Sasol shares plummet as interim dividend put on hold
The Johannesburg-headquartered company told investors that it decided to hold back on the interim dividend to protect its investment grade.
Chief financial officer Paul Victor said the current position of the balance sheet necessitated that the board make the decision in the long-term interest of shareholders.
“Where we find ourselves in terms of our peak gearing, one of the key priorities for the company is to protect our investment grade,” Victor said. “Ultimately, in terms of our capital allocation framework, we protect the investment grade and then also allocate resources to sustain operations and the health of the operations.”
Sasol’s shares later clawed back their losses to close 3.31 percent lower at R207.
Sasol’s gearing increased to 64.5 percent during the period from 56.3 percent in June 2019.
The rise was at the upper end of the previous market guidance of 55 percent to 65 percent.
Moody’s Investors Service affirmed Sasol’s Baa3 ratings, with the outlook changing from stable to negative last May. In December 2018, S&P rated the company at a BBB-/A-3 with a stable outlook, which is two notches above the sovereign credit rating.
Michael Treherne, a portfolio manager at Vestact Asset Management, said cutting the dividend was a signal that things were tough at the company.
“In the case of Sasol, their debt is now too high, so it makes sense to not pay a dividend and to use the cash instead to reduce debt levels. In the long run, not paying a dividend and reducing debt levels will be a good thing. In the short run, though, it is always tough for shareholders,” said Treherne.
Sasol reported that earnings plummeted 74 percent to R4.5 billion during the period, from R23.25bn in the prior period, on the 9 percent weakness in the rand per barrel price of Brent crude oil, softer global chemical prices and refining margins.
Lower productivity at the group’s mining operations and a negative contribution from the US-based Lake Charles Chemicals Project (LCCP) also hurt the group’s balance sheet.
The group reported that the investigation into the root cause of the explosion at the low-density polyethylene (LDPE) unit at the LCCP last month found that a piping support structure within the LDPE emergency vent system failed during commissioning, causing a pipe to dislodge.
“No major equipment was damaged, and the incident was isolated,” the group said. “Remediation has commenced. However, the replacement of the high-pressure piping material components have long lead times.”
The company said it expected the beneficial operation of the LDPE unit to be delayed to the second half of calendar year 2020.
It said that the overall LCCP cost estimate was tracking $12.8bn (R194bn), within the previous guidance of $12.6bn to $12.9bn.
The weak macroeconomic environment, which resulted in lower margins, and the LCCP being in a ramp-up phase, resulted in cash generated by operating activities falling by 21 percent to R19.6bn compared with R24.8bn in the prior period.