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MBA Research Report Page 1

Analysis of Valuation Methods: Sasol Share Valuation and its

Implications

A Thesis

presented to

The Graduate School of Business

University of Cape Town

in partial fulfilment

of the requirements for the

Masters in Business Administration Degree

by

Gideon Jacobs

December 2010

Supervisor: Sean Gossel

Co-supervisor: Professor Mills Soko

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This thesis is not confidential. It may be used freely by the Graduate School of Business.

I wish to thank Sean Gossel for his valuable advice on my research report.

I certify that except as noted above the thesis is my own work and all references used are

accurately reported.

Signed:

Gideon Jacobs

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Analysis of Valuation Methods: Sasol Share Valuation and its

Implications

Abstract

This research report aims to find the share valuation method that most accurately predicts

the actual share price of Sasol on the Johannesburg Stock Exchange. It also tests whether

valuing each of Sasol‟s separate business units as individual companies result in a more

accurate overall valuation.

Proven valuation methods and their fundamentals are applied to the Sasol financial

parameters in order to obtain valuation results. Three main approaches are used:

Discounted Cash Flow method, Dividend Discount (or Gordon Growth model) method

and a relative valuation method. On the Discounted Cash Flow and relative valuation

method, Sasol is broken down into sub sections, each of these sections valued separately

(using different risk parameters, different earnings forecasts and different companies as

proxies) and the sum of these different parts used as the total share price valuation.

The most accurate valuation method for the Sasol share price is found to be a sum of

parts Discounted Cash Flow valuation. Using the dividend growth model method (with

an adjusted growth forecast) and the relative valuation method (using price to earnings

ratios of oil companies as proxies) also gives relatively accurate results when compared

to the actual Sasol share price. The sum of parts approach is found to be feasible for

applying to valuation of the Sasol share price and does increase the accuracy of the

valuation, but only in the Discounted Cash Flow method. It fails to do so in the relative

valuation method.

It is recommended to use the sum of parts Discounted Cash Flow valuation method if

time constraints in valuation are not a significant concern. When a valuation needs to be

done in a relatively short time frame, it is recommended to use relative valuations with

price to earnings ratios of international oil companies as proxies for the valuation.

KEYWORDS: Sasol share price, Valuation methods, Sum of Parts

approach, Earnings and Growth forecasting

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Table of contents

List of abbreviations -------------------------------------------------------------------------------- 6

List of figures ----------------------------------------------------------------------------------------- 8

1. Introduction --------------------------------------------------------------------------------------- 9 1.1 Research area ---------------------------------------------------------------------------------- 9

1.2 Problem statement ----------------------------------------------------------------------------- 9

1.3 Research question --------------------------------------------------------------------------- 10

1.4 Research objective -------------------------------------------------------------------------- 11

1.4.1 Primary objective ---------------------------------------------------------------------- 11

1.4.2 Secondary objectives ------------------------------------------------------------------ 11

1.5 Ethical clearance ---------------------------------------------------------------------------- 11

2. Background -------------------------------------------------------------------------------------- 12 2.1 Recent History of the South African Oil and Fuel market ---------------------------- 12

2.2 International oil market --------------------------------------------------------------------- 14

2.3 Oil price--------------------------------------------------------------------------------------- 14

2.4 Sasol process and comparison with a typical oil company ---------------------------- 15

2.5 Sasol‟s operational structure --------------------------------------------------------------- 16

3. Literature Review ------------------------------------------------------------------------------ 18

4. Research Approach and Design ------------------------------------------------------------- 23 4.1 Background to valuation techniques ------------------------------------------------------ 23

4.1.1 Discounted dividend approach ------------------------------------------------------- 23

4.1.2 Discounted cash flow valuation ------------------------------------------------------ 23

4.1.3 Relative valuation ---------------------------------------------------------------------- 24

4.2 Assumptions and limitations --------------------------------------------------------------- 24

5. Methodology ------------------------------------------------------------------------------------- 25 5.1 Dividend discount models ----------------------------------------------------------------- 25

5.2 Discounted Free Cash Flow Model ------------------------------------------------------- 26

5.2.1 Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE) -- 27

5.2.2 Weighted Average Cost of Capital -------------------------------------------------- 28

5.2.3 Cost of equity --------------------------------------------------------------------------- 28

5.2.4 Risk free rate ---------------------------------------------------------------------------- 29

5.2.5 Beta -------------------------------------------------------------------------------------- 29

5.2.6 Equity risk premium ------------------------------------------------------------------- 31

5.2.7 Cost of debt ----------------------------------------------------------------------------- 31

5.2.8 Cost of preferred stock ---------------------------------------------------------------- 32

5.2.9 Growth ----------------------------------------------------------------------------------- 33

5.2.10 Estimating terminal value ----------------------------------------------------------- 33

5.2.11 Sum of parts approach in discounted cash flow ---------------------------------- 33

5.3 Relative valuation --------------------------------------------------------------------------- 34

6. Data------------------------------------------------------------------------------------------------ 36 6.1 Data for the discounted dividend approach ---------------------------------------------- 36

6.2 Data for the discounted free cash flow approach --------------------------------------- 36

6.2.1 Risk and growth parameters: --------------------------------------------------------- 36

6.2.2 Financial data --------------------------------------------------------------------------- 37

6.3 Data for the relative valuation approach ------------------------------------------------- 38

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7. Empirical Investigation ----------------------------------------------------------------------- 40 7.1 Discounted Cash Flow Valuation --------------------------------------------------------- 40

7.1.1 Gearing ---------------------------------------------------------------------------------- 40

7.1.2 Risk Free Rate -------------------------------------------------------------------------- 41

7.1.3 Cost of debt ----------------------------------------------------------------------------- 42

7.1.4 Beta -------------------------------------------------------------------------------------- 43

7.1.5 Equity Risk Premium ------------------------------------------------------------------ 43

7.1.6 Cost of Preferred Stock --------------------------------------------------------------- 44

7.1.7 WACC calculation --------------------------------------------------------------------- 44

7.1.8 Growth opportunities ------------------------------------------------------------------ 45

7.1.9 Discounted Cash Flow – Sum of Parts Approach --------------------------------- 46

7.1.9.1 Industry Grouping ---------------------------------------------------------------- 47

7.1.9.2 Weighted Average Cost of Capital --------------------------------------------- 47

7.1.9.3 Free cash flow and Share price valuation ------------------------------------- 48

7.9.1.4 Alternative Approaches - Splitting the Sector Parameters ------------------ 49

7.2 Dividend discount approach – dividend growth model -------------------------------- 49

7.3 Relative valuation --------------------------------------------------------------------------- 51

7.3.1 Data availability ------------------------------------------------------------------------ 51

7.3.2 Data Preparation ----------------------------------------------------------------------- 52

7.3.3 Relative Valuation – Comparable to a single company -------------------------- 53

7.3.4 Valuation of Sasol as an Oil Company --------------------------------------------- 54

7.3.5 Valuation of Sasol as a Chemical Company --------------------------------------- 55

7.3.6 Relative Valuation of Sasol using the Sum of Parts Approach ------------------ 56

8. Results discussion ------------------------------------------------------------------------------ 58 8.1 Summary of results ------------------------------------------------------------------------- 58

8.2 Discounted cash flow valuation – Sasol group and sum of parts --------------------- 59

8.3 Dividend discount approach --------------------------------------------------------------- 60

8.4 Relative valuation Sasol Group and sum of parts -------------------------------------- 61

8.4.1 Oil Companies as a Proxy ------------------------------------------------------------ 61

8.4.2 Chemical Companies as a Proxy----------------------------------------------------- 62

8.4.3 Sum of Parts Relative Valuation ----------------------------------------------------- 64

9. Conclusion and Recommendations --------------------------------------------------------- 65

10. Recommendations for Future Research ------------------------------------------------- 67

11. References -------------------------------------------------------------------------------------- 68

Appendices ------------------------------------------------------------------------------------------ 71

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List of abbreviations

ALSI – All Share Index

BFOE - Brent-Forties-Oseberg-Ekofisk

BP – British Petroleum

Capex – Capital Expenditure

CAPM – Capital Asset Pricing Model

CTL – Coal to Liquids

DandA – Depreciation and Amortisation

DACF – Debt adjusted Cash Flow

DCF – Discounted Cash Flow

EBIT – Earnings before Interest and Tax

EBITDA – Earnings Before Interest, Tax and Amortisation

EM – Exxon Mobil

EV – Enterprise Value

FCFE – Free Cash Flow to Equity

FCFF – Free Cash Flow to Firm

FY – Financial year

GTL – Gas to Liquids

ICE – Inter Continental Exchange

JSE – Johannesburg Stock Exchange

KPI – Key Performance Indicators

MSA – Main Supply Agreement

NetWC – Net Working Capital

PV – Present Value

PWC – Price Waterhouse Coopers

RoACE - Return on Average Capital Employed

RDS – Royal Dutch Shell

ROE – Return on Equity

RONA – Return on Net Assets

SA – South Africa

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SOP – Sum Of Parts

SS – Support Services

USA – United States of America

WACC – Weighted Average Cost of Capital

WTI - West Texas Intermediate

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List of figures

Figure 2.1: Oil price history

Figure 2.2: Oil refinery versus Sasol CTL factory

Figure 3: ROACE and EV/DACF

Figure 5: Default credit ratings

Figure 7.1: R157 historic yield

Figure 7.2: RSA coupon bonds

Figure 7.3: After tax cost of debt

Figure 7.4: WACC for Sasol Group

Figure 7.5: Dividend growth model approach valuation of Sasol share price

Figure 7.6: Sasol baseline financial parameters used in relative valuation

Figure 7.7: Oil company relative valuation parameters

Figure 7.8: Sasol share valuation using oil company parameters

Figure 7.9: Chemical company relative valuation parameters

Figure 7.10: DOW Chemicals relative valuation parameters

Figure 7.11: Sasol share valuation using chemical company parameters

Figure 7.12: Sasol share valuation using DOW chemical‟s parameters

Figure 7.13 Sum of parts relative valuation

Figure 8.1: Most accurate valuation methods

Figure 8.2: DCF Valuation summary

Figure 8.3: Discounted cash flow summary

Figure 8.4: Summary of Dividend growth model results

Figure 8.5: Oil company relative valuation - table

Figure 8.6: Oil company relative valuation – graph

Figure 8.7 Chemical company relative valuation - table

Figure 8.8 Chemical company relative valuation – graph

Figure 8.9: Sum of parts company relative valuation - table

Figure 8.10: Sum of parts company relative valuation - graph

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1. Introduction

1.1 Research area

This document will attempt to dissect the common valuation methods that are used by

analysts and to apply the implicit assumptions and processes to the oil industry and to

Sasol in particular. In the application of these methods, the theory will be discussed and

how it applies to the oil industry and to Sasol.

