Analysts say improving operational performance extends the investment case beyond energy geopolitical premiums
Sasol headquarters in Sandton, Johannesburg. Picture: iStock
Sasol’s share price plunged by around 20% from its high of R242 last week to R195 early on Monday, as international oil prices fell sharply after reports of a new – and seemingly robust – deal to bring peace to the Middle East.
On Thursday, it fell further to around R175.43, as US President Donald Trump reportedly signed the peace agreement with Iran, which saw Brent crude down to $77 a barrel.
The decline in the share price on the Johannesburg Stock Exchange (JSE) follows the very strong rally that pushed Sasol from a low of less than R60 in April 2025 to its recent high.
Some analysts say Sasol’s strong performance can be attributed not only to higher oil prices as a result of the sudden war in Iran, but also because of improving operational performance at the energy and chemical company.
They note that the investment case extends beyond the current geopolitical premium in energy markets.
Adrian Hammond, head of resources, gold, platinum and chemical research at SBG Securities, says Sasol remains one of his highest-conviction investment ideas despite the recent rally.
“We have a high-conviction valuation of about R450 a share,” he told Moneyweb last week, while saying that the share price might fall back as oil prices could retreat if peace returns to the Middle East.
“Any weakness in the share price could provide investors with an attractive entry point.”
“If the oil price comes down and the share price follows, it would create an opportunity to add the stock to a portfolio,” he said.
Improvements
A key part of the investment case is Sasol’s improving financial position. The company has prioritised debt reduction and is generating strong free cash flow, supported by higher energy and chemical prices.
According to Hammond, Sasol could move into a net cash position within the next three years.
A stronger balance sheet is also bringing the prospect of dividend payments closer. Sasol has previously indicated that it intends to resume dividends once net debt falls below $3 billion.
Hammond expects the company could reach that target as early as December, although management may prefer to wait until the end of the financial year in June 2027 before reinstating dividends.
“They will want to send a signal that the dividend is sustainable,” he says.
The return of dividends could attract a broader pool of investors, particularly international funds that focus on dividend-paying energy and chemical companies.
Operational improvements have also strengthened the outlook. Hammond said Sasol’s mining division has increased production, in particular, with the launch of a new plant to remove rocks from coal and efficiency gains.
“It will reduce purchases of coal from third-party suppliers and reduce costs.
“The operational side of the business is doing better and the risk profile is lower than it has been for some time,” he said.
He added that many South African investors remain sceptical after years of disappointment, which could mean the market is underestimating the company’s progress.
Sasol is also benefiting from stronger chemical prices, particularly at its US operations, which are highly leveraged to chemical market conditions.
In addition, Hammond believes there could be upside from a reassessment of the value of Sasol’s synfuels assets, which have previously been written down significantly. “Although any revaluation would be a non-cash accounting adjustment, it could improve investor sentiment.
“Sasol has always been critically important to South Africa’s fuel security and the broader economy,” he said, “now more than ever.”
Nedbank Corporate and Investment Banking senior research analyst Thobela Bixa is also optimistic, if a bit less so. He also says that the recent gains in the share price cannot be explained solely by higher oil prices.
“Higher oil prices have clearly been a key driver for Sasol, but the share had already rallied before the shock in energy markets. Investors had responded positively to management delivering on some of the commitments made during its capital markets day in May 2025.
“The prospect of higher free cash flow and faster debt reduction has also improved market sentiment. The move in the share price reflects a faster de-gearing profile than previously thought by the market,” Bixa said.
Strong earnings
Bixa expects Sasol to report strong earnings over its next two reporting periods as elevated oil, fuel and chemical prices support profitability.
“As such, we expect bumper profits in the next two reporting periods,” he says.
However, he warned that the outlook becomes less certain beyond that, with commodity prices expected to ease over the next six to 12 months. “If tensions in the Middle East subside and oil markets normalise, Sasol’s share price could come under pressure.
“The oil premium should unwind and Sasol’s share price will also trend lower.”
Bixa added that prices are unlikely to collapse because global supply disruptions are expected to be temporary and the rebuilding of strategic petroleum reserves could support demand over the medium term.
Despite the positive near-term outlook, Bixa believes much of the recent upside may already be reflected in both oil prices and Sasol’s valuation.
“Most of the outsized gains have probably already been made in both oil and Sasol,” he says.
As a result, Nedbank previously advised investors to reduce their exposure to oil-related investments and lock in some profits in May 2025, when Bixa downgraded Sasol to underweight.
Investors now need to decide whether Sasol’s improving balance sheet, operational performance and potential return to dividend payments can continue to support the share price once the current oil-price tailwind fades.
While risks remain, analysts agree that Sasol is in a stronger position than it has been in several years.
This article was republished from Moneyweb. Read the original here.
