The secret of Sasol's stock surge
Young Americans speculating on energy stocks appear to be behind the surge in Sasol's share price over the past three weeks, casting doubt on the sustainability of the synfuels and chemicals giant's recent stock rally.
Fund managers say the meteoric rise in the share price - at one stage increasing some 127% to about R180 in 10 days - is overdone and is primarily due to young investors in the US making use of American depository receipts (ADRs) to obtain positions in Sasol. The share has since dropped back to close at R146 on Friday.
In March, Sasol was staring down the barrel of a gun after its share price collapsed to R20.77 as it faced a cocktail of spiralling company debt, the coronavirus pandemic that roiled world markets and an oil price war between producers Russia and Saudi Arabia. Since then it has staged a remarkable comeback - when it comes to its share price.
The extent of the company's challenges were disclosed this week, with Sasol saying on Thursday it plans to restructure into two core businesses, chemicals and energy, to streamline its business model.
The new model, which will see the two units responsible for their own profits and losses, is aimed at helping the group negotiate a low oil price environment and could result in possible retrenchments.
Sasol said it had given notice to unions that it plans to restructure the business and that this could lead to a possible retrenchment process.
The company also said it had renegotiated with lenders "regarding increased balance sheet flexibility" in the context of Covid-19 and market volatility.
Given the company's weak fundamentals, the recent gains in Sasol's share price initially stumped some analysts.
While the early improvement in the share price, from about R20 to about R70, might have been explained by the near doubling of the oil price from a low of $20 a barrel in March, as well as the company's turnaround plan, the jump to R180 was nothing less than astounding.
David Shapiro, the deputy chair of Sasfin Securities, said he was initially mystified about what was driving the share price "in massive volumes" until he was alerted to US investors making use of ADRs to get exposure to Sasol.
ADRs allow US investors to take a position in companies in foreign markets. The ADR is issued to the investors by a depository bank, which then takes up the stock in the foreign company to satisfy the demand.
Shapiro said just under 15% of Sasol's entire share capital traded during the past three weeks or so, thanks to these ADRs, which is a "massive amount".
"I could understand the share moving from R28 to R70.
"Sasol had released results and outlined a strategy to raise capital and take precautionary measures and implement a turnaround plan. Then we get this rush from R70 to R180 and what we discover is the ADRs in America.
"The stock market has become a new game. There has been this absolute explosion of young, inexperienced new investors on the market in the US.
"They were responsible for gains in some of the most bombed-out shares such as energy stocks. They've created momentum in stocks which have sucked others in too."
Shapiro said while there may be a few outliers who value Sasol's stock at about R150, most fund managers would say fair value for the group at the moment is around the R80 level.
"Certainly under conditions now, where the oil price is beginning to come down [after initially recovering] and demand is going to be slow, I would be cautious about Sasol. I still think Sasol has got troubles ahead and a lot they've got to get through," said Shapiro.
Nick Kunze, portfolio manager at Sanlam Private Wealth, which holds Sasol stock, said ADRs for Sasol used to "trade at between 1-million and 2-million shares a day" in the US, showing it wasn't really an active share there. "That has jumped to almost 10-million a day in a few weeks."
Kunze said these typically young investors are now "hunting for so-called bankrupt shares" and although Sasol has a strong cash-generative business it has been lumped together with other struggling energy stocks.
He said they are mainly retail investors using accounts on trading apps such as Robinhood and that they are responsible for the rally in stocks such as bankrupt car rental giant Hertz in the US.
Kunze said though a lot of the uptick in Sasol's share price is due to speculation, the initial recovery in the stock to the R70 range was supported by market fundamentals.
"When Sasol was at R20 and thereabouts, the oil price was under $20 a barrel. The oil price is now at around $38. At under $20 a barrel, it's not just Sasol that is going to be in trouble, every oil producer in the world is not profitable at $20 a barrel.
"Then in the middle of the Covid lockdown globally we had negative oil. There was so much oil in the world that the main storage capacities in Oklahoma were basically full. There was nowhere to store it."
Since then there had been record production cuts by Opec, which had "helped".
"People are speculating that things are slowly going back to normal. We've had the Far East opening up, the Chinese have been net buyers of oil, and of course oil has gone from $20 to $40."
Kunze said Sasol "still has its problems", with a net debt of about $9bn, even though the outlook for the company appears a lot better than it did at the beginning of March.
"That's a big number, but at current levels where oil starts to grind higher it gives a bit of breathing room for Sasol."
Kunze said it appeared that a rights issue - which Sasol said in March would only be used as a last resort to raise capital - was probably off the table now because of the strength of the stock.
Sasol also had a cash-generative business and its Lake Charles Project in the US, although massively over-budget, was a "world-class asset that apparently people are queuing up to get a stake in".
Sasol's ambitious Lake Charles Chemicals Project was meant to be a game changer for the company, transforming it into a global chemicals giant.
However, cost overruns that ran into billions, as well as delays, placed the company under increasing pressure and ultimately prompted an independent review, after which Sasol joint CEOs and presidents Stephen Cornell and Bongani Nqwababa stepped down in October.
South African investors who started piling into Sasol when it initially plunged in March have also benefited from the demand in the US. Although many locals may have been planning to take a long-term view on the stock, the recent rally saw a lot of them deciding to cash in and take profits.
Charles Savage, CEO of Purple Group, which owns EasyEquities, one of the biggest online trading platforms in SA, said Sasol was "by far" the most popular share among investors on its platform over the past three months, with the average entry point being about R55.
"To a large extent those investors have exited. If you are faced with those kind of returns, what do you do? Their price targets over three or five years might have been R200 or R150. If your price appreciation is steep, you'll turn a long-term investor into a short-term investor."
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