1.2 Problem statement

Like most oil companies, Sasol is a very complex business with operations in different

countries and a wide variety of products. Its business is to a large extent linked to the oil

price as it is primarily a fuel producing company and fuel is primarily derived from oil on

the world market. Due to its complexity, valuing the Sasol business presents challenges.

Different views exist on how this company should be valued. A number of fund

managers have the Sasol share as part of their portfolio of companies as it has generally

been a well performing stock over the past few years. The problem is what method to use

when valuing the Sasol share price and which of these methods predicts the share price

most accurately. Even with a method proving accurate, the outcome of the study must

include a set of recommendations on what methods works best, why they are the most

accurate and what changes must be made to them when valuing the Sasol share price.

A breakdown of the different Sasol divisions will be done and the value of each of these

divisions will be determined. Whilst the principles in valuation of oil companies in

general will be considered, each division of Sasol that contributes to its bottom line will

be valued separately and at the end the sections added back together. It is thus envisaged

that this proposed research will provide added insight into the most accurate in-sample

valuation technique applicable to oil shares. This will be achieved by undertaking a

valuation of the Sasol share price using the established valuation techniques and then

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conducting further sensitivity analysis of each individual parameter such as growth rate

assumptions or beta of the cost of equity and their effect on the final outcome of the

valuation.

1.3 Research question

The primary research question that this proposed research intends to answer is: What is

the most accurate valuation method for valuing the share price of Sasol? In order to

ascertain which valuation technique is most accurate, the results of each valuation

technique will be compared against the actual share price so as to determine which

method produces the most consistent and closest match.

Secondary questions include:

1. Is it feasible to do a sum of parts valuation for an oil company such as Sasol?

2. What are the main value determinants for Sasol‟s separate business entities?

3. Does a sum of parts valuation method provide a more accurate valuation approach

than the overall valuation?

These secondary questions link to the primary question by detailing the approaches used

to determine the most accurate valuation method. The feasibility of the sum of parts

method will for instance be tested by determining if the effort and time involved doing a

sum of parts valuation brings about a substantial increase in accuracy. If not the extra

effort by dividing Sasol up into parts and valuing each company separately is not worth

effort. The main value drivers are the building blocks of a valuation exercise. It‟s those

parameters that (by adjusting them) have the biggest influence on the valuation outcome.

This builds on the separate valuation efforts in order to be able to more clearly answer the

primary question.

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1.4 Research objective

1.4.1 Primary objective

To determine (quantitatively) what the most accurate valuation method is to value the

share price of Sasol.

1.4.2 Secondary objectives

1. To recommend a modified valuation method that can be used to accurately value the

share price of Sasol.

2. To test the main sensitivities in determining the share price of oil companies such as

Sasol and what their effect is on the outcome of the valuation.

3. To do a valuation of each of the Sasol business divisions in order to be able to know

what that division contributes to the total value. This enables a view if certain

divisions has a bigger contributions than other and can allow one to ignore some

divisions in future valuations if their contribution are insignificant.

This valuation will consider Sasol to be a collection of divisions rather than as a unified

whole and thus will make use of a sum-of-parts approach. It is envisaged that this

approach will produce a more accurate outcome as it will take the risks specific to Sasol

into account.

1.5 Ethical clearance

It must be noted that ethical clearance for research application for this study was

approved on 02/09/2010 by Tamlyn Mawa, the Research and Faculty Co-ordinator from

the University of Cape Town.

There are no concerns with this research from an ethical point of view as it does not

involve any human subjects.

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2. Background

This section provides the background to the South African and International oil and fuel

history so as to provide an understanding of why and how the oil and fuel market

developed as the issues raised are key to contextualising the difficulties associated with

valuing an oil share. Hence, the oil price and how it is determined is reviewed due to the

close relation that any oil company including Sasol‟s profit margin has on this price. The

main aspects of a normal oil refinery (that coverts the oil to fuel) and the Sasol operations

is discussed to describe the main differences in structure and profit drivers. Even though

Sasol is seen as an oil company, it is essentially a petrochemical operation and thus the

different driving forces will influence value determination. In addition, the background to

Sasol‟s different operational and other divisions is also given in order to provide context

to the sum of parts valuation. This is relevant in order to be able to structure the valuation

of the different Sasol sections according to the most relevant methods.

2.1 Recent History of the South African Oil and Fuel market

For around the last 50 years the so called Main Supply Agreement (MSA) regulated the

basis of the South African liquid fuels market. This was the agreement between Sasol and

other oil companies during this time up to 2003 when the agreement was terminated

(Swart, 2009).

The Main Supply Agreement was established in 1954 and served the purpose of dividing

the country into two effective regions with regards to fuel supply, an inland (or Sasol

supply) area and a coastal area. The original MSA ensured that all liquid fuels produced

by Sasol would be purchased by the oil companies. The oil companies thus had to service

their marketing requirements in the inland area. On the other hand Sasol was not allowed

to sell into the retail market by not selling liquid fuels at any Sasol service stations. Sasol-

branded „blue pumps‟ on the forecourts of service stations was Sasol‟s only presence in

the retail sector.

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From 1954 to 2003 the principles of the MSA formed the cornerstone and regulated the

South African liquid fuels market. Before the Sasol 2 and Sasol 3 sites were established,

South Africa had a shortage in refining capacity. This meant that refined product had to

be purchased and shipped inland in order to meet the country‟s fuel demands. However,

after the commissioning of the Sasol Secunda site, the country had a surplus refining

capacity. Thus the coastal refineries purchased more from Sasol than they would have

under normal conditions, resulting in the decommissioning of up to 30% of the refining

capacity of some of the refinery units. The meant that up to 90% of Sasol‟s fuel products

were purchased by the other oil companies.

The termination of the MSA came about after Sasol proposed in 1998 to terminate the

agreement. It was thought to be in breach of the Competition Act that would come into

effect in 1999, therefore the drive to end the merger despite it giving an obvious

advantage to Sasol‟s business. Sasol is believed to have thought that it will be able to

exploit its inland comparative advantage (logistical costs to move fuel products from the

coast towards the inland supply area making it unprofitable to do so) in the fuel market as

well as be able to aggressively market its products by opening up fuel selling retail

stations. The opening up of the new branded Sasol “delight” shops all over the inland

area and also in some coastal regions serves testimony to this drive.

The value of Sasol depends in a large way on its operations in South Africa. It is

strategically placed to dominate the inland fuel supply market. Sasol as a company has a

responsibility towards the South African public to produce an important consumable

commodity (fuel) on a stable basis, but that position is not what makes it a valuable

company. Its ability to turn coal and gas into fuel plus other chemical products gives it a

competitive advantage and changes its valuation approach compared to its international

oil company counterparts.

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2.2 International oil market

Although the South African oil and fuel market history has been described in some detail

above, the international oil market remains the biggest factor influencing the local

market. The bulk of South Africa‟s liquid fuel demands are met by normal crude oil

refining. This results in oil imports being the country‟s single largest import item (Swart,

2009). Oil refining remains the primary source of fuel production in the world today.

2.3 Oil price

The oil price, although referred to often as a single price, in fact have several definitions.

It is normally priced in US dollars per barrel, with a barrel being approximately 159

litres. Benchmark pricing is used in order to ensure consistency and transparency in

trading. The most important benchmark crude oils are Dubai in the Arab Gulf region,

West Texas Intermediate (WTI) in North America and Brent in Europe (Swart, 2009). A

combination of these is the dated Brent oil price (this is commonly quoted in the media as

the oil price), which is the price on the market that buyers can purchase oil for physical

possession taken within 21 days of the purchase. BFOE (Brent-Forties-Oseberg-Ekofisk)

or 21-day Brent refers to the forward physical market, for delivery one or more calendar

months from the day of the trade. ICE Brent refers to futures that are traded on the

intercontinental exchange (Swart, 2009). Due to an efficient market, these prices track

each other remarkably well.

The oil price remains the most important parameter in oil company valuation, including

Sasol. Hence, understanding the factors that influence the oil price is crucial in order to

the forecast future earnings and risk parameters of an oil company.

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Oil price history

0

20

40

60

80

100

120

140

160

Aug 11,1987

May 07,1990

Jan 31,1993

Oct 28,1995

Jul 24,1998

Apr 19,2001

Jan 14,2004

Oct 10,2006

Jul 06,2009

Apr 01,2012

US

do

llars

Figure 2.1: Oil price history (http://production.investis.com)

2.4 Sasol process and comparison with a typical oil company

Sasol‟s operations are different to those of a typical oil refinery. Whereas an oil refinery

separates the various oil components in order to produce mainly fuel related products,

Sasol‟s process converts coal and/or gas into the same fuel products as that of an oil

refinery, but in addition, produces an array of other chemical by-products. Consequently,

Sasol‟s profit drivers are thought to differ somewhat to those of a typical oil company.

Due to the longer and much more complex process of changing coal into fuel, the capital

outlay of a CTL factory is an order of magnitude bigger than that or a conventional oil

refinery (when based on equal volumetric product output, normally measured in

equivalent barrels of oil per day). Its array of products other than fuel products gives it a

diversification factor in terms of exposure to market related price changes of fuel

products. The main differences are summarised below:

Solvents

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Normal oil refinery Sasol CTL factory

Feed Crude oil Coal, water, air

Price of feedstock Oil price

Relatively fixed compared to the oil price. Coal price is not fixed, but varies much less than oil price.

