Bond investors are rewarding Sasol with record low yields relative to US debt as the local fuel producer benefits from a weaker rand and expansion abroad.
The premium that investors demand to hold Sasol dollar debt due in November 2022 over similarly dated US treasuries fell 58 basis points since the start of the year to 187 on June 10, the smallest since the company sold the securities in November 2012.
The yield on the bond was 4.37 percent on Thursday, compared with 4.79 percent for dollar debt of emerging market oil and gas companies, JPMorgan Chase indices show.
“A weaker rand against the dollar benefits Sasol as most of its production costs are paid in rands,” Martin Seitz, a money manager at Zantke Cie Asset Management, said from Stuttgart. “Its selling prices, even in the domestic market, are linked to the dollar price of oil. For their credit rating, Sasol’s bonds are trading at a very attractive spread.”
Sasol, which is considering building a petrochemical plant costing as much as $7 billion (R75bn) in Louisiana, is reorganising business units and strategy to focus operations abroad as growth stagnates at home. The biggest producer of fuel using coal-to-liquids technology plans to save at least R3bn a year starting in financial 2016 following the changes, which include management, from July 1.
“It is a very inefficient, almost parastatal-like company,” Gavin Wood, the chief investment officer at Kagiso Asset Management, said on Thursday. Executives were “reducing layers of middle management and senior management that were unnecessary”.
The rand’s 19 percent slide against the dollar last year and 2.3 percent decline this year is set to boost the company’s profit as sales to customers outside its home market contributed 51 percent to its R181.26bn revenue in the year to June 2013.
A change of 10 South African cents in the annual average rand-dollar exchange rate would raise or lower profit from operations by R936 million, Sasol spokesman Alex Anderson said on Thursday.
The rand was bid at R10.741 at 5pm yesterday, 1.6c firmer than Friday’s bid of R10.757.
Sasol is among local companies such as Anglo American, brewer SABMiller and Investec that have managed to expand in international markets.
Local antitrust authorities fined Sasol R534m on June 5 for charging excessive prices to customers of its polymer products. The investigation started in 2008 and covered a period of almost four years from January 2004, according to a Competition Tribunal ruling.
Sasol planned to explore for crude oil off the east coast and sold a 40 percent stake in the licence to Eni, Italy’s largest oil company, it said last week.
The collaboration diversified the producer’s risk and was a “good thing”, Lionel Therond, the head of oil and gas research at SBG Securities, a unit of Standard Bank, said from London on Thursday.
Sasol’s Nitro unit was “a major supplier” of explosives to platinum producers, and the recent strike had had a “significant impact on sales volumes”, Anderson said. The division fell within the so-called Other Chemical Business cluster, which contributed 4.6 percent to operating profit in the six months to December, he said.
Also, constrained electricity supply is capping expansion of factories and mines.
“Ultimately, the growth for Sasol, with this unique technology, is limited in South Africa,” Wood said. “If they can get into bigger markets… that’s a way of growing.”
Sasol shares leapt 4.3 percent to close at R645.10 on the JSE on Friday. – Bloomberg