We are holding on to our Neutral recommendation on
) over the long term based on the company's various strategic
initiatives, superior technical expertise and compelling
investment program. However, these positives are somewhat negated
by the effects of exchange rate fluctuations and unfavorable
Based in South Africa, Sasol is an integrated energy and
chemicals company that provides liquid fuels within the domestic
region. The company - which enjoys business collaboration with
Canadian energy explorer
Talisman Energy Inc.
) - is also a major international producer of chemicals.
Sasol is a world leader in the unique coal-to-liquids (CTL)
technology, owning and operating the largest integrated
commercial facility of its kind. The company has been
manufacturing synfuels and chemical feedstock from coal for over
We appreciate Sasol's focus on bolstering its chemicals portfolio
and the commercialization of its gas-to-liquids (GTL) technology
by constructing GTL plants in gas-rich regions of the world. The
GTL technology, an offshoot of Sasol's years of commercial
experience with its South African synthetic fuels operations,
plays a critical role in the group's long-term growth plans.
Additionally, Sasol's deleveraged balance sheet and strong cash
position (operating activities generated R47.9 billion in fiscal
year 2012) keep the group well equipped to weather the global
economic storm and fund its growth program in tough credit
However, the company's weaker-than-expected results for the
fiscal year ended June 30, 2012, is a concern. Sasol's earnings
per share, excluding one-time items, came in at R42.07 or $5.05,
lagging the Zacks Consensus Estimate of $5.74.
The results were impacted by high costs and poor contributions
from the Chemical Cluster, arising from the slowdown in the
international polymers market and margin pressure in the local
polymer industry, partially offset by increased output.
We also expect that Sasol's difficult operating environment,
characterized by a fluctuating domestic currency and weaker
refining margins will keep near-to-mid-term earnings under
Moreover, with operations in various overseas regions, Sasol
remains exposed to risks such as embargoes and/or expropriation
of assets, exchange rate risks, terrorism and political/civil
Taking into account these factors, we believe that Sasol has
limited upside potential and will perform in line with the
SASOL LTD -ADR (SSL): Free Stock Analysis
TALISMAN ENERGY (TLM): Free Stock Analysis
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