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Sasol Research Report - Assessment

This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.

Management:

** Integrity: NA. Pat Davies, CEO:

I can not find any conferences for Sasol online in my quick search. Apparently Davies’ resume looks in order but that doesn’t count for too much.

** Past Performance: B+.

Obviously, their accounting standards are a little different than ours but since they are listed on the NYSE, their financials are quite readable. Despite the thick wad of their financial information, it was straightforward and readily understandable (just long but thorough!). I’m impressed with their margins and cash flow generation. They don’t show signs of slowing too much.

Valuation:

A quick discount cash flow analysis figures the company worth ~ $42.50 USD. A margin of safety around 40% is warranted in this case which puts the accumulation price around $26. So probably start nibbling around $26.50, $27 and buy down.

The Skinny:

I hate to keep harping on the Peak Oil theme but the facts as they stand are that cheap oil is expensive to find and pull out of the ground. Unless that trend reverses (and from here, that looks highly unlikely), the attractiveness of companies like Sasol only increase. But that doesn’t mean that Sasol is not without risk. Actually, it looks like one of the riskier prospects I’ve been watching.

To me, the biggest risks posed to a Sasol investment are mostly non-traditional regulatory threats, at least in terms of investing. South Africa is a pseudo-emerging market, the currency (rand) is notably volatile, and the non-apartheid era is relatively new.

Additionally, they've got a regulatory environment to make the U.S. blush. BEE (Black Economic Empowerment) requirements as well as a possible windfall tax could kill the company’s ability to compete globally.

Then, there's the AIDS epidemic in South Africa. Sasol estimates 5-15% of their workers have the AIDS virus. Implications of this besides increased healthcare, training and productivity costs are unclear.

Finally, competition exists from traditional energy sources as well as other attractive alternatives such as solar, nuclear, wind, etc. It is still too early to determine the viability of the Fischer-Tropsch process in the upcoming alternative energy world.

All that aside, I still think that Sasol is a worthwhile investment but only with a large margin of safety. The abundance of coal seems to ensure that clean-coal technology is only a matter of time. Almost all of their divisions are profitable and synergistic with each other. The upcoming 2010 World Cup will mean massive investment in infrastructure and Sasol, as the preeminent South African corporation, stands to profit.

While the risks are seemingly looming, the upside is also very big. If the company has not fallen prey to the threats to its business, it should be a very nice gainer in the upcoming years. Without the margin of safety, this risk is not worthwhile.

Disclosure: Author has no position in this stock.










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