Products Fuel related productsFuel related products plus a variety of specialized chemical products

Capital outlay Relatively small Relatively bigOperational complexity Easy Difficult

Figure 2.2: Oil refinery versus Sasol CTL factory

These different operational divisions is the primary reason for the hypothesis that valuing

an oil company such as Sasol could be more accurately accomplished using a sum of

parts approach rather than valuing the company as a unified whole. The reason being that

operational diversity implies that the valuation of the business as a single entity will

require too many assumptions relating to risk and future cash flows. These factors are

relevant when forecasting future cash flows. Normal oil refineries would base the bulk of

its future cash flows on the oil price assumption (what the price would be in future).

Although Sasol will also have a large part of its forecast based on these same

assumptions, it has other factors to consider as well, such as the outlook of the

international chemical industry (Comer, 2010).

2.5 Sasol’s operational structure

In order to understand the diversity in Sasol‟s business model and to know which

companies to compare with the relevant parts of Sasol when doing a relative valuation,

the 7 major business units within Sasol are listed below. Only the main products and

geographic locations are considered to have an influence on the valuation of Sasol:

1. Sasol Synfuels – Coal to liquids factory situated in South Africa

2. Sasol Chemical Industries, under which the following businesses fall:

o Sasol Polymers – Producer of synthetic polymers. Operations are located in

South Africa

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o Sasol Nitro – manufacturer of explosives, fertilizer and ammonia. Operations

located in South Africa

o Sasol Solvents – manufacturer of a range of industrial chemicals, including

alcohols, ketones, acids, co-monomers and detergent alcohols. Operations in

South Africa and Germany

o Sasol Infrachem – The Sasolburg equivalent of Synfuels, smaller range of

products and using mainly gas as feedstock

o Sasol Wax – Hard wax producer. Production facilities in the USA, Germany,

France, England, Australia, Malaysia and South Africa.

o Merisol – Producer of high-quality cresylic acids and pure isomers.

Operations in the USA and South Africa

3. Sasol Technology – The technology arm of the Sasol operations. Located at all Sasol

operations and acts as its main support service.

4. Sasol Mining – The mining entity of Sasol (coal only). Operations in South Africa

5. Sasol Oil – The marketing and distribution entity of Sasol‟s fuel and oil related

product business. Operations located in South Africa at all main factories.

6. Sasol Gas – Sasol‟s gas distribution operation. Located in Mozambique and South

Africa.

7. Sasol Synfuels International – Sasol‟s international Synthetic fuel operations, mainly

the joint venture gas to liquids operation in Qatar, but in future possibly operations in

China as well as India.

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3. Literature Review

According to economic theory, exploration and development of new oil and gas fields

should respond positively to increasing petroleum prices (Osmundsen, Asche, Misund &

Mohn, 2006). However, since the late 1990s, stock market analysts have focused strongly

on short-term accounting benchmarks such as the Return on Average Capital Employed

(ROACE) and Enterprise Value per Debt-Adjusted Cash Flow (EV/DACF) for

international oil and gas companies (ROACE and EV/DACF are explained in more detail

further on in this paper).

Oil and gas exploration and production has failed to respond to increasing oil prices over

the last years (Osmundsen et al., 2006). Production growth among Western major oil and

gas companies has remained low and the share of exploration spending in total E&P

investments has been cut back substantially since 1990. Recent research has indicated a

stronger relationship between cash flow variables and investments (Stein 2003).

However, an increasing share of oil industry investments have been directed at short and

medium term development projects in oil company expenditure rather than long-term

reserve development (Dohbs, Manson & Nyquist, 2006).

The dynamic oil and gas industry has experienced numerous changes in operational,

business and market behaviour over the last 25 years. From around 1985 and towards the

end of the 1990s, the international oil and gas industry was subject to extensive changes

in their market, business and political environment (Weston, Johnson & Siu, 1999).

Globalisation advanced rapidly, and had far-reaching implications for politics,

economics, technology, competence, communication and financial markets. The national,

strategic and political powers that the industry once had were no longer applicable.

Investments of the international oil and gas industry expanded, as more and more

countries opened their petroleum sector for foreign direct investments (Weston et. al.).

Former national oil companies were privatised all around the world with deregulation and

market liberalisation progressing. After some time, the oil industry no longer delivered

satisfactory returns on investors‟ investments A combined result of these developments

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was a wave of mergers and acquisitions that erased former prominent independent names

such as Elf, Fina, Mobil, Amoco, Arco, YPF, Texaco, Phillips, Lasmo and recently also

Unocal (Weston et. al. 1999).

The international oil and gas industry entered a new stage towards the end of the 1990s,

with heavy focus on production growth, cost-cutting, operational efficiency and short-

term profitability. Scorecards of key performance indicators were presented to the

financial market, as an implicit incentive scheme between investors and senior

management in the companies. Investors were treated to some of the information of an oil

company that would direct them as such to a valuation. This kind of knowledge and

sharing of information might not necessarily exist practically for investors around the

world today and would skew valuations that use this knowledge, unless all that are

participating in oil share trading have access to this knowledge (Osmundsen et al., 2006).

The single most important performance indicator among international oil and gas

companies has been ROACE. This crude measure of capital return is a vital input to

valuation analyses among stock market analysts. The measure has also been widely

adopted by the international oil and gas companies (Osmundsen et al., 2006). But

ROACE has its flaws. Inherent in the unit of production depreciation method (where

assets are depreciated not on a linear time line, but in accordance to the volume or value

that the asset produces) in the oil sector, ROACE will fall in the first years of a project

cycle. Later in the project cycle, when investments fall and the capital asset depreciates,

ROACE will rise. Hence, ROACE is boosted in periods of divestment (Antill & Amotl

2000).

Ideally, valuation (of a company that produced cash flows) should be undertaken by

means of net present value analyses (Smith 2003). This ties up with one of the valuation

methods (DCF) used in this study that is in essence the determination of the net present

value of the future cash flows (discounted). The value of a company is then determined

by the cash flow, growth and risk characteristics. However, stock market analysts often

lack the necessary resources for continuous updates of detailed valuations and therefore

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often resort to relative valuation as this approach is commonly believed to require fewer

assumptions, and is quick and easy to communicate to equity markets (Damodaran 2002).

A widespread approach among oil and gas analysts has been to plot key performance

indicators (KPI‟s) among the companies against their respective market based valuation

multiples such as EV/DACF (Deutsche bank, 2004).

Figure 3: ROACE and EV/DACF (Deutsche bank, 2004)

ROACE is defined as net income adjusted for minority interests and net financial items

(after tax), as a percentage ratio of average capital employed. Capital employed is the

sum of shareholders' funds and net interest-bearing debt. EV, or Enterprise Value, is the

sum of the company's debt and equity, at market values. DACF or Debt-Adjusted Cash

Flow reflects cash flow from operations plus after-tax debt-service payments

(Osmundsen et al., 2006). Simple correlations are illustrated and calculated by analysts,

at best with a regression line for a cross-section of observations. Note that the fit is not

very convincing (R- below 0.5), indicating that a more robust or accurate method is

needed for valuation purposes. Osmundsen et al. (2006) do not support the general

perception of ROACE as an important valuation metric in the oil and gas industry. They

find that the variation in company valuations is mainly explained by the oil price, oil and

gas production, and to some extent reserve replacement.

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Accounting information, such as earnings and book equity, is insufficient in the equity

valuation process for oil and gas exploration companies. Although some studies from the

Financial Accounting Standards Board have concluded that accounting information, such

as net income and the book value of equity are value-relevant in cross-sectional studies,

the dominating view has been that historical cost accounting is inappropriate for

accurately conveying the oil and gas companies' financial performance to the financial

markets (Osmundsen et al., 2006).

Since the accounting information in the up-stream sector "does a distressingly poor job of

conveying the true economic results, this valuation miss-match arises from measurement

errors in petroleum reserves (McCormack & Vytheeswaran, 1998). Thus the response to

new information is asymmetric; bad news is quickly reflected in the reserve figures

whereas good news takes more time to be accounted. Moreover, reserves may be exposed

to measurement errors since they are noted in current oil price (and not the mid cycle

price), and since they do not include the value of any implicit real options. There is also a

bias in the reported figures, as the large and profitable oil companies are more

conservative in their reserve estimates than most of the others.

Econometric tests have been performed on financial relationships for the largest oil and

gas companies by McCormack & Vytheeswaran (1998). They also tested total

shareholder return against EBITA (earnings before interest, taxes and amortization),

RONA (return on net assets) and after-tax earnings. The results show that the estimated

relationships between the valuation and the financial indicators were weak or

insignificant. Hence it is concluded that the valuation of oil companies will need a

different approach that is not as reliant on the use of financial indicators or free cash

flows for the company as a whole.

As an alternative approach, Chua & Woodward (1994) apply econometric valuation tests

on the American oil industry between 1980 and 1990 by. The Price/Earnings (P/E) ratios

were tested for integrated oil companies against dividend payout, net profit margin, asset

turnover, financial leverage, interest rate, and Beta. However, robust relationships could

not be found and thus Chua and Woodward conclude that that the use of a P/E ratio is not

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recommended for valuing oil companies. As an alternative approach Chua and

Woodward then tested cash flows from operation against dividend payout, net profit and

asset turnover. The results found that future cash flow and proven reserves are

statistically significant explanatory factors and thus support a fundamentals-based

approach to valuation (Osmundsen et al., 2006). Given that this contradicts previous

findings, for Sasol all fundamental financial ratios will be tested (including price to

earnings and price to cash flow) in order to determine which predicts the share price in

the most accurate way. The fundamental approach should be even more accurate if longer

projections are used (5 years compared to 2 years), building a stronger case for

fundamental valuation. (Osmundsen et. al., 2006). Taking this into account a time frame

of at least five years will be used for Sasol‟s valuation.

As the DCF method remains the primary agreed method amongst most analysts (Comer,

2010), it will also be tested to determine its accuracy with regards to Sasol despite

findings that it is inaccurate in valuing oil companies. The sum of parts approach is

foreseen to provide the “different approach” that McCormack & Vytheeswaran (1998)

refers to.

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4. Research Approach and Design

The research approach that will be undertaken in this study consists of a quantitative

evaluation of different share valuation methods. Three main methods will be tested, but

as many variables as possible within those main methods are evaluated to see if certain

varieties of these methods work better (or worse) in predicting the actual Sasol share

price. Hence the three most common valuation techniques will be:

1. Discounted free cash flow method

2. Dividend discount (Gordon growth) method

3. Relative valuation method

4.1 Background to valuation techniques

4.1.1 Discounted dividend approach

In the strictest sense, when buying a publicly traded stock the only cash flow you can

receive from the firm or company is the dividend. While many analysts do not use this

model as they view it as outdated, the model is based on the principal of available cash

flow from owning a stock, one of the simplest forms of valuation (Damodaran, 2002).

