One thing many investors miss about Sasol

Sasol’s share price has lost 79% of its value over the last six years. However, it is still a quality company that pays excellent dividends.

Sasol is a global chemicals and energy company founded in 1950 in Sasolburg, South Africa. It initially used coal to produce synthetic oil, petrol, and diesel.

The company has evolved significantly since its start in the 1950s and has expanded into numerous other products.

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

Between 2000 and 2014, it was a JSE darling. The Sasol share price increased by over 1,000% during this period, and it was seen as a must-hold in many portfolios.

However, it has lost its lustre since then. Over the last six years, Sasol has lost nearly 80% of its value.

Many investors see it as a risky stock due to its oil price exposure and international struggles, especially in the United States.

The company’s erratic profitability has scared many investors. Over the past eight years, it recorded two years of big losses.

In the past financial year, Sasol reported a R44.3 billion net loss. This sent the share price tumbling.

In 2024 so far, Sasol has lost 34% of its value. The share price declined from around R183 per share to R120 per share in the year to date.

The chart below shows Sasol’s net profit between 2016 and 2024, with two big losses in 2020 and 2024.

Significant impairment losses at several of Sasol’s cash-generating units (CGUs) contributed the most to its low profitability and net losses over the years.

Impairment losses arise in a company’s books due to assets that are written down to lower values.

Impairments represent assets that decline in value. Numerous internal and external factors can cause the decline.

For example, if a CGU generates much less revenue than initially anticipated, its “value-in-use” could decrease, triggering an asset impairment.

The largest impairment losses at Sasol were at the Lake Charles chemical project, its Secunda operation, and its Chemicals America operations.

The impairments were due to many factors, including cost overruns, lower-than-expected demand, weaker profit margins, and degrading infrastructure.

Since 2017, Sasol reported cumulative impairment losses of R242 billion. The chart below shows Sasol’s impairment losses.

Impairment losses are reported on a company’s income statement and directly affect its net profit.

Therefore, Sasol’s major impairments are a big reason for the company’s poor net profits and decline over the years.

Although these items represent degradations in a company’s revenue generation and asset quality, they do not represent an actual cash outflow.

Asset impairments, therefore, typically do not immediately affect a company’s cashflows.

Impairments tend to impact a company’s future operations through lower revenue growth, profit margins, or the sale of assets at a loss.

Although Sasol’s profitability looked dismal, its cashflows remained relatively strong as it was unaffected by the impairments.

Sasol’s dividend policy is dependent on its cash flow generation and not its reported income statement profits.

Therefore, Sasol’s dividend payouts remained relatively stable over this period. When dividends remain stable and share price falls, dividend yield increases.

Sasol’s dividend yield experienced its strongest boost and currently sits at 9% based on its trailing 12-month dividend.

This is significantly higher than its 20-year average of 3.22%. The chart below illustrates the dividend yield growth.

If Sasol can maintain its current operating cashflows, it will offer dividend investors a good short-term opportunity.

The long-term operational impact that these asset impairments reflect is less certain. Once the group’s cashflows come under pressure, it may signal a good exit point.