Chief Financial Officer's strategic review on value targets
Paul Victor
Chief Financial Officer
Drive improved cash generation through the business cycle
Sharpen focus in applying disciplined capital allocation framework and approach
Return value to shareholders following a more balanced approach
Achieve value-based growth through optimal capital structure
Dear stakeholder
In 2018, we updated Sasol's financial framework, informed by our refined long-term strategy and our drive towards a more balanced approach to returning value to shareholders through the cycle.
We believe that this framework, and renewed focus and disciplined approach, will ultimately benefit shareholders through higher sustained pay-out ratios as the balance sheet deleverages and as the sustainable growth targets are achieved.
OUR FINANCIAL FRAMEWORK
Sasol is exposed to financial market risks in its normal course of business. Major financial risks include crude oil price, rand/US dollar exchange rate, ethane price and interest rates.
- Protection the balance sheet against undesirable market movements aiming to participate in favourable markets.
- No Hedging without the underlying exposure i.e. no speculation.
- Optimise the cost cover ratio by also considering natural hedges.
- Match the hedge cover ratio with the risk appetite.
- Continuous focus on effective hedging execution.
>5% CAGR (US% real)
2% ROIC uplift by FY22
>12% (US$ terms)
Gearing = 20% – 40% (target 30%) Net debt/EBITDA 1,0 – 1,7x (target 1,5x)
Towards 40% – 45% payout on Core HEPS (2,5 – 2,2x cover)
Our drive towards growing shareholder value sustainably is guided by our continuous focus on:
- a sustainable delivery of operational and capital efficiencies;
- continuously improving our cost competitive position;
- managing the balance sheet's risk prudently by means of our financial risk management strategy; and
- growing the value of the business as informed by our focused strategy and disciplined capital allocation.
We are intent on improving cash flows from our base of high-quality, diversified assets, with only marginal levels of further capital investment and believe this can be achieved in the short to medium term from our digitalisation drive, our continuing work to manage costs, as well as a focused review and optimisation of our portfolio. Longer term, we will enhance cash flows by debottlenecking the Lake Charles chemicals complex in the US and by extracting more value from our oil and gas investments in Mozambique.
DELIVERING VALUE THROUGH DISCIPLINED CAPITAL ALLOCATION
step-up dividend
2019–2022
1st ORDER OF ALLOCATION
returned to shareholders
2022+
1st ORDER OF ALLOCATION
Balancing returns through growth and dividends
allocations
2022+
2nd ORDER OF ALLOCATION
- At value, if market offers opportunity
- Growth and dividend options deliver less value to shareholders
ALLOCATE CAPITAL AND DIRECTIONAL APPROACH TO DISTRIBUTE SHAREHOLDER VALUE
Our cash breakeven oil price is currently at $35/bbl largely due to the sustainable cost cutting initiatives that have been implemented since 2014. We are one of very few companies globally that can operate profitably at such low oil prices. It is therefore a strategic objective that we further improve and retain our cost competitiveness through continuous improvement. Digital will play a key role in further reducing our cost base, increasing efficiency and allowing us to interface with the customer much quicker.
The use of predictive analytics and automated reporting will enable the organisation to be more proactive in scenario planning and responsive to mega trends in the market. We want to increase the level of disclosure to shareholders and become more transparent in all that we do.
Learning from our past, we are determined to follow a more prudent and disciplined capital allocation framework and approach to grow shareholder value sustainably.
As we consider capital allocation decisions, we are guided by key financial risk and return metrics such as our gearing and liquidity levels and the return on invested capital, with the ultimate objective being to deliver maximum sustainable return to shareholders.
The two key overarching objectives in the capital allocation framework are to firstly, protect and strengthen the balance sheet and then to focus on value-based capital allocation.
Protecting our licence to operate and ensuring the integrity and reliability of our assets is our first priority.
Following this we remain committed to a dividend payment of at least 2,8 Core HEPS cover or 36% payout ratio, provided we can maintain our investment grade credit rating.
