Sasol Inzalo in a race with debt

It seems like the odds continue to stack up against Sasol Inzalo, the Broad-Based Black Economic Empowerment scheme of petrochemical giant Sasol.

The biggest challenge – which will probably not go down well with shareholders – is that Sasol Inzalo’s long-term debt pile continues to be bigger than its assets (its 2.4% shareholding in parent company Sasol).

The scheme is wrestling with R7.2 billion in debt at a time when the value of its investment into Sasol is dwindling. Sasol Inzalo’s investment into Sasol was worth R7.2 billion in June but has dropped to about R6.7 billion for the six months to December 31, 2015. This makes Sasol Inzalo’s debt exceed its assets by R600 million.

Making matters worse is that there is a variable interest rate to its debt and with an interest rate rising cycle, the cost of debt is expected to increase and subsequently destroy value in the scheme.

Its parent company Sasol has also had its fair share of woes, as the falling oil price has weighed on its share price. Earlier in January, Sasol’s share price slumped to R360 – levels last seen in 2011. The share price has since recovered to around R475 at the time of writing. The share price swings of Sasol impact the value of Sasol Inzalo’s investment into the company.

Declining oil prices – to 12-year lows – and a share price slump prompted Sasol to suspend the progressive nature of its dividend policy. Sasol Inzalo holds ordinary shares of Sasol and derives income from its dividends. For the period under review, it received dividends worth R248 million from Sasol, which was used to fund its operating activities, finance costs and repay its long-term debt. The cash retained from operating activities amounted to R137 million from the previous year’s R125 million.

Taking into account the recent decline in the value of the Sasol share price, the Sasol Inzalo board did not declare a dividend –  a prevalent trend since March last year. And, it gets worse. Sasol Inzalo incurred a net loss of R50 million, but this is a 14% improvement, given that at the same time in the previous year the loss widened to R58 million.

In December, Sasol Inzalo listed on the JSE’s BEE segment, as trading of shares was previously on an over-the-counter (OTC) platform. This follows a Financial Services Board directive, which planned to put a stop to unlicensed exchanges (extending to OTC platforms).

The listing has been no easy feat for Sasol Inzalo, as it saw its expenses increase by R8 million due to listing costs. Since February, the Sasol Inzalo scheme share price has shot up by 111.81% to R45.75, giving the scheme a market capitalisation of R735 million.

The scheme was launched in 2008 and now boasts about 200 000-plus black shareholders. Sasol Inzalo will mature in September 2018, and its debt together with expenses will have to be repaid. This might be through the sale of its Sasol shares and remaining Sasol shares will be given to Sasol Inzalo shareholders.

Currently, Sasol Inzalo shares can only be bought and traded by black investors, but this restriction will be lifted when the scheme matures. Industry players note that Sasol Inzalo has a negative net asset value, pricing in its debt on the balance sheet and the decline of Sasol’s share price.

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