Morningstar | Raising Our Sasol Fair Value Estimate, but Stock Still Looks Overvalued
We are raising our fair value estimate for no-moat Sasol Ltd to $30 (ZAR 424) from $24 (ZAR 305) on our lower cost of capital forecast. As the Lake Charles Chemical Project in the United States becomes operational, we expect a shift in operations toward North America. Accordingly, we are lowering our cost of equity country risk premium. With shares trading near $39 (ZAR 550), which represents a 30% premium to our fair value estimate, the stock still looks overvalued. While Sasol has an extensive near-term growth portfolio and favorable cost structure, we believe the market is overlooking rising costs driven by inflation while giving the company too much credit for the growth portfolio.As a reminder, Sasol reported fiscal 2018 results that were highlighted by another decrease in production. Liquids production declined 13% (after being down 16% in fiscal 2017) to 1.5 million barrels. Natural gas production was modestly lower at 135 billion cubic feet, down 2% compared with the prior year. Refined products were also modestly lower at 31.5 million barrels, down 3% from fiscal 2017. Despite the decline in production metrics, EBITDA was ZAR 52 billion, in line with our expectations.
Sasol continues to make progress on its Lake Charles Chemicals Project in Louisiana. The project is 88% complete, and Sasol is maintaining its December startup date. Management expects the cost of the project to remain unchanged at $11.13 billion.
We are maintaining our no-moat rating.
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