TLM

Sasol Ltd. (SSL) announced weaker-than-expected results for the fiscal year ended June 30, 2011, dragged down by an unfavorable exchange rate. The South Africa-based petrochemicals group reported headline earnings per share, excluding one-time items, of R33.72, or $4.94, lagging the Zacks Consensus Estimate of $5.01.

However, Sasol’s earnings per share improved significantly from the year-ago level of R26.44, while operating profit was up 25.1% to R30.0 billion on account of higher energy prices and production volumes.

Segmental Analysis

South African Energy Cluster: Within its South African energy cluster, Sasol Mining's operating income increased 30.4% to R1.1 billion, buoyed by higher U.S. dollar export coal prices. This was partially offset by unfavorable currency fluctuations.

Sasol Gas generated an operating profit of R2.6 billion, up 4.0% year-over-year. The positive comparison can be attributed to higher sales volumes, somewhat negated by lower gas prices and start-up costs associated with a new compressor in Mozambique.

Sasol Synfuels' operating profit rose 15.3% to R15.2 billion, mainly reflecting higher average oil prices that more than made up for lesser production volumes.

Sasol Oil reported an operating profit of R1.2 billion as against R1.4 billion in the prior-year period. The decline primarily resulted from exchange rate fluctuations and weaker refining margins. To some extent, these factors were offset by increased sales volumes and higher wholesale margins.

International Energy Cluster: Sasol Synfuels International recorded an operating profit of R1.2 billion, up significantly from R131 million earned during the previous year period. The improvement was due to higher production at the Oryx gas-to-liquids plant in Qatar and higher product prices. These were partly negated by unfavorable currency fluctuations.

Sasol Petroleum International's operating profit improved 13.4% year-over-year to R382 million, mainly reflecting increased production and higher energy prices.

Chemical Cluster: Sasol Polymers reported an operating profit of R1.6 billion, as against R958 million in the prior year comparable period. The segment results were favorably affected by increased output, partially offset by and the margin pressure in international polymer industry and foreign exchange translation differences.

Sasol Solvents' operating income was up 43.4% from the previous year's level to R1.7 billion, driven by stronger margins, whose effect was partly mitigated by the strength of the rand against the US dollar and lower production volumes. 

Sasol Olefins & Surfactants reported an operating profit of R4.2 billion, a considerable improvement over the income of R2.5 billion during the fiscal year ended June 30, 2010. The positive comparison came on the back of improved margins and strength in demand, partly offset by foreign exchange impacts.

Operating Cash Flow & Capex

Sasol generated R38.6 billion in operating cash flows, a 41.3% year-over-year increase, primarily due to higher operating income and lower working capital. The company spent R20.7 billion in capital expenditures during the period. Additionally, the Johannesburg-based entity shelled out R3.8 billion in cash related to its agreements with Canadian energy explorer Talisman Energy Inc (TLM) to enter the North American shale gas market. 

Dividend

The company announced a final cash dividend of R9.90 per share. The dividend will be paid on October 17 to shareholders of record as on October 14, 2011. The holders of American Depositary Receipts (“ADRs”) will be paid on October 28, 2011.

Outlook

Looking ahead, Sasol management remains cautious. The company saw some signs of demand and price recovery during the past financial year but at the same time reiterated that economic conditions still remain challenging. A stronger Rand/U.S. dollar exchange rate is the main concern.

Our recommendation

Sasol currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, for the longer-term, we are maintaining our Neutral recommendation on the ADR.

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