{"id":2528,"date":"2020-03-18T14:11:12","date_gmt":"2020-03-18T14:11:12","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=2528"},"modified":"2020-03-18T14:11:12","modified_gmt":"2020-03-18T14:11:12","slug":"sasols-fight-for-survival","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2020\/03\/18\/sasols-fight-for-survival\/","title":{"rendered":"Sasol\u2019s fight for survival"},"content":{"rendered":"

In a sea of red share price movements, Sasol has stood out over the past couple of weeks as a turd that even the COVID-19 toilet paper hoarders would struggle to get rid of.<\/span><\/p>\n

Nonetheless, it\u2019s a turd that many financial professionals are buying up at the moment. The reason is pretty simple \u2013 if it recovers, it has the potential to deliver 10x and possibly even 20x returns. You either lose R10k or you pay off the remaining debt on your car.<\/span><\/p>\n

That\u2019s a simplification of the situation (not least of all because of tax) and sounds a lot like gambling, mainly because that\u2019s what it is. Many investors choose to use a portion of their portfolio to make high-risk investments like this.<\/span><\/p>\n

[the_ad id=”3223″]<\/p>\n

Whether you invest or not, Sasol is a great learning opportunity.<\/b><\/p>\n

Sasol released a detailed <\/span>announcement on 17<\/span>th<\/span> March entitled:<\/span><\/p>\n

\u201c<\/span>????????????????????????????????<\/span> ????????<\/span> ????????????<\/span> ????????????????????????????<\/span> ????????????????????????????????????<\/span> ????????????????????????????<\/span> ????????????????????????????????????<\/span> ????????????<\/span> ????????????????????????<\/span> ????????????????????????????????<\/span> ????????????????????????<\/span> ????????<\/span> ????????????????????????????????????????????????????<\/span> ????????????????????????<\/span> ????????????<\/span> ????????????????<\/span>, <\/span>????????????????????????????<\/span> ????<\/span> ????????????????<\/span> ????????????????????????????????????????<\/span> ????????????????<\/span> ????????????????????????????????????<\/span> ????????<\/span>$6 <\/span>????????????????????????????<\/span> ????????<\/span> ????????????????<\/span> ????????????????????????????????????????????????<\/span>, <\/span>????????????????????????????<\/span> ????????????????????????????????????<\/span> ????????????<\/span> ????<\/span> ????????????????????????????????????<\/span> ????????????????????????<\/span> ????????????????????<\/span> ????????<\/span> ????????<\/span> ????????<\/span>$2 <\/span>????????????????????????????<\/span>, <\/span>????????????<\/span> ????????????????????????????<\/span> ????????????????????????????????????????<\/span> ????????????????????????????????????<\/span>.\u201d<\/span><\/p>\n

What a mouthful.\u00a0<\/span><\/p>\n

In simple terms, Sasol\u2019s management needed to tell investors how they plan to keep the company alive. The market rewarded Sasol\u2019s verbosity (but mainly its financial dire straits) with another substantial drop in the share price.<\/span><\/p>\n

Interestingly, Sasol reports its financials in ZAR, but the announcement was written in USD, likely because it was aimed at the foreign debt providers that Sasol is desperately trying to keep at bay. Shareholders aren\u2019t top of mind for them currently.<\/span><\/p>\n

At 31 December 2019, Sasol had over R120bn in long-term debt. That number has grown further. The market capitalisation of the company (the number of shares multiplied by the share price) is now just over R17bn.<\/span><\/p>\n

That isn\u2019t the kind of debt : market equity ratio that helps investors sleep at night.<\/span><\/p>\n

Let\u2019s break the plan down into high-level measures that will help you understand the financial terminology a bit better\u2026<\/span><\/p>\n

Cash conservation<\/b><\/p>\n

Sasol wants to increase its cash reserves by US$2 billion, because they\u2019ve been very naughty with the credit card.<\/span><\/p>\n

They suggest that US$1.5 billion will be found from \u201cworking capital optimisation and re-prioritising capital expenditure\u201d \u2013 a fancy way of saying they will be paying their creditors later, making their debtors pay earlier and lowering their overall inventories, all while investing less in infrastructure.<\/span><\/p>\n

Hardly ideal, but they are in survival mode.<\/span><\/p>\n

The other US$0.5 billion will come from general cost saving measures, which isn\u2019t good news for Sasol employees, although the announcement doesn\u2019t specifically reference retrenchments etc.<\/span><\/p>\n

There are only so many ways to save that kind of money, so it\u2019s probably just a matter of time.<\/span><\/p>\n

Asset disposals<\/b><\/p>\n

When you\u2019ve been so naughty with the credit card that you are out of options, you might have to start advertising unused items in your house for sale. Unfortunately, the unused stuff is often useless or old, so you either don\u2019t get any buyers or you lower the price significantly.<\/span><\/p>\n

The same is true for corporates in trouble.<\/span><\/p>\n

They either sell their best divisions, which then leaves shareholders with very little reason to stick around, or they sell underperforming divisions at bargain basement prices.<\/span><\/p>\n

Either way, asset disposals in times of crisis aren\u2019t great.<\/span><\/p>\n

In Sasol\u2019s case, the Lake Charles project is probably up for sale. Talk about a disaster from start to finish – this is the project that helped get them into trouble in the first place.<\/span><\/p>\n

Potential rights issue of US$2 billion<\/b><\/p>\n

This is where it gets nasty.<\/span><\/p>\n

A rights issue is a capital raising transaction through which shareholders are given a choice to either put in more money or watch their % shareholding drop as other investors put the money in instead.<\/span><\/p>\n

If the rights issue takes place at a company\u2019s traded market price, then in theory shareholders don\u2019t lose any money. Whether you pay R50,000 for half a car or R100,000 for the entire car, you\u2019re in the same value position in a perfect world.\u00a0<\/span><\/p>\n

In practice, rights issues take place at substantial discounts to the market price, especially where they are being done as a last resort. The company is desperate for the money by that stage, so the management team finds an underwriter who promises to plug any gap resulting from current shareholders not following their rights to invest.<\/span><\/p>\n

Underwriters don\u2019t do this for free \u2013 they charge underwriting fees (a % of the capital raised) and demand to get the shares at steep discounts (often 20% less than the market price).<\/span><\/p>\n

The net result is a company with enough money to survive, an underwriter who got a good deal and a group of upset shareholders with bloody noses.<\/span><\/p>\n

The share price tanks on the rights issue announcement and shareholders either throw good money after bad or simply watch their value drop.<\/span><\/p>\n

To make things worse for Sasol, they want to raise US$2 billion (around R34 billion currently) when the entire company is only worth R17 billion. That means existing shareholders get wiped out unless they dig deep to follow their rights and invest more money in Sasol.<\/span><\/p>\n

It’s worth noting that rights issues certainly aren\u2019t always bad. It all depends on what the money will be used for. If the company is making a terrific acquisition and needs money to pay for it, the market views this very differently.<\/span><\/p>\n

Why would any sane person buy these shares?<\/b><\/p>\n

If you\u2019re buying Sasol at these prices, you need to believe a few things:<\/span><\/p>\n