Our next priority is to evaluate between value levers from which we can derive the most value for our shareholders. Items which can be considered include:
- value-based growth delivered from our portfolio of projects which may include merger and acquisitions transactions;
- value returned to shareholders through targeted and increased dividend payout ratios, however still remaining within our 2,2 - 2,8 times range; and
- value returned to shareholders through special dividends and/or share buy-back programmes.
It is important to note that these levers will be competing equally for capital.
Before we consider investing in large projects with long lead times, we will pursue small to medium-sized projects (whether organic or not) which require capital of less than US$500 million and US$1 billion respectively. Mega projects are not within our focus and will only be considered in future in partnerships and only once we have built a track record of successful smaller investments. This marks a significant change in our investment philosophy.
Another important change is our strategic focus, from one concentrated on increasing production volumes to one driven by value creation. As a result, we are committing to a more balanced approach in returning value to shareholders through the ups and downs of the commodity cycle. This includes stepping up dividend payments as well as pursing a consistent share buy-back programme to counter the effects of any corporate actions, ensuring that shareholders do not suffer from share dilution.
We are continuing to build on our recent efforts to effectively manage our capital structure, anchored in effective financial risk mitigation strategies. We are working to deleverage our balance sheet and so create more flexibility to facilitate the improved execution of our strategy. This is essential in an industry operating in a volatile operating environment marked by swings in commodity prices and currency rates, as well as the potential for technology disruption.
We are working to extend the maturity of our existing portfolio of debt instruments and returning to and maintaining our target debt levels to remain within our investment grade credit rating metrics. By following a sound approach to financial risk mitigation, we will protect the balance sheet through hedging crude oil, currencies and ethane.
In the year we extended, at very favourable terms, our US$1,5 billion revolving credit facility to a US$3,9 billion facility, with a tenure of five years and option to extend the facility by another two years. This increases our access to liquidity and is the first step in refinancing the Group's debt requirements.
To grow shareholder returns sustainably, we need to ensure that Sasol's operational performance and cash flow delivery remain strong and our strategic choices clear. Financial risk management must be prudent, and capital allocation disciplined.
To this end, we have set definitive growth targets in terms of return on invested capital (ROIC), earnings before interest and tax (EBIT) as well as dividend returns. Based on scenario planning, we believe we can deliver at least 12% ROIC and more than 5% US dollar-growth in EBIT through the cycle. In addition, we plan to step up shareholder dividend payouts to 40% of Core HEPS, or 2,5 times cover, by 2022 and thereafter move towards 45% payouts or 2,2 times cover.
With limited capital available for deployment until 2022, and as we progress in deleveraging the balance sheet, we are committed to enhancing the value of the company by targeting a 2% increase in ROIC off the base of 2017.
Maintaining our investment grade credit ratings within an optimal capital structure remains key to our approach to mitigating financial risk. We plan to manage gearing to between 40%-44% in 2019 and net debt: EBITDA to below 1,9x. In the long-term, we are targeting gearing at 30% and net debt: EBITDA at 1,5x as these will provide us with the necessary flexibility to sustain a quality growth rate, step up the dividend payout and provide sufficient flexibility to manage market volatility and uncertainty.
With the start-up of the first units of the LCCP before the end of the 2018 calendar year, and following the recent commissioning of numerous other capital projects, we are reaching the end of a period of significant growth for Sasol. Our focus is thus shifting to deleveraging the balance sheet and increasing the dividend pay-out ratio, at an appropriate time, by moving towards the upper end of the payout ratio of 40%-45% of Core HEPS, which is aligned with our industry peers.
By reaching and remaining within these targeted ranges we will be in a position to, over time, grow our total shareholder returns responsibly and sustainably. We look forward to working alongside our many stakeholders to deliver on these targets.
Paul Victor
Chief Financial Officer
27 August 2018
In supporting the Financial Stability Board's recommendation for consistent and coherent disclosures, Sasol adopted the TCFD in 2018 for application in its financial filings and other relevant disclosures.
| * | Earnings before interest, tax, depreciation and amortisation (EBITDA). |