4.1.2 Discounted cash flow valuation

The DCF based methodology is founded on the Present Value Principle where the value

of an asset is defined as the net present value of expected future cash flows. The two

primary aspects associated with this approach are the difference between Equity and Firm

Value and the discount rate applied. Although the traditional discounted cash flow (DCF)

technique is workable and reasonably accurate in many applications, it presumes the

analyst can clearly distinguish between systematic and non-systematic sources of risk

(Smith, 2003). Furthermore, the use of this approach to value oil companies has been

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criticised on the grounds that it needs detailed calculations taking a lot of time and effort.

It certainly is not an approach to be used when time constraints in doing the valuation

play a role. However, it remains the valuation method most commonly agreed to have

the most accurate results in valuing a broad array of companies (Damodaran, 2002).

4.1.3 Relative valuation

In relative valuations, the value of the company is derived by comparing a set of variables

of other similar companies (such as earnings or book value) against the company being

valued. Hence, there are two components to relative valuation. The first is that, to value

assets on a relative basis, prices have to be standardised, usually by converting prices into

multiples earnings, book values, or sales. The second is to find similar firms, which is

difficult because no two firms are identical and firms in the same business can still differ

in terms of risk, growth potential and cash flows (Damodaran, 2002).

4.2 Assumptions and limitations

The first assumption in undertaking this study is that the financial information obtained

on which to do the valuation is correct. There is no major risk in this assumption, mainly

because of the fact that Sasol is a publicly traded company and is as such responsible for

having their results audited by an independent company. Secondly an assumption is made

that all financial ratios from companies that is used for especially relative valuation

purposes is calculated in the same manner across the range of companies, including

Sasol. There is always the risk that companies are displaying information in a completely

different way than what is the norm, but again the risk for this is small as valuation is not

a territory that is unfamiliar to those responsible for the financial numbers, thus a

consistent way of reporting should have been established by now. Ideally the Sasol price

must be valued numerous times through a given financial year in order to be able to

compare it to the actual price more regularly than once a year. The limitation in this case

is that the inputs to valuation approaches are the very results that are only released once a

year, making it impractical to value more than once per year as the bulk of the

information used as inputs will stay constant through the year.

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5. Methodology

As mentioned above, three broad approaches to valuation is used to determine the most

accurate method to value the Sasol share price, with a specific adjustment to value the

different business units in Sasol separately in order to judge whether this yields a more

accurate result within the broader context. In the literature study, many approaches are

suggested and discussed by other quoted authors. This study however keeps to

approaches that are well entrenched in order to rule out inaccurate valuation attempts, not

due to the method being inaccurate, but due to a lack of knowledge on valuation as a

subject. .

5.1 Dividend discount models

Dividend discount models are considered to be the simplest valuation method and this

approach is based on the following equation: (Damodaran, 2002):

gk

DPSP

e 1

0

Where DPS1 = expected dividends next year

ke = cost to equity

g = growth rate

Assumptions are made about the future cost of equity and the riskiness of the business as

well as the future payout ratios and earnings. The advantage of this model is that is

extremely easy to use and has a small amount of variables used as inputs. It is essentially

a determination of the present value of future cash flows, where these cash flows are the

simplest form of available cash, i.e. the dividend paid out. The concern with this model is

its sensitivity to the growth rate. It can yield answers that are totally unrealistic if an

incorrect rate is used as input (Damodaran, 2002). Sasol‟s value will however be

determined using this model by estimating the future dividend payouts. The growth rates

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will not only be the long term growth rate, it will rather be a combination of the short

term rate as set out by analyst‟ predictions and the long term assumed growth rate. The

reason a combination of two or more periods are not used to determine the value of the

share is that Sasol is a mature company with a relatively fixed dividend cover policy

(Sasol annual financial results, 2010). If the growth in earnings can be accurately

forecasted, the dividend can also be determined accurately.

5.2 Discounted Free Cash Flow Model

Free cash flow models are based on the Capital Asset Pricing Model (CAPM). What

CAPM suggests is that asset specific risk is diversifiable and can be eliminated and hence

does not need to be compensated for (Damodaran, 2002). So the only risk which needs to

be compensated for is the non diversifiable risk which is the market risk. In this approach

the value of the company is based on its ability to generate future free cash flows that can

be used to either re-invest or be paid back to its investors. This value is then referred to as

the enterprise value and if the long-term liabilities are deducted then this produces the

equity value.

Hence the DCF valuation process thus consists of the following steps:

1. Estimate annual free cash flows over a specified period, commonly five years;

2. Estimate a cash flow realisable on termination at the end of the specified period;

3. Discount these cash flows using the weighted average cost of capital (WACC) to

derive the enterprise value; and

4. Deduct long-term liabilities to derive the equity value.

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5.2.1 Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE)

In order to determine the free cash flows that will be discounted to produce the enterprise

value, the net profit after tax is adjusted for the following:

1. Interest paid

2. Depreciation

3. Net capital expenditures (capital expenses less depreciation)

4. Non-cash working capital

Hence the cash flow to equity will be the net income of a firm less investment needs, with

depreciation and amortisation added back and less the change in net working capital. In

order to arrive at the equity value, consideration will also have to be given to the effect of

changes in the debt levels of the company. Paying off debt is a cash outflow, but the re-

issuing of debt is again a cash inflow (Damodaran, 2002). Thus:

FCFE = Net income – Capex + Depreciation – Change in noncash WC + New debt

– debt payments

If it is assumed that net capital expenses and working capital is financed by a fixed mix

between debt and equity, the formula can be written as (with δ equal to the proportion of

the Capex and WC that is raised from debt financing):

FCFE = Net income – (Capex – Depreciation) x (1-δ) – (∆WC) x (1-δ)

Thus the principle difference between FCFE and FCFF are the cash flows arising from

debt. For firms at their desired debt level, which finance their capital expenditures and

working capital needs with this mix of debt and equity and use debts to finance principle

repayments, the FCFF will exceed the FCFE. Sasol‟s debt level and the way it services its

debt repayments will be scrutinized in order to have a firm understanding of the impact

this debt structure will have on its valuation.

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To arrive at the value per share after the FCFF valuation, all non-equity items must be

subtracted from the firm value. All forms of debt, long and short term, as well as issues

such as expected liabilities, unfunded pension obligations and deferred tax should also be

subtracted in order to arrive at the value of equity. The equity value is then divided by the

amount of shares in issue. If share options exist in a company (of which a fair amount

resides in Sasol) these option values will have to be considered and also subtracted from

the equity value as they might and will influence the share price if exercised.

5.2.2 Weighted Average Cost of Capital

The WACC is determined by taking the risk free rate that investors would expect to

receive on their investment and adding to this the risk assumed by those same investors

for investing in a particular asset. The second portion varies depending on the type of

asset; the first portion is usually the same for a specific environment (i.e. a country).

The WACC is defined by the following equation (Damodaran, 2002):

PSDE

PSCostratetax

PSDE

DCost

PSDE

ECostWACC stockpreferreddebtequity

.).1(

Where

WACC = Weighted average cost of capital

E = Equity

Debt = Interest bearing liabilities

PS = Preferred stock

5.2.3 Cost of equity

The cost of equity is a factor of the risk free rate, the risk premium of a firm and the

relative volatility of that firm when compared to the equity market as a whole. The cost

of equity for a company (or in this case a division within Sasol) can be expressed as

follows:

)..()..( premiumriskCountrypremiumriskEquityRCost fequity

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5.2.4 Risk free rate

The most basic risk that has to be determined in most valuation exercises is the risk free

rate. The expected returns on an investment (that is assumed to have some type of risk,

i.e. it is very unlikely to be risk free) will be measured with the risk free rate plus some

risk premium. In order to determine what this risk free rate is, an asset has to be selected

that is truly risk free. Two conditions have to be met in order to fulfil this requirement:

1. There can be no default risk – Any corporate or firm has some kind of risk, therefore

governments are the only entity whose assets can be classified as risk free. The return

rate of treasury bills (of a specific country) is normally used to determine the risk free

rate. But even certain governments refuse to honour bills that were issued in previous

regimes. These are true for high risk countries and will not be applicable for Sasol or

other oil companies (who normally have the bulk of their operations in countries

where this risk will not materialize).

2. There can be no re-investment risk – When a return is made on an investment and that

return is again invested in another way where the return cannot be measured, the total

risk free rate condition does not hold. Therefore only zero-coupon rate government

bonds can be used and preferably for the same time over which the valuation is done.

Thus a zero coupon bond will be used to determine the risk free rate on a 5 year

future free cash flow or dividend forecast of a firm. In practice, using the expected

return of a bond that has a shorter or longer time span does not make a significant

difference to the risk free rate calculation (Damodaran, 2002).

5.2.5 Beta

Beta is a measurement of the performance of a specific investment versus that of the

market. The Beta of a share indicates the sensitivity of the share value to movements in

the market as a whole. Hence a share with a Beta=1 would move proportionately with the

market; a share with a Beta>1 would change in value by an amount greater than the

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change in the market; and a share with a Beta<1 would change in value by an amount less

than the change in the market (Damodaran, 2002).

Regression is most commonly used to determine a firm‟s beta. The returns of an

investment (in this case Sasol‟s returns on investment) are fitted against the overall

market return over specific time periods. A regression line is fitted through the data. The

slope of the line will correspond to the beta of the stock (Damodaran, 2002). Due to

Sasol‟s share having been traded for a reasonable amount of time on the JSE, the data

should represent the beta of Sasol relatively accurately. The regression fit or R2 of the

regression line gives an indication of how much of the firm‟s risk can be attributed to the

market risk, the balance (1 – R2) is the amount of the risk that is firm specific.

Another way to determine a firm‟s beta is to calculate a fundamental beta. The way in

which to do this is to find comparable firms to the ones that will be valued and unlever

the beta with the following formula:

firmscomparable

firmcomparable

essbu

Equity

Debtratetax

BetabetaUnlevered

.

.

sin

))(.1(1

.

