industry and foreign exchange translation differences, partially offset by increased output.
Sasol Solvents' operating income was down 15.2% from the previous year's level to R1.4 billion, hamstrung by margin pressures, challenging trading conditions and falling product prices, whose effects were partly mitigated by the weakness of the rand against the US dollar.
Sasol Olefins & Surfactants reported an operating profit of R3.2 billion, a considerable deterioration from the income of R4.2 billion during the fiscal year ended June 30, 2011. The negative comparison came on the back of lower volumes and the inclusion of significant one-off profits in the prior year results.
Operating Cash Flow & Capex
Sasol generated R47.9 billion in operating cash flows, showing a 24.1% year-over-year increase, primarily due to higher operating income, partially negated by increased working capital requirements. The company spent R29.2 billion in capital expenditures during the period.
The company announced a final cash dividend of R11.80 per share. The dividend will be paid on October 15 to shareholders of record as on October 12, 2012. The holders of American Depositary Receipts (“ADRs”) will be paid on October 26, 2012.
Looking ahead, Sasol management remains cautious. The company, while expecting better results in the current year, declined to give a ‘precise’ outlook saying that economic conditions still remain challenging. A stronger Rand/U.S. dollar exchange rate is the main concern.
The Johannesburg-based entity stressed on its focus toward the U.S. and Canada in the next few years to fuel growth. In particular, Sasol has plans to build an $8–$9 billion GTL facility in Louisiana that would churn out 96,000 barrels (mostly diesel) a day.
Additionally, the company has completed the feasibility study for a 48,000 barrels-per-day GTL plant in Alberta, Canada with a decision expected in the second half of 2012. Sasol’s project partner – Canadian energy explorer Talisman Energy Inc. (TLM - Analyst Report) – has, however, decided not to exercise their right to participate in the front end engineering and design (FEED) phase of the project.
The group further informed that in view of the U.S. and European Union sanctions against Iran, it has stopped buying crude oil from the country in January and is in the lookout for a buyer for its Iranian petrochemical plant.
Rating & Recommendation
Sasol currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, for the longer term, we are maintaining our Neutral recommendation on the stock.
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