Currency Fluctuations Hit Sasol, but the Company Has Its Growth Plans in Place

South African energy and chemicals company Sasol (NYSE: SSL) released its annual earnings report for the financial year ended June 30, 2017 on August 21. Going by the numbers, it appears that management's efforts to rein in costs and capital spending amid challenging business conditions is paying off. Meanwhile, Sasol doesn't foresee any further cost or time overruns on its key Lake Charles Chemicals Project (LCCP), even as it intends to shift focus to profitable assets and strengthen its financials going forward.

Here's the lowdown on Sasol's key numbers and its outlook for the year ahead.

Sasol earnings: The raw numbers

Despite a stagnant top line, Sasol continues to drive its profits higher thanks largely to stringent cost control as is evident in the table below. Note that all financial amounts in the table are in South African rand, as reported by Sasol.

A point worth noting here is that the big jump in Sasol's EPS is because asset impairments worth 12.9 billion rand hit the company's profits hard in FY 2016, boosting the year-over-year comparisons.

What happened with Sasol this year?

Strong sales volumes largely helped Sasol offset the negative impact of low oil prices and currency fluctuations.

Numbers from the company's operating and strategic business units, however, were a mixed bag. (All comparisons are year over year.)

  • Mining: Operating profit declined 21% as labor strikes hit operations at Sasol's Secunda mine.
  • Exploration and production international: Operating profit jumped to 585 million rand versus a loss of 1.8 billion rand.
  • Performance chemicals: Sales volumes and normalized operating profit improved 2% each on a production ramp up.
  • Base chemicals: Sales volumes improved 3%, but normalized operating profit slumped 13% because of a stronger rand.
  • Energy (liquid fuels): Normalized operating profit improved 5% partly because of higher production.

Overall, a stronger rand proved to be the biggest headwind for Sasol in FY 2017, which was partly offset by low, yet improving, crude oil prices.

What management had to say

Sasol's sales and profits depend a great deal on oil prices. The numbers above clearly prove that the company is striving hard to remain profitable despite the headwinds, something that management didn't shy away from highlighting in the earnings release. In Joint President and Chief Executive Officer Bongani Nqwababa's words:

Speaking of Sasol's growth strategy going forward during the media presentation, Nqwababa revealed management's intentions to streamline operations to keep costs below inflation, boost returns on invested capital, and use assets more "effectively and efficiently." He said, "We have initiated a detailed asset review process to ensure that all assets in our portfolio deliver against our stringent financial metrics."

In other words, investors shouldn't be surprised if Sasol announces some divestments in the near future.

Looking forward

Sasol is optimistic about its growth prospects for FY 2018. While the company expects production in mining to return to normalized levels, it foresees higher gas production and low single-digit percentage growth in sales volumes from both base and performance chemicals businesses. Energy could be a damper, though, as planned shutdowns will likely hit liquid fuels volumes.

On the growth front, Sasol's mega ethane cracker and chemicals project at Louisiana, LCCP, was 74% complete as of June 30, 2017 and is on track for completion within the $11 billion budget that the company had last outlined. However, Sasol lowered its estimated internal rate of return from the project to 7%-8% from erstwhile 8%, citing ethane pricing and polyethylene margin pressures. Once complete, LCCP should expand Sasol's footprint outside South Africa substantially, also helping it mitigate foreign-exchange risks.

One risk investors should be aware of is an ongoing tax dispute between Sasol and the South African Revenue Service (SARS) that could lead to a "potential tax exposure" of 11.6 billion rand over and above a provision of 1.2 billion rand that the company made in June. While Sasol opposed SARS' assessment and won a temporary suspension on the payments from the courts, investors should keep an eye on any development in this regard in coming months.

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Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool recommends Sasol. The Motley Fool has a disclosure policy.