An unlevered beta for the firm can then be calculated by adding the weighted value

(according to any parameter, but preferably the share value of earnings value of the

comparable firm) of all the firms together. The beta is then levered by the following

formula:

]))(.1(1[.. sinsinsin essbuessbuessbuEquity

DebtratetaxbetaUnleveredbetaLevered

This can be done for every division within Sasol, because due to their difference in

operating areas and risk, each will have a different beta.

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5.2.6 Equity risk premium

The risk premium can be described as what investors require the investment to deliver,

over and above the risk free rate. In practice, the way the risk premium is calculated is by

determining what the premium earned on the stock market is over the risk free rate. In

developed countries, this is the accepted and accurate way, but in countries where the

historic data on the stock market is not readily available for long periods or if the equity

market does not represent a significant portion of the country‟s economy, this is a

meaningless exercise. In Sasol‟s case and with South Africa‟s stock market being well

developed and containing a significant portion of the economy, the risk premium will be

relatively well represented with the average returns on the stock market. South Africa is

an emerging market, but does have an open trading system that should prevent

inequalities between the returns from the stock market and the real risk premium.

The risk premium is that portion of the rate that is used to discount cash flows to equity

that represents the risk that a specific firm or company brings to the valuation. It is the

portion that will be unique for every valuation and this is the point where most analysts

differ into what this number should be. The difference comes in where there is

disagreement into how to measure this risk. From Damodaran (2002), the expected risk

for any investment can be written as:

).(... premiumRiskratefreeRiskreturnExpected

5.2.7 Cost of debt

One scenario for estimating the cost of debt occurs when a firm has long term bonds

outstanding that are widely traded. The market price of the bond together with its coupon

and maturity can be used to calculate a yield that serves as the cost of debt (Damodaran,

2002). If a firm does not have bonds that are widely traded, the default spread of that firm

can be added to the risk free rate (Treasury bond rate). The default spread would be given

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by the specific rating a firm has. Figure 5 below reports the cumulative averages for

different rating categories for the period 1981 to 2007 (Standard & Poor‟s, 2007).

Time

horizon

(years)

AAA AA A BBB BB B CCC/C

1 0.0 0.0 0.1 0.2 0.8 6.3 25.6

2 0.0 0.0 0.2 0.5 2.5 12.7 34.1

3 0.1 0.0 0.3 0.9 4.6 17.8 39.0

4 0.2 0.1 0.4 1.4 6.5 21.3 41.9

5 0.3 0.2 0.6 2.0 8.4 23.8 44.5

10 0.7 0.7 1.7 4.4 14.6 30.4 49.8

15 0.8 1.1 2.6 6.5 17.3 35.0 52.5

Figure 5: Default credit ratings (S&P, 2007)

In Sasol‟s case, the cost of debt will be the same across all business units as the principle

borrowing takes place from head office and each division does not attempt its own debt

acquiring.

5.2.8 Cost of preferred stock

An additional component in the cost of capital is the cost of hybrid securities and in

Sasol‟s case this will be the cost of preferred stock. This cost can be expressed as the

dividend per share over the share price or:

sharepreferredperpriceMarket

shareperdividendeferredCost stockpreferred

....

...Pr.

If Sasol has convertible bonds, they will also be assessed and the cost of these bonds

determined. The cost of these bonds will be calculated by determining the equity portion

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and the debt portion. The two portions will be added to the equity and debt sections when

determining the total cost of capital.

5.2.9 Growth

Growth rates are probably some of the most contentious parameters to predict when

doing valuations. It is here where special precaution needs to be taken when adjusting

future estimates of growth rates based on previous results. Each division within Sasol will

be evaluated and the best approach decided on once the data can be observed.

5.2.10 Estimating terminal value

The terminal value of a firm will be valued as one that has stable growth into perpetuity

(with regards to free cash flow valuation). The terminal value is equal to the cash flow in

the last year of prediction (5 years after the current year) over the difference between the

cost of capital (if the value of the firm is determined) and the estimated growth rate into

perpetuity. If the value of equity is determined, the cost of equity will be used. This:

rategrowthCost

CashflowvalueTerm

capital ..

5.2.11 Sum of parts approach in discounted cash flow

As referred to earlier in this document, Sasol consists of a number of separate business

units. Each of these units can be viewed as a separate entity generating cash flow (that

can be used in the discounting cash flow methods) or having earnings or a book value

that can be used in relative valuation methods. The sum of these individual parts should

reflect a more accurate valuation than an individual valuation of Sasol as a whole.

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This approach is followed in valuing petroleum properties. Smith (2003) states that: If the

values of the separate petroleum properties are believed to be statistically independent,

then the single-property methods (DCF and relative) can be applied directly. The value of

the whole portfolio would equal the sum of the parts. To satisfy the independence

criterion, however, the outcome (i.e., net cash flow) of each property must be

uncorrelated with the others. If there are common economic risk factors (e.g., price and

cost levels) on which all the properties depend, their values are unlikely to be

independent. In Sasol‟s case, although the businesses are run separately with separate

boards of directors, there are factors that will be the same across the different businesses,

causing them not to be totally independent. However, these factors are not believed to be

significant enough to skew the valuation with this approach.

5.3 Relative valuation

5.3.1 Total company relative valuation

Relative valuation is considered to be the simplest and most popular valuation method

that is readily used in the market by analysts alike (Damodaran, 2002). The ratios applied

are relatively easy to obtain and a quick answer can be calculated using the information.

It is however due to its simplicity that it is also more likely to be inaccurate. The very

nature of comparing firms by the their respective ratios is a risk in that no two firms are

the same and therefore should not be viewed as being the same, but simply with different

share prices (Damodaran, 2002). Common multiples that are used are:

1. Earning multiples – Similar firms are identified and their price to earnings (PE ratio)

ratios determined. This ratio is then applied to the Sasol earnings.

2. Book value multiples – Some analysts prefer valuing a company on their worth (book

worth) and not what earnings they generate.

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3. Revenue multiples – Accountants have the ability to adjust earnings and book values

to reflect certain aspects of the business. Although this is of course not true to all

businesses, analysts prefer to use revenue to price ratios as the revenues or sales of a

business are more likely to be the raw un-manipulated data that can be used.

4. Cash flow multiples – Valuing a business based on its ability to produce cash flows is

another method of relative valuation.

5.3.2 Sum of parts approach in relative valuation

The sum of parts approach is also applied in the relative valuation section. Every business

unit (or groups of units with similar operations) are valued in comparison with another

company that is operating in a similar environment with similar products. This then

compares each division with its kind. Once a relative value for each division is

determined, they are added together to arrive at a value for Sasol as a whole. It is then

determined whether this approach yields a more accurate valuation result for the Sasol

share price.

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6. Data

Since the bulk of Sasol‟s operational activities still reside in South Africa, most of the

data that will be used to determine parameters for the valuation will be South African

based.

6.1 Data for the discounted dividend approach

For the dividend discount approach the cost of equity will be determined (used as

calculated in the next section) and the dividend growth. The dividend growth will be

estimated at a certain ratio to Sasol‟s earnings growth (dividend cover ratio). All this

financial data is obtained from Sasol‟s annual financial statements.

6.2 Data for the discounted free cash flow approach

6.2.1 Risk and growth parameters:

Johannesburg Stock Exchange returns – The average returns from the market will be

used to determine the equity risk premium (before beta adjustments). The All Share

Index (ALSI) will be used as a proxy for the market. Damodaran (2002) proposes

using the country in which a company has the bulk of its operations‟ share trading

market to determine the equity risk premium.

South African zero coupon bond rates – in order to determine the risk free rate for

South African companies

Growth outlook for South Africa – Reserve Bank forecast, linked to inflation targets

that will determine what will be a reasonable nominal growth rate into perpetuity.

Analysts‟ views on growth will contribute an important part of the forecasted growth

for Sasol.

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6.2.2 Financial data

Sasol‟s annual financial statements, for the group and per division is used to source

financial ratios and parameters and set out in the methodology section above. The group

results are made available to the public and are freely accessible. The financial

information per division is also found in the annual results. Financial results from 2000

up to the latest released results (released on 13 September 2010) are used.

The data from the stock exchanges will be on a daily frequency in order to determine the

most relevant returns. The bond rates and the financial results will be on a yearly basis.

In order to not only compare the current price with the valuations, the Sasol financial data

stretching back 5 years and going forward up to the last set of results will be used for the

valuation efforts. This is to have a set of values for the Sasol share price (for each of the

methods) and then establish a trend of results and compare it with the actual price. The

danger in this is that it has the possibility to create a massive amount of calculations

based on assumptions which are at best only fairly accurate. Thus, the assumptions made

for the Sasol share price valuation today, in terms of the parameters that will be discussed

in some detail below, will be kept as constant as possible through the 5 year period with

only the predictions varied where applicable. This is also done so that as little as possible

interference with the valuation method is experienced. Only where obvious changes in

the business entity would have necessitated a drastic change in the future assumptions for

the operation of that business will the assumption be made applicable to the valuation. It

is likely that such a major change would in any case change the valuation calculations for

most of the other methods as well (expect the comparable method, which is the simplest

method and does not take major changes in the business into account expect for earnings,

sales or book value).

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6.3 Data for the relative valuation approach

Sasol consists of different business units that each performs a different role or function.

Financial information on contribution to attributable earnings and cash flow from

operations is broken down per the following business units in the Sasol group:

1 Oil sector

2 Chemical sector

3 Coal mining sector

4 Gas sector

5 Support services sector

For each of these units, relative valuation parameters were obtained from I-Net Bridge.

Those that were not discussed in the Sasol Group relative valuation in section 7.3.5 are

listed in Appendix H (Coal mining, Gas and Support services). The relative parameters

for each of the years and for each of the sectors were taken as follows:

1. Oil sector – edited average of the four oil companies‟ (BP, Chevron, RDS and

EM) relative valuation parameters.

2. Chemical sector – edited average of the South African chemical industry‟s

relative valuation parameters. This was chosen rather than the DOW parameters

due to the more accurate valuation (when compared to the actual Sasol share

price) of the SA chemical industry compared to DOW Chemicals. This

comparison revealed an average offset from the actual Sasol share price for the

calculated share price of R47 for the SA chemical industry and an average offset

of R59 for DOW Chemicals. This comparison and calculation can be seen in

Appendix I.

