Sasol’s share price collapsed last week after it announced cost overruns at its Lake Charles Chemical Project. The project will cost around $1 billion more than expected but the share prices has shed almost $4bn on the news.
At R 356, our JSE stock monitor has the share significantly oversold, with a 2.3x Standard deviation from recent trading levels. Although there is some disappointment, we believe the market has overreacted and expect the project team to have built in a lot more ‘fat’ so the LCCP is completed well within the latest guidance.
It’s likely the stock will recover, the consensus earnings forecast, for R50.20 per share for 2020 this puts the share on a forward price to earnings (PE) ratio of 7.07 times. The long-term average is 9.6 times, which means the share price would have to rise to R481.92 to equal the long-term average forward PE.
Look at the weekly chart of Sasol below and you will see the share doesn’t stay below the R375 level for long. Going back 8 years, the chart shows the buying zone between R375 and R340 is a good entry.
With the fundamentals signalling Sasol is offering good value, and the technicals highlighting a great buying opportunity. It’s time to buy, the blue line shows the R420 level is a good level for traders to exit or bank some profits on their longs.
Longer term investors should look to bank some profits at the R475 level ahead of the dark blue line at R480.
Sasol managements should release a trading statement in the next 8 weeks, with financial results for the full year 2019 and an LCC project update in the next 12 weeks.
Buy Sasol below R360 for a move to R480 in the medium term.
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The week ahead:
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Other Economic data releases of interest…
- Tuesday: BOJ Gov Kuroda Speaks (JP); RBNZ Financial Stability Report, RBNZ Gov Orr Speaks, ANZ Business Confidence (NZL); CB Consumer Confidence (USA)
- Wednesday: German Buba President Weidmann Speaks (EU); Annual Budget Release (NZL); BOC Rate Statement, Overnight Rate (CAN); Private Capital Expenditure, Building Approval (AUS)
- Thursday: Prelim GDP, FOMC Member Clarida Speaks, Treasury Currency Report (USA); Current Account, Gov Council Member Wilkins Speaks (CAN); Manufacturing PMI (CNY)
- Friday: Core PCE Price Index, Personal Spending, Chicago PMI, FOMC Member Williams Speaks (USA); GDP, RMPI (CAN); German Prelim CPI (EU)