We are maintaining our Neutral recommendation on Sasol Ltd. (SSL) ADRs with a target price of $42.
Sasol is the largest oil and chemical concern in South Africa, engaged in diversified and highly profitable activities along the energy chain. The company specializes in gas-to-liquids (GTL) and coal-to-liquids (CTL) technologies, which produce synthetic fuels in commercial quantities from low-grade natural gas and natural coal. Recently, these technologies have been attracting attention as they provide an alternative to traditional oil, whose prices are highly fluctuating and reserves are also diminishing.
The company’s highly-sophisticated technical expertise gives it a competitive edge over other industry players. A robust balance sheet and strong cash position are other positives in the Sasol story.
However, we remain concerned by the group’s unfavorable operating environment, characterized by the unprecedented deterioration in chemical prices, with volumes falling in tandem with declining global manufacturing and construction activity.
With approximately 90% of its sales either denominated in dollars or influenced by the global commodity and benchmark prices (which are quoted in dollars), Sasol is exposed to risks associated with an unfavorable rand-dollar exchange rate.
Considering these counterbalancing factors, we expect the long-term growth potential of the company to be restrained and expect the ADRs to perform in line with the market.
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