3. Coal mining sector – the edited average of the South African coal mining sector‟s

relative valuation parameters were used.

4. Gas sector – Afrox‟s (a local gas company) relative valuation parameters were

used.

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5. Support services sector – the edited average of the South African support services

sector‟s relative valuation parameters were used.

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7. Empirical Investigation

7.1 Discounted Cash Flow Valuation

7.1.1 Gearing

Sasol‟s gearing ratio can be seen in Appendix A. Two measurements of gearing are

calculated: total debt over assets and interest bearing debt over market capitalisation plus

the interest bearing debt. The first measurement is used to determine what direction

Sasol‟s gearing strategy is pointing towards (as this is the gearing ratio that the company

has direct control over) and the second is used in the WACC calculation.

The first ratio has been steadily increasing over the past 3 years as Sasol made a

conscious decision to ungear its balance sheet in order to be more risk averse in times of

economic uncertainty. It is assumed for the purposes of the discounted cash flow

valuation that the target gearing band (debt/assets) will be 20% to 40%.1 Even though it is

assumed that ambitious projects will be taken on in the next 10 to 20 years, it is not

foreseen that the gearing ratio will move out of this regime. The gearing ratio used for the

WACC calculation has however moved from the 10% to 20% band into the 5% to 10%

band (with its lowest point in 2008 when Sasol‟s share price hit its record high). With

Sasol‟s growth ambitions over the next 10 to 20 years (Sasol Annual Financial Statement

2010, p 20), it is assumed that this ratio will increase towards the 20% mark as more debt

will have to be acquired in order to fund all the projects. For each of the valuation points

the average between the current ratio (at that point in time) and the 20% (interest bearing

debt to market cap) will be used. For 2009 and 2010 when the Sasol Inzalo share scheme

was initiated, the ratios associated with each cost element of the WACC changes slightly.

The preferred shares then also forms part of the capital, with the gearing ratio only

applicable to the cost of debt and the cost of equity.

1 Sasol actually moved into that band in the release of its latest set of results (FY10).

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7.1.2 Risk Free Rate

According to PWC‟s Valuation Methodology Survey (2010: p27): “The R157 continues

to be the most popular proxy for the risk-free rate. However, respondents indicated that

they are looking to change to other government bonds with longer maturity. The most

popular choices in this regard are the R207 and the R203 bonds.” In Figure 7.2 below the

specifics of these bonds plus some others can be seen. Since the purpose of this research

is not to do a valuation study of the Sasol share price, but rather to determine which

method is most accurate with the assumptions that are generally used by current analysts

who already incorporated these assumptions into their valuations, Geldenhuys and

Kushnir‟s assumed risk free rate of 8.5% was used in the discounted cash flow valuation

for the valuations in FY2010. For the valuations in history (past 5 years), Figure 7.1 with

the historic R157 yield (relative to 2010‟s yield of 8.5%) was used.

R157 historic yield

0%

2%

4%

6%

8%

10%

12%

14%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Figure 7.1: R157 historic yield (Sylvester, 2010)

The South African government bonds could be argued not to be completely risk free.

Political risk in particular plays a role in South Africa (where the bulk of Sasol‟s

operations are located). The risk free rate of 8.5% however includes the country risk as it

will be assumed in the coupon rate and yield to date of the government bond due to the

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government rewarding of the holder of the coupon for the country‟s risk profile

(willingness to invest despite an element of country risk involved).

Figure 7.2: RSA coupon bonds (PWC‟s Valuation Methodology Survey, 2010)

7.1.3 Cost of debt

In determining the cost of debt, the BBB default credit spread that Sasol obtained from

the Standard and Poor‟s rating agency is used with the risk free rate. As discussed in the

Methodology section 5.2.7 a specific risk (based on the company‟s default credit risk

rating) can be added to the risk free rate to determine the cost of debt. In Sasol‟s case

with the BBB rating and according to Figure 5, this additional risk is deemed to be 2%.

Hence the calculated (after tax) cost of debt was calculated and is shown below in figure

7.3. The changing corporate tax rate in South Africa over the past 10 years was also

included in the calculation.

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Risk free

rate

Tax

rate

After tax cost of

debt

2000 12.0% 30% 9.8%

2001 11.0% 30% 9.1%

2002 10.3% 30% 8.6%

2003 9.0% 30% 7.7%

2004 8.0% 30% 7.0%

2005 7.0% 29% 6.4%

2006 7.5% 29% 6.7%

2007 8.5% 29% 7.5%

2008 7.0% 29% 6.4%

2009 8.0% 28% 7.2%

2010 8.5% 28% 7.6%

Figure 7.3: After tax cost of debt

7.1.4 Beta

Sasol‟s historic Beta is calculated at 1.08 according to Standard Bank Analyst Review

(p2). Geldenhuys and Kushnir (2010) use a Beta of 1.1 in their study. The latter is chosen

as input into the WACC calculations. The calculated betas are probably different due to

different calculation techniques and assumptions in the calculations. The Standard Bank

Analyst Review did not include a valuation on Sasol, thus the latter beta is chosen for

further use in this study as it has been specifically applied to Sasol in Geldenhuys and

Kushnir‟s review.

7.1.5 Equity Risk Premium

The following approach to calculating historical risk premiums is suggested as it does not

require historical data or corrections for country risk. The method is suggested because of

the various problems associated with calculating historical risk premiums. This method,

based on the Gordon model, assumes that the overall market is correctly priced (Luüs,

2004).

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Dividends next periodEquity Risk Premium

Return on equity Expected dividend growth rate

Luüs, (2004) used this approach with market data from the Johannesburg Stock Exchange

All Share Index to calculate a return on the JSE of 11.8%. He also calculated a risk free

rate for South Africa at 8.4%, which derives a South African equity risk premium of

3.4%. This calculation however depends on what the assumed growth rate of the dividend

returns on the market will be into the future. According to Geldenhuys and Kushnir

(2010), the South African equity risk premium is 4.5%. Hence Luüs (2004) thus assumed

a higher dividend growth for the JSE ALSI since the risk-free rate is relatively

unchanged. In this empirical analysis, the equity risk premium was set at 4.5%.

7.1.6 Cost of Preferred Stock

If the equation in section 5.2.2 is used, with a preferred dividend per share of R2.80 and

the market price per preferred share R274 per share at year end, then a cost of preferred

stock of 1.1% is derived. This figure will be used in the WACC calculation for 2009 and

2010 when the Sasol Inzalo share issue transaction was initiated. Before that, the number

of preference shares is assumed to be insignificant, which can be deemed to be

reasonable since none of the analyst reports (Geldenhuys and Kushnir, 2010, Comer, or

Zacks) made any mention of preference shares in their WACC calculations for valuation

purposes.

7.1.7 WACC calculation

Using the formula in section 5.2.2 and the inputs as described in the previous sections the

WACC is calculated for each of the financial years ending in June of 2006, 2007, 2008,

2009 and 2010.

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A summary of the results are presented in Figure 7.4 below (The long term growth

number is discussed in the next section):

2006 2007 2008 2009 2010

Gearing 14.8% 15.7% 13.1% 15.0% 14.1%Cost of debt 6.7% 7.5% 6.4% 7.2% 7.6%Risk free rate 7.5% 8.5% 7.0% 8.0% 8.5%Beta 1.1 1.1 1.1 1.1 1.1Equity risk premium 4.5% 4.5% 4.5% 4.5% 4.5%Cost of equity 12.5% 13.5% 12.0% 13.0% 13.5%Cost of pref shares 1.1% 1.1% 1.1% 1.1% 1.1%Weight of equity 85.2% 84.3% 86.9% 82.1% 83.5%Weight of debt 14.8% 15.7% 13.1% 9.1% 7.7%Weight of pref shares 0.0% 0.0% 0.0% 8.7% 8.8%WACC 11.61% 12.51% 11.22% 11.39% 11.91%Long trem growth 2.15% 2.15% 2.15% 2.15% 2.15%

Figure 7.4: WACC for Sasol Group

7.1.8 Growth opportunities

The discounted cash flow valuation has included a long term growth rate based on those

used by Geldenhuys and Kushnir, 2010, and Comer 2010, which is 2.15% (the average of

the two papers). However, for the specific earnings growth in the 5 years of the

forecasted cash flows, a growth rate based on the historic financial performance was

calculated at follows:

If years 2010 and onwards are included in a specific year‟s forecast, the analysts‟ views

(Geldenhuys and Kushnir, and Comer) for forecasted growth is used. For years before

2010 that are included in a specific year‟s forecast, the actual earnings for those years as

per the yearly Sasol financial statements (2006 to 2010) are used. The exception to this

rule is when a severe turn in the economic market could not have been expected. This

means that if earnings was growing in the previous year, more or less the same growth is

used going forward and a severe slump in fortunes is not forecasted. For details around

the earnings growth forecasts see Appendix E.

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For this research paper to be able to determine whether the specific valuation method is

accurate, it must be assumed that the earnings and other line entries into the discounted

cash flow (depreciation and amortisation, capital expenditure, working capital changes

and tax paid) can be forecasted accurately. The Income Statement (Appendix B) is used

to forecast expenditure items in the free cash flow calculation. In this way the anomalies

of inaccurate forecasting from one individual to the next is removed. The exception to

this method will be in years where the last released financial results has a defining impact

on the way the forecasting for the earnings into the future would have been made. Very

few analysts would have predicted the economic recession in 2008/2009 and even fewer

would have incorporated a massive slump in earnings for Sasol. In the specific years

where these conditions were relevant, the 10% assumed growth in earnings was used.

The results with all the assumptions and methods set out above can be seen in Appendix

E. The graphical representation is shown in the final valuation comparison and discussion

in section 7.2.

7.1.9 Discounted Cash Flow – Sum of Parts Approach

As discussed earlier in the literature review and methodology sections, doing a valuation

on the Sasol share price using a sum of parts approach is because Sasol consists of

business units that can each be valued on their own. Each of these units has different

aspects influencing valuation methods. When a valuation is done separately on these

units and added back together it will yield a different value for the total Sasol share price,

compared to the valuation done for the Sasol group in the previous section. The aim of

this study is to determine whether following the sum of parts approach yields a more

accurate valuation of the Sasol share price than when undertaken for the Sasol group. The

approach that will be followed is to use the Sasol group DCF valuation as a base case,

breaking the case down into separate parts (sectors), to change parameters within those

separate parts, value each sector individually and add the sectors back together to produce

a sum of parts.

