Sasol’s Undervalued Stock: A Hidden Gem for Investors?

Sasol
  1. Sasol, South Africa’s leading chemicals and oil company, is currently trading at a significant discount, offering investors an attractive opportunity to buy into the organization.
  2. Experts such as Graeme Franck of PSG Wealth and Lonwabo Maqubela of Perpetua Investment Managers believe Sasol’s fair value is higher than its current trading price, pointing to potential gains for investors.
  3. To increase its valuation and attract investors, Sasol should expedite its Sasol 2.0 strategy, shifting away from coal towards a combination of gas and hydrogen, which would improve margins, reduce its carbon footprint, and enhance its ESG score.

South Africa’s leading chemicals and oil company, Sasol, is currently trading at a significant discount, offering investors an appealing opportunity to buy into the organization. Graeme Franck of PSG Wealth expressed this sentiment, choosing Sasol as his stock pick on Business Day TV.

Sasol is a multinational chemicals and energy company with operations in 22 countries. Its business is divided into three segments: Sasol Chemicals, Sasol Energy, and Sasol ecoFT. The company was established in 1950 in Sasolburg, South Africa, and has its roots in processes first developed by German chemists and engineers in the early 1900s for extracting oil from coal.

Today, Sasol is focused on developing and commercializing various technologies, including synthetic fuel technologies, while producing a range of liquid fuels, chemicals, nuclear, coal tar, and electricity. The company is South Africa’s largest corporate taxpayer and the world’s seventh-largest coal mining company, employing nearly 30,000 people.

Sasol has significant operations throughout South Africa, particularly in Secunda and Sasolburg, where it operates the Natref refinery. Additionally, it maintains natural gas operations in Mozambique and Qatar. The company is presently in a transition phase, dubbed ‘Sasol 2.0’, aiming to optimize the performance of existing assets, minimize capital expenditure, and reduce its carbon footprint.

According to Franck, it is rare to find a blue-chip company like Sasol available for purchase at a 40-45% discount. Sasol’s fair value is estimated at around R400 per share, but it is currently trading between R240 to R260 per share. The company boasts a price-to-earnings ratio just above four, with a dividend yield approaching 9%.

Franck also anticipates Sasol’s upcoming results on April 21st to be positive, with the company providing an update on its Sasol 2.0 strategy and potentially announcing a substantial dividend to narrow its valuation gap. Lonwabo Maqubela of Perpetua Investment Managers concurred with Franck’s assessment when interviewed on Moneyweb.

Maqubela estimated that Sasol is trading at a R250 billion discount to its fair value, noting that the company typically trades at 40% of the rand price of oil, but has recently been trading at only half that amount. While Maqubela acknowledged Sasol’s current undervaluation, he cautioned investors that the company must address certain issues before its valuation can rise to fair value.

A key concern is Sasol’s South African coal assets, which are the primary factor behind its trading discount. Although Sasol is trading as if it were primarily a coal miner, its coal business accounts for less than 30% of its overall operations. The problem arises from investors, particularly global asset managers, who are reluctant to expose themselves to Sasol’s coal assets due to the negative impact on their ESG scores.

Maqubela recommends that Sasol expedite its shift away from coal towards a combination of gas and hydrogen, which is already part of the company’s Sasol 2.0 strategy. This transition will result in higher margins, a reduced carbon footprint, and an improved ESG score, ultimately making the company more attractive to investors.

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