Sasol Limited (SASOL) - Form 20-F Summary
Business Context and Reporting Period
Company: Sasol Limited (South Africa)
Reporting Period: Year ended 30 June 2017
Accounting Standards: International Financial Reporting Standards (IFRS)
Reporting Currency: South African Rand (ZAR)
Sasol is an international integrated chemicals and energy company. Its operations span mining, energy (synthetic fuels, natural gas, oil), and chemicals (base and performance). The company operates globally with significant assets in South Africa, the United States, Qatar, Mozambique, and Canada.
Key Financial Metrics (Year Ended 30 June 2017)
| Metric | 2017 (ZAR Millions) | 2016 (ZAR Millions) |
|---|---|---|
| Turnover | 172,407 | 172,942 |
| Operating Profit | 31,705 | 24,239 |
| Profit Attributable to Owners | 20,374 | 13,225 |
| Basic Earnings Per Share (ZAR) | 33.36 | 21.66 |
| Dividends Per Share (ZAR) | 12.60 | 14.80 |
| Total Assets | 398,939 | 390,714 |
| Total Equity | 217,234 | 212,418 |
| Net Debt | 56,510 | 30,166 |
| Operating Cash Flow | 44,069 | 54,673 |
Material Changes vs. Prior Period
- Profitability Surge: Operating profit increased by 31% (ZAR 7.5 billion) and profit attributable to owners increased by 54% compared to 2016. This improvement was driven by higher crude oil prices (average Brent US$49.77/bbl in 2017 vs. US$43.37/bbl in 2016) and a significant reduction in remeasurement items (impairments).
- Turnover Stability: Turnover remained relatively flat (-0.3%) due to offsetting factors: higher product prices were negated by a stronger Rand (average ZAR 13.61/USD in 2017 vs. ZAR 14.52/USD in 2016) and lower volumes in certain segments.
- Impairment Reversals: A key driver of the profit increase was the reversal of a ZAR 849 million impairment on the Lake Charles Chemicals Project (LCCP) LDPE unit and a ZAR 197 million reversal on Gabon assets. In contrast, 2016 included a ZAR 9.9 billion impairment on Canadian shale gas assets.
- Segment Performance:
- Energy: Operating profit decreased 20% due to a ZAR 1.7 billion impairment on the US GTL project and lower petrol differentials, though underlying performance improved.
- Base Chemicals: Operating profit increased 25% primarily due to the LCCP impairment reversal.
- Mining: Operating profit decreased 21% due to a 79-day strike in the first half of the year, costing ZAR 1.4 billion in additional costs and lost production.
- Debt Profile: Net debt increased significantly from ZAR 30.2 billion to ZAR 56.5 billion, driven by capital expenditure on the LCCP and the strengthening of the Rand impacting the translation of foreign debt.
Guidance, Outlook, and Risks
- Capital Projects: The US$11 billion Lake Charles Chemicals Project (LCCP) is approximately 74% complete with ZAR 36.8 billion spent in 2017. First units are expected to reach beneficial operation in the second half of 2018. Management estimates an Internal Rate of Return (IRR) of 7% to 8%.
- Outlook: Management expects gearing to reach the internal ceiling of 20% - 44% in the near term due to capital intensity. The company is focused on cost containment and cash conservation.
- Key Risks:
- Commodity Prices: Continued volatility in crude oil and natural gas prices directly impacts margins.
- Regulatory & Tax: A significant tax dispute with the South African Revenue Service (SARS) regarding crude oil procurement resulted in a ZAR 1.2 billion liability recognized in 2017, with a potential further exposure of ZAR 11.6 billion for 2013-2014. Sasol has appealed the initial judgment.
- Environmental Compliance: Stricter air quality regulations in South Africa pose compliance challenges and potential capital costs for retrofitting plants.
- Geopolitical & Sovereign Risk: South Africa's sovereign credit rating was downgraded to BB+ in April 2017, which may impact Sasol's cost of funding.
- Labour Relations: Ongoing wage negotiations in Mining and Chemicals sectors pose a risk of future strikes.
Investor Verification Checklist
- Tax Litigation Status: Verify the progress of the appeal against the SARS judgment regarding the ZAR 1.2 billion liability and the potential ZAR 11.6 billion exposure.
- LCCP Economics: Monitor the Internal Rate of Return (IRR) assumptions for the Lake Charles project against current ethane and ethylene price spreads.
- Debt Maturity & Covenants: Review the debt maturity profile and ensure compliance with covenants given the increased net debt and potential sovereign rating impacts.
- Environmental Compliance: Assess the timeline and capital requirements for meeting South African air quality standards (National Environmental Management: Air Quality Act).
- Labour Negotiations: Track the outcome of wage negotiations in the Mining and Chemicals sectors to assess strike risks.