Sasol trading at huge discount – Graeme Franck

South Africa’s largest chemicals and oil company, Sasol, is trading at a huge discount, presenting an attractive opportunity to buy into the company.

This is the view of Graeme Franck of PSG Wealth, who selected Sasol as his stock pick on Business Day TV

Sasol is a global chemicals and energy company operating in 22 countries. Its business is split into Sasol Chemicals, Sasol Energy, and Sasol ecoFT. 

The company was formed in 1950 in Sasolburg, South Africa, and built on processes that German chemists and engineers first developed in the early 1900s to extract oil from coal. 

Today, Sasol develops and commercializes technologies, including synthetic fuel technologies, and produces different liquid fuels, chemicals, nuclear, coal tar, and electricity.

It is the largest corporate taxpayer in South Africa and the seventh-largest coal mining company in the world, employing nearly 30,000 people. 

Sasol has significant operations across South Africa, particularly in Secunda and Sasolburg, where it operates the Natref refinery. It also has natural gas operations in Mozambique and Qatar. 

The company is currently undergoing a transition to ‘Sasol 2.0’. It aims to optimise the performance of its existing assets, minimise capital expenditure, and lower its carbon footprint. 

Sasol is cheap

Franck said that it is not often a blue-chip company such as Sasol that can be bought for a 40-45% discount. 

Sasol’s fair value is around R400 per share, currently trading between R240 to R260 per share. It hasa price-to-earnings ratio of just above four, with a dividend yield nearing 9%.

Franck also said that he expects Sasol’s results on 21 April to be good, with the company updating the market on its Sasol 2.0 strategy and potentially a bumper dividend to narrow its valuation gap. 

Lonwabo Maqubela of Perpetua Investment Managers broadly agreed with Franck when interviewed on Moneyweb

Maqubela estimated Sasol to be trading at a R250 billion discount to its fair value, explaining that Sasol usually trades at 40% of the rand price of oil. In contrast, it has been trading at half of that. 

While Maqubela said that Sasol is cheap, he did caution investors that the company has some issues to deal with before its valuation rises to fair value. 

Among these is the company’s South African coal assets which are the driving force behind its trading discount. 

Sasol has been trading as though it were a coal miner, even though its coal business makes up less than 30% of its business. 

The issue is that investors, particularly global asset managers, do not want exposure to Sasol’s coal assets as it will negatively affect their ESG scores. 

Maqubela suggests that the Sasol pivots strongly away from coal to a mixture of gas and hydrogen. This is part of the company’s Sasol 2.0 strategy, but he says it must be accelerated. 

This will bring higher margins, a lower carbon footprint, and a better ESG score.