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7.1.9.1 Industry Grouping

Sasol‟s financial statements segregate the company into the following sectors: Mining,

Gas, Oil, Synfuels, Synfuels International, Petroleum International, Chemical Cluster and

Other Business (Support Services). Synfuels, Synfuels International and Petroleum

International are all oil industry related. This produces five well defined sectors, which

will be used to produce the sum of parts approach:

1. Oil sector

2. Chemical sector

3. Coal mining sector (all Sasol mining is coal mining)

4. Gas sector

5. Support services sector

7.1.9.2 Weighted Average Cost of Capital

The WACC equation used in the sum of parts analysis is the same as that used in the

discounted cash flow calculations. Although the risk free rate could be argued to be

different due to the operations of some of the chemical sectors of Sasol residing in

countries outside of South Africa, the risk-free rate was left unchanged since regional

risk-free rates were not readily available (see further study recommendations in chapter

10). However, the betas of the different industry sectors were obtained in order to

recalculate the WACC for each industry in each year (using the group valuation as the

base). The defined industries and their betas are as follows (Anthony, 2007):

1. Oil sector 0.90

2. Chemical sector 0.75

3. Coal mining sector 1.01

4. Gas sector 0.69

5. Support services sector 0.71

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The calculated WACC for each industry for each year can be seen in Appendix J.

7.1.9.3 Free cash flow and Share price valuation

In order to determine the free cash flow for each sector for each year, the earnings and

expenditures for each of these industries were determined. The financial information

from the Sasol yearly financial statements does however not indicate each industry‟s

contribution directly. Indicators are available though from which this information can be

derived.

EBIT – The operating profit (EBIT) is available for each of the industries defined

above;

DandA – The depreciation and amortisation for each of the defined industries is

available;

Changes in Working capital – Changes in working capital is assumed to be aligned

with a sector‟s revenue. Revenues for all sectors are available and are used to

determine what each sector‟s contribution is towards changes in working capital

Capital expenditure – Capex for all sectors are available

Tax – Tax contributions for each sector is assumed to be aligned with a sector‟s

operating profit. The EBIT contribution percentage is thus copied to the tax

contribution.

For each of the years under investigation (2006 through to 2010), the base case valuation

(Sasol group) is thus broken down into the five different sectors. The sector‟s EBIT,

DandA, net WC, Capex and Tax are then calculated with the contribution percentages

through the specific years as defined above. For the years post 2010, the contribution in

2010 to each of the line entries was taken as the forecasted split into the future forecasted

earnings, DandA, net WC, Capex and Tax.

The free cash flow is calculated by adding up all the line entries (as done previously with

the group valuation) and the terminal value is determined for each of the sectors. All the

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free cash flows and well as the terminal value are then discounted by the industry specific

WACC and the sum of these discounted cash flows equals the industry specific present

value (PV).

The present values of all five industries are added up to calculate the sum of parts PV.

From this PV the company debt and minority interest are subtracted and the result

divided by the number of shares in issue to give the calculated sum of parts DCF Sasol

share price valuation.

7.9.1.4 Alternative Approaches - Splitting the Sector Parameters

A sensitivity analysis was undertaken in order to determine the effect of forecasting the

parameters that make up the free cash flow differently than set out in section 7.1.9.3.

These parameters (EBIT, DandA, Capex, net WC and Tax) are calculated in the

following two ways for the years of the valuation (2006 through to 2010):

The average contribution to total earnings and expenses for each of these parameters

is calculated and this average used as the forecast for their contribution going

forward.

The contribution in 2010 is used as the forecast going forward.

The results of the DCF sum of parts approach with each sector‟s free cash flow,

discounted cash flow, present value and calculated share price can be seen in Appendix

K. The results of the DCF sum of parts valuation is discussed in the next chapter.

7.2 Dividend discount approach – dividend growth model

Sasol has a dividend payout philosophy of having 2.5 to 3.5 times the cover in earnings to

the dividend paid out (Sasol annual financial results 2006 and 2009). A similar approach

to that of the discounted cash flow model will be followed to forecast future earnings.

The forecast in each year will ignore future Sasol results and forecast earnings with only

financial information available up to that year. This together with the cost of equity and

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the growth rate of the company (in terms of dividend growth) is used as input to the

equation set out in section 5.1 above. The dividend cover ratio was set at 3 for all the

calculations in this model, being the mid-point of the known range. The cost of equity in

each year was calculated in section 7.1.1.7.

The growth rate assumed for the dividend payout going forward is a combination of the

long term growth rate (assumed to be 2.15% in the Discounted Cash Flow model) and

Sasol‟s aim of 10% growth in earnings year on year. Hence a conservative growth rate of

5% was assumed. The only outstanding element of the model is then the forecasted

dividend in the next year. Due to the dividend cover policy, the earnings for the next year

thus need to be accurately forecasted. In order to provide a basis of comparison, the same

earnings growth used in the Discounted Cash Flow model was used in the dividend

discount calculations.

The full dividend growth model approach calculation and set of results can be seen in

Appendix F. A summary of the results can be seen in below in Figure 7.5. The graphical

representation is shown in the final valuation comparison and discussion in section 7.3.

The sensitivity of the model was tested and the dividend cover and growth was adjusted

until it fitted 2006‟s actual share price quite well. This was at 8.25% growth and a

dividend cover of 2.5 (lower limit of Sasol‟s range that is mentioned in the annual

financial reports. When using these as inputs, a significantly more accurate number is

obtained (relative to the actual price). It is however highly unlikely that the dividend will

keep on growing with 8.25% into infinity. With the fixed dividend cover ratio policy, this

means the earnings also have to grow at these rates.

2006 2007 2008 2009 2010

Sasol year end share price 275.0 266.0 461.0 270.0 274.6Valuation with Dividend growth (5% growth and dividend cover ratio of 3 ) 121.0 140.8 202.5 116.8 132.4Valuation with Dividend growth (8% growth and dividend cover ratio of 3 ) 202.6 218.3 356.3 187.6 205.3Valuation with Dividend growth (8.25% growth and dividend cover ratio of 2.5 ) 257.6 274.6 456.5 237.1 258.2

Figure 7.5: Dividend growth model approach valuation of Sasol share price

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7.3 Relative valuation

7.3.1 Data availability

Ideally, ratios for the share prices of all companies (that could in some way be compared

to some division of Sasol) to all financial parameters possible must be available. This

would make comparisons across all company parameters possible. In reality however,

only certain financial parameters are included in a ratio with a company‟s share price. For

South African companies, the data was sourced from I-Net Bridge and for international

(specifically oil) companies the data was extracted from http://ycharts.com. For both the

Sasol Group and the sum of parts valuation all possible ratios that are available were

used. However, there are a few instances of omitted variables: the price per revenue ratio

could only be used for Sasol group valuation as there was no price per revenue

comparables for different companies. The price per book ratio was also only applicable to

the Sasol Group relative valuation, because Sasol does not state a specific book value

(equity value) for each of its different business units. This had no impact on the

valuation validity or accuracy; it just limited the study‟s ability to compare ratios for the

valuation of Sasol as a whole and the sum of parts approach.

For relative valuations of each of the different business units, only the price per earnings

ratio is readily available for different companies that can be compared to the individual

Sasol business units. The price per cash flow ratio for oil companies could however be

calculated using the cash flow from operations for each of the oil companies mentioned

above together with the share price in that particular year (years that are used for the

valuation, 2006 to 2010).

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7.3.2 Data Preparation

The data obtained for the different companies on the JSE that served as proxies for the

different business units in the Sasol sum of parts calculations had missing data for certain

years. For all the sets of data, the input multiples were determined by averaging the

multiples for all the companies in that specific group in the year of valuation (2006

through until 2010). However, after the specific multiple for the specific year in a specific

industry (i.e. oil companies, chemical companies and coal mining companies) was

calculated, an edited version was also created. This is done in order to eliminate outliers

in the data that can cause inaccurate valuation.

In cases where at least four data entries existed for a specific multiple in a year, the

highest and lowest number was disregarded and only the average of the rest of the inputs

was taken. In cases where less than four entries existed, any number differing by more

than 50% of the average was also disregarded. Wherever negative values existed, these

were also disregarded. Lastly, any clear outliers (high or low) differing substantially from

the other numbers in that year were also eliminated. This is the kind of thought processes

that would have existed when a relative valuation for a company was done at any time

from 2006 until 2010 (and any other time period for that matter). This is not considered

biased data manipulation as any negative parameter or a parameter that is clearly (for

whatever reason) out of sync with other similar companies‟ parameters would not be

considered for valuation purposes. All of this is done in order to be able to compare a

relative valuation based on raw data to a valuation based on data where outliers have

been removed.

Editing the data for oil companies had a smaller effect on the valuation accuracy of the

international oil companies than the small capital companies used in the relative

valuation. The reason for this is possibly due to the more stable price, earnings, revenue

and book value of the large capital companies compared to others, making their financial

ratios also more stable. The data for all the companies used for relative valuations can be

seen in Appendix G.

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7.3.3 Relative Valuation – Comparable to a single company

When valuing the Sasol Group using relative valuation, the inputs to the valuation

calculation are the specific ratios relating the companies‟ (that Sasol is being compared

to) share price to their earnings, book value, cash flow and revenue. In a South African

context, listed oil and gas companies are scarce. According to I-Net Bridge, the only

other comparative companies are Oando and Sacoil, and neither of these is found to be

comparable to Sasol.

Thus the four largest international oil companies namely British Petroleum (BP),

Chevron, Royal Dutch Shell and Exxon Mobil was chosen as comparable to Sasol.

In Figure 7.6 below the baseline parameters of Sasol (the value that must be multiplied by

the proxy‟s multiple in order to obtain a calculation of the Sasol share price) can be seen.

These are obtained directly from the Sasol financial year end statements (2006 through to

2010).

