Sector Star | Is $SSL’s 20% Rally Just the Start of a Bigger Rebound?
U.S. stocks closed at new heights last Friday as cool inflation data spurred optimism among investors that the Federal Reserve can stay on its rate-cutting path, boosting the U.S. economy and justifying higher valuations for equities.
The best-performing concepts is Diversified Chemicals. Considering the different perceptions of the stock, this time TigerPicks chose $Sasol(SSL)$ to have a fundamental highlight to help users understand it better.
In the past five days, $Sasol(SSL)$ 's share price has risen by 19.71%.
$Sasol(SSL)$
Sasol is an integrated chemicals and energy business built on coal and gas-to-liquids, anchored by the Secunda complex in South Africa and a big U.S. footprint at Lake Charles.
Sasol Limited: Profits Under Pressure, Cash Rising
Sasol has been working on reshaping its business for the last ten years and is now all about putting those plans into action. The company seems to be scrutinizing its spending closely, and that's helping it make progress, even if profits are relatively all over the place behind the scenes. Even though sales and profit rates went down by 9% and 12%, respectively, Sasol still made about ZAR 12.6 billion in free cash, which is about 75% more than the previous year..
Sasol pulled this off by making some competent financial decisions, like scaling back on major investments, maintaining spending at ZAR 25 billion, stabilizing operating costs below inflation, and dealing with their working capital with greater effectiveness. Plus, the company grabbed some extra cash from a legal settlement with Transnet, which helped bring down its breakeven point in South Africa for a period of time. Even without that one-time perk, free cash flow still went up by over 30%.
The earnings engine is still based in South Africa. So, around 85% of adjusted EBITDA came from the local value chain, with Mining and Gas seeing year-on-year increases of 15% and 35% in each case.
Fuels took the hit, going down 38% due to a 15% drop in the price of rand oil and a 68% drop in refining profits that eliminated Natref's share, a big problem. Chemicals Africa was also weaker, which was due to less output and higher prices for feedstock. The negative aspect of a diverse portfolio is that when oil-linked realizations and local refining crack spreads roll over, the South African complex is the first to experience the impact.
At the moment, the company seems to be all about making cash instead of just boosting revenue. Sasol's got over $4 billion in available cash, and there aren't any pressing debts on the horizon. To boost its finances, it rolled out a new bond for around $300 million in July and used some extra cash to pay down credit lines, which helped cut down on interest costs.
Shareholder payouts are still in the restricted zone, though: dividends are on hold until debt drops below $3 billion for good, and then the company aims to give back 30% of free cash flow to investors.
Remember that Sasol's system in South Africa needs around $55 to $60 Brent to break even in 2026. About 60% of the 2026 oil exposure is covered by a floor near $60, and 30% of the USD/ZAR rate is held between 17.60 and 21.10, which protects a part of the P&L. For Sasol, oil prices above plan give extra breathing room on margins.
Fuels Weakness, Chemicals Contrast
Building on financials, South Africa is still doing most of the work. Stronger prices and better production helped Mining and Gas keep up a steady showing. Fuels, on the other hand, made the difference. Natref's profits were hurt by lower oil prices in rand and low processing margins, even though the company was able to sell more into higher-value channels and see a small rise in fuel sales for mobility in a soft market.
On the demand side, ignoring today’s short-term bump in oil prices, the fuels business is facing a pretty weak global backdrop. The IEA thinks that 2025 is going to have some of the slowest oil demand growth we've seen since 2009, which is going to squeeze refining margins and make it tougher for complex refineries to do their thing.
When it comes to chemicals, there are essentially two different regions involved. As Sasol shifted its emphasis away from sheer volume and toward quality, ethylene prices in the United States remained high, which caused margins to increase.
Europe looks totally different. Plants are still not getting enough love, demand hasn’t really picked up, and profits are pretty slim. There's even talk about cutting back on capacity. In that situation, it makes sense for Sasol to cut down the portfolio and simplify its assets.
Sasol: Valued for Distress
On raw multiples, Sasol looks mispriced to pessimism. The blended P/E is about 3.5, and the forward P/E is close to 3.6, while the median for the Materials sector is around 17.
EV to EBITDA is about 3.2 for both trailing and forward looks, while the sector hangs around 9 to 10.
The price-to-cash-flow ratio is around 2, while the sector averages between 9 and 11.
The price-to-book is sitting around 0.5, while competitors are around 1.6 to 2. The price-to-sales ratio is about 0.31 compared to 1.4.
I think one of the issues is that Sasol’s growth picture is uneven, and the market doesn’t like that. Both revenue and EBITDA are lower than a year ago, and near-term forecasts suggest a slight decline.
SSL's valuation metrics
Analysts expect earnings per share to fall about 6% in FY26 and then bounce back about 6% in FY27.
But the track record for accurate forecasts isn’t great (see above), with a lot of misses, which, I gather, makes investors demand a bigger risk premium. On top of that, Sasol’s credit rating is only BB+, and debt makes up nearly half of its capital, which raises its cost of equity. All of this adds extra pressure on the stock.
Final Takeaway
To put it mildly, the stock looks washed out with a very low forward P/E, EV/EBITDA, and a price-to-book around 0.5, probably already baked in plenty of bad news. If oil stays around 60 for most of FY26 and South Africa's breakeven is set at 55–60, everything looks good.
Of course, the risks are very real, too. We know that forecast misses have piled up. Export tariffs, low demand in Europe, and increasing power costs in South Africa might really squeeze those margins. Asset write-downs are still a possibility if price expectations drop or things don’t go as planned. If earnings take a hit again and paying down debt slows, the stock might seem like a good deal on paper, but could take a while to get a boost.
Even with those caveats, I’m calling it a Buy and will take a position.
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts.
Based on 9 Wall Street analysts offering 12 month price targets for Sasol in the last 12 months. The average price target is $7.54 with a high forecast of $25.43 and a low forecast of $6.78. The average price target represents a +102.04% change from the last price of $6.56.
Resource:
https://seekingalpha.com/article/4818687-why-im-buying-sasol-cash-flow-up-debt-down-valuation-too-cheap
For whom haven't open CBA can know more from below:
🏦 Open a CBA today and enjoy privileges of up to SGD 20,000 in trading limit with 0 commission. Trade SG, HK, US stocks as well as ETFs unlimitedly!
Find out more here：
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
