Sasol sparks as lockdown eases to Level 3, but analysts remain skeptical

Sasol became an investor darling literally overnight as South Africa eased its Covid-19 lockdown to level 3 and the global price of oil spiked to near $40 a barrel.

Sasol’s share price jumped a massive 16.3% to close R117.50 on the JSE on Tuesday, adding to the 17.7% gain it recorded on Monday when level 3 kicked in.

Under the new lockdown rules chemical manufacturing facilities are allowed to scale up to 100% capacity.

Market analyst Tyler Crowe said in a report on Motley Fool that South Africa’s response to the coronavirus pandemic and global demand for petroleum products have hit Sasol’s business hard.

Sasol had to shutter its Natref refinery and announced a 25% cut in synthetic fuel output in April after the government imposed a nationwide lockdown to stem the spread of Covid-19, “moves that piled on top of the company’s extraordinarily high debt load”.

Crowe said large manufacturing facilities like those owned by Sasol have lots of fixed costs. “For them to be profitable, they need to run at high utilisation rates. While no facility is ever able to run at 100% all the time, the closer to full capacity, the better” – which is good news for Sasol.

However, returning to normal operations doesn’t fix the company’s balance sheet issues or make it a good investment, Crowe said. “The company’s stock has declined 77% on a total return basis over the past decade compared to an S&P 500 total return gain of 244%. Maybe there’s a chance that things will improve from here, but history isn’t on Sasol’s side,” he wrote in the MF report.

Local market analyst David Shapiro is skeptical too. He told Alec Hogg on Monday on the Biznews Rational Radio show that if there are troubles ahead, he tends to stay away. 

Referring to Sasol he said: “It’s looking a lot better – I’m not challenging that. And markets are moving in the right direction, but there’s still so much that we have to get through there.”

On 25 March, a day before the lockdown, the stock closed at a dismal R23.22, a far cry from its 52-week high of R383.50.

Two weeks ago Sasol cautioned that it expected full-year profits to end-June to be 20% down on the year before.

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