AUG 31, 2021 8:00 AM

Sasol intends to return to IG  

buy

Sasol (BB / Ba2 / -) reported strong results for the full fiscal year 2021. Higher oil and chemical prices boosted gross margins to 55% versus 49.5% a year earlier. Adjusted EBITDA rose 38% yoy to R48.4 billion on the back of a 53% decline in capital expenditures. The company generated free cash flow of R15.4 billion, up from negative R12.2 billion a year earlier. Net debt was reduced by approximately $ 5 billion thanks to cash flow from asset sales. Thus, net leverage declined to 1.5x from 4.3x a year earlier, well below the 3x covenant threshold. The improvement in the financial profile occurred against the backdrop of a favorable market environment in the oil and oil products market, a reduction in capex and the sale of assets, the proceeds from which were used to reduce the debt burden.

YTM

3.5%

RISK

BB/ Ba2 / -

DURATION

4.4

The R6.9 billion asset divestiture program remains a key financing area for Sasol in terms of improving its debt profile. The ROMPCO sale (R4.1 billion) is expected to be closed by December 2021. The sale of CTRG must be completed within the next 12 months. The company announced its intention to continue to reduce its debt burden until it meets the criteria for inclusion in the IG category. Management announced that it will host Investor Day on September 22nd, at which the company will provide an update on its long-term strategy and ESG development plan. We believe that the implementation of the Sasol 2.0 program remains key to the company's business development, as spot prices for petrochemicals could potentially begin to normalize in 2022. Among the Sasol Eurobonds, we highlight the issue of Eurobonds with maturity in 2026 (ISISN - US80386WAC91). The issuer's securities offer a dollar yield of 3.5% with a duration of 4.4 years.

Sasol makes all manner of petrochemicals, liquid and gaseous fuels (gasoline, diesel, jet fuel, fuel alcohol, and fuel oils), synthetic fuels, and lubricants. The company also operates coal mines in South Africa and uses the coal as feedstock for its synthetic fuels and chemicals plants. Although one of the world's leaders in the development of coal gasification technology, Sasol uses petroleum as a feedstock in some of its chemical products, which include polymers and solvents.  Sasol Petroleum International explores for and produces oil and gas in South Africa.