Sasol trading update is really good

Yesterday we had a very good, but also expected trading update from one of our long time recommended companies, Sasol. I remember at one stage we were seriously considering taking this company off the list because of the long term environmental issues, Sasol is the second biggest polluter in South Africa. But after closer inspection we saw a shift in the company's focus to the much less carbon intensive gas to liquids (GTL) process as opposed to the coal to liquids (CTL) method. Don't get me wrong, CTL is an integral part of the business but the fact that this company has an innovative alternative was reassuring. Not only are they extremely serious about sustainable growth as far as the environment is concerned but they also save the South African government R40bn a year in foreign exchange. This gives them a lot of bargaining power and keeps South Africa from being too dependent on volatile oil producing nations.

So let's look at the numbers. They actually released an update in November last year declaring an expected 45% gain in earnings. This has now been handsomely revised. "Sasol is now able to indicate that the increase in EPS and HEPS for the six months ended 31 December 2011 is expected to be between 80% and 90% compared to the prior comparable period." Wow, that is huge. I had a look at the comparative period and this time last year they made just under R13 a share. That means they are expecting to make around R24 a share this time round. Annualise that and you find Sasol trading on a forward multiple of 8.5. For an innovative company like Sasol who turn coal and gas into oil I think that sounds extremely cheap.

Let's look at why the numbers were so good. In the last update this is what they indicated. "The expected increase in earnings was mainly due to solid operational performance in our businesses, coupled with a strong improvement in the average crude oil and product prices and a weaker rand/US dollar exchange rate." But what happened at the end of last year? The oil price remained strong and the Rand weakened. A perfect storm for Sasol and why I say the revised trading update was expected.

Currency swings however are unpredictable and volatile. Sometimes they will go in Sasol's favour, sometimes they won't. For us, the long term fundamentals for the oil price are still extremely solid. Only 50 in 1000 Chinese have cars and sales in that region are growing fast. Unrest in the Middle East is also underpinning the price although that is not something we look positively on. The company's operations also look strong with big gas investments in North America providing encouraging prospects. We will have to look at the operations in more detail when the results come out but on the face of it, we are very happy to be adding to Sasol at these levels.