Sasol take a write down on their gas business

Still playing catch up from a disruptive public holiday week, today I'm going to cover the Sasol trading update which came in last week Wednesday. The release expects headline earnings per share to come in between 20%-30% higher than the prior financial year. This was a slight disappointment to the market following the nine month operational update released in June. The update indicated a 31% average rise in domestic fuel and an increase in production so the market had high expectations.

Where the disappointment arose, and I suppose it should not have come as a surprise following the Billiton impairments, was a write-down of the Canadian gas assets following the big fall in gas prices.

"These positive factors have been partially offset by an impairment of R964 million (CAD120 million) and depreciation of R1 324 million (CAD171 million) (at a rate of approximately 24% per annum) in respect of our Canadian shale gas assets, where we have been more conservative in the valuation and depreciation, ahead of our future gas-to-liquids ("GTL") investment decision."

Ironically cheap gas is good for the company as an input for the GTL process but they bought those assets at a certain price and the price has come down so an impairment is required. The timing of the purchase was not great, as with Billiton, but we are still confident in the long term demand for gas as an alternative energy source. So let's take a look at the numbers.

Headline earnings per share came in at R33.85 last year. If we take the middle of the range 25% we should be expecting around R42.31. The stock is trading at R342.50 and a very attractive valuation of 8. The dividend also looks to be handsome as they plan on growing their dividend payout. Last year the company paid out R13, a cover of 2.6. Let's say they increase this cover to 2.2 paying out around R19. That is a handsome yield of 5.6%.

We continue to like the company with its exciting technology in a world where we see energy demand increasing. The chemical business is struggling a bit due to European issues but the big profits still come from the synfuels business. The future in gas is also very exciting so we are not too deterred by the impairments. A definite buy at these levels.