2010 2009 2008 2007 2006

Sasol share price (Rand) 274.60 269.98 461.00 266.00 275.00Sasol shares in issue (million) 667.70 665.90 676.70 627.70 683.00Headline earnings per share (Rand) 26.57 25.42 38.08 25.37 22.93Sasol Revenue per share (Rand) 183.10 206.99 192.02 156.33 120.64Sasol Book value per share (Rand) 141.88 125.90 116.74 100.79 77.58Sasol Cash flow from operations per share (Rand) 46.07 55.86 62.28 47.30 41.41

Figure 7.6: Sasol baseline financial parameters used in relative valuation

All the raw data for relative valuations for all the companies used as proxies for the

valuation can be seen in Appendix G.

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7.3.4 Valuation of Sasol as an Oil Company

Figure 7.7 presents the average international oil company segmental ratios. The first

section is the average of the four international oil companies‟ parameters and the second

section is the edited version as discussed in Section 7.3.2. This indicates the stabilising

factor that editing the data has on the ratios used for valuation, eventually increasing the

accuracy of the valuation.

Average oil company 2010 2009 2008 2007 2006

Price / Book Value 1.67 1.89 2.07 2.91 2.77 -Price / Earnings 9.95 16.40 8.88 13.10 11.87 -Price / Share 51.46 47.42 69.30 75.46 64.83 US$Price/Revenue 0.67 0.81 0.59 0.95 0.83 -Cash from operations 7.92 3.29 7.88 8.19 8.59 billion US$Revenue 77.98 58.78 115.31 78.11 77.29 billion US$Price/cash from operations 6.37 23.47 8.76 9.10 7.44 -

Average oil company (edit) 2010 2009 2008 2007 2006


Figure 7.7: Oil company relative valuation parameters

Figure 7.8 presents the results of the valuation of the Sasol share price using the

parameters as set out in Figure 7.7 above (the results are discussed in Chapter 8).

Sasol group share price valuation (oil) 2010 2009 2008 2007 2006

Using Price / Book Value multiplier 158.44 158.03 163.52 183.80 146.77Using Price / Earnings multiplier 265.33 375.45 331.32 358.29 199.22Using Price/Revenue multiplier 81.91 111.30 76.02 92.73 68.18Using Price/cash from operations multiplier 196.10 872.80 369.29 270.08 210.31

Sasol group share price valuation (oil - edit) 2010 2009 2008 2007 2006

Using Price / Book Value multiplier - (Rands) 152.99 144.62 139.43 167.35 135.90Using Price / Earnings multiplier - (Rands) 264.27 494.53 343.35 372.92 230.47Using Price/Revenue multiplier - (Rands) 84.97 106.13 59.12 80.46 61.38Using Price/cash from operations multiplier - (Rands) 184.69 1032.50 372.66 220.83 203.99

Figure 7.8: Sasol share valuation using oil company parameters

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7.3.5 Valuation of Sasol as a Chemical Company

Figure 7.9 below presents the international chemical company ratios. The first section is

the average of the six companies‟ parameters and the second section is the edited version

as discussed in Section 7.3.2.

Average Chemical parameters 2010 2009 2008 2007 2006

Price / Book Value 1.30 2.03 2.71 2.43 3.07Price / Cash From operations 5.42 5.49 5.63 8.06 1.33Price / Earnings 43.32 11.73 10.16 12.55 6.83

Average Chemical parematers (edited) 2010 2009 2008 2007 2006

Price / Book Value 1.30 1.46 2.48 2.43 3.07Price / Cash From operations 5.42 4.38 5.63 8.06 6.29Price / Earnings 11.85 11.73 10.16 12.55 10.10

Figure 7.9: Chemical company relative valuation parameters

In Figure 7.10 below DOW Chemicals‟ relative valuation parameters can be seen.

DOW 2010 2009 2008 2007 2006

Price / Book Value 1.29 0.89 1.61 2.36 2.23 -Price / Earnings 14.2 -2.13 12.83 12.28 9.25 -Price / Share 7.22 4.41 8.99 11.15 9.88 US$Price/Revenue 0.53 0.39 0.55 0.84 0.79 -Cash from operations 1.3 0.14 0.969 1.43 1.24 billion US$Revenue 13.62 11.32 16.35 13.27 12.51 billion US$Price/cash from operations 5.55 31.53 9.28 7.79 7.97 -

Figure 7.10: DOW Chemicals relative valuation parameters

Figure 7.11 and Figure 7.12 present the results of the valuation of the Sasol share price

using the ratios from Figure 7.9 and Figure 7.10 (the results are discussed in Chapter 8

below).2

2 When using DOW Chemicals as a proxy, the 2009 price to earnings parameter had to be adjusted due to

the negative earnings DOW posted in that year. For only that data entry, the AECI chemicals company‟s

price to earnings ratio was used (in 2009).

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Sasol group share price valuation (SA Chemical) 2010 2009 2008 2007 2006

Using Price / Book Value multiplier - (Rands) 122.68 170.32 213.92 154.00 162.79Using Price / Earnings multiplier - (Rands) 1155.64 268.54 379.04 343.30 114.61Using Price/cash from operations multiplier - (Rands) 166.58 204.13 237.10 239.31 37.69

Sasol group share price valuation (SA Chemical edit) 2010 2009 2008 2007 2006

Using Price / Book Value multiplier - (Rands) 122.68 122.40 195.64 154.00 162.79Using Price / Earnings multiplier - (Rands) 316.16 268.54 379.04 343.30 169.48Using Price/cash from operations multiplier - (Rands) 166.58 162.98 237.10 239.31 177.91

Figure 7.11: Sasol share valuation using chemical company parameters

Sasol group share price valuation (DOW) 2010 2009 2008 2007 2006

Using Price / Book Value multiplier - (Rands) 183.02 112.05 187.94 237.88 172.99Using Price / Earnings multiplier - (Rands) 377.29 331.25 488.57 311.54 212.10Using Price/Revenue multiplier - (Rands) 97.04 80.73 105.61 131.32 95.30Using Price/cash from operations multiplier - (Rands) 255.82 1761.35 577.96 368.71 330.05

Figure 7.12: Sasol share valuation using DOW chemical‟s parameters

7.3.6 Relative Valuation of Sasol using the Sum of Parts Approach

The data on how to determine the sum of parts financial parameters are discussed in

section 6.3. For the price per earnings and the price per cash flow relative valuations, the

weighted average parameter (to multiply the Sasol earnings or Sasol cash flow with) was

determined. This was done by multiplying the relative parameter with the fraction of the

earnings or cash flow for that sector. For instance, the calculated price/earnings ratio for

coal mining in 2010 is multiplied by the earnings from coal mining in 2010. All these

weighted fractions are then added up to yield a weighted average price per earnings ratio

(sum of parts) for 2010. The same is done for previous years as well as for the price per

cash flow parameters. In 2010, the Gas industry was assumed to be the same as the

chemical industry, because the Afrox 2010 results were not yet available. In 2009 the

weighted average had to be adjusted due to the negative earnings posted by the chemical

industry. The negative earnings had the effect that the calculated price to earnings ratio

was much higher than the contributor of 130% of the earnings for that year (Synfuels).

For this reason the ratio was taken as that of the calculated oil industry ratio for the year

in question. A summary of the results can be seen in Figure 7.13 below. The results are

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laid out in columns (for each year of valuation) and in rows (for each industry‟s

contribution to the weighted average of the sum of parts price to earnings and the sum of

parts price to cash flow multiplier). The results are discussed in the next chapter.

Contribution to earnings

Sector

Sector

P/E ratio

Earnings

(Rm)

Sector

P/E ratio

Earnings

(Rm)

Sector

P/E ratio

Earnings

(Rm)

Sector

P/E ratio

Earnings

(Rm)

Sector

P/E ratio

Earnings

(Rm)

Mining Coal mining 25.12 567 23.15 1163 18.40 1053 19.47 814 7.48 813Gas Gas 11.85 1402 29.16 1344 17.43 904 21.70 1163 15.83 842Synfuels Oil 9.91 8907 13.03 17643 11.51 13582 11.92 11076 13.74 9278Oil Oil 9.91 642 13.03 -353 11.51 2765 11.92 1037 13.74 1390Other Oil 9.91 -25 13.03 -169 11.51 -53 11.92 0 13.74 0Synfuels International Oil 9.91 504 13.03 -505 11.51 -189 11.92 -653 13.74 -366Petroleum International Oil 9.91 -53 13.03 352 11.51 507 11.92 -73 13.74 266Chemical cluster Chemical 11.85 4476 11.73 -2773 10.16 5627 12.55 3922 10.10 -1441Other businesses SS 8.22 -479 8.22 -3054 7.78 -1779 10.10 -256 10.15 -376Total 15941 13648 22417 17030 10406Weighted Average 11.21 13.03 12.03 13.12 14.05Sasol earnings per share 26.57 25.42 38.08 25.37 22.93Sasol share price 274.6 269.98 461 266 275Relative valuation sum of parts 298.0 331.2 458.1 333.0 322.1

Cash flow from operations

Sector

Sector

P/C ratio

Earnings

(Rm)

Sector

P/C ratio

Earnings

(Rm)

Sector

P/C ratio

Earnings

(Rm)

Sector

P/C ratio

Earnings

(Rm)

Sector

P/C ratio

Earnings

(Rm)

Mining Coal mining 10.59 1727 5.39 2437 2.13 2097 11.03 1819 9.66 1896Gas Gas 5.42 2793 11.02 2778 10.11 2193 12.65 1863 14.03 1724Synfuels Oil 6.00 15754 8.61 27346 8.84 20062 7.44 16553 7.21 14351Oil Oil 6.00 1917 8.61 393 8.84 5998 7.44 2796 7.21 3077Other Oil 6.00 -25 8.61 -170 8.84 -53 7.44 0 7.21 0Synfuels International Oil 6.00 -349 8.61 1113 8.84 1168 7.44 540 7.21 561Petroleum International Oil 6.00 864 8.61 1340 8.84 1238 7.44 554 7.21 915Chemical cluster Chemical 5.42 7937 4.38 2545 5.63 9144 8.06 5758 6.29 4573Other businesses SS 5.00 144 3.66 -588 4.40 297 9.04 -192 6.88 1187Total 30762 37194 42144 29691 28284Weighted Average 6.05 8.37 7.85 8.10 7.63Sasol cash flow per share 46.07 55.86 62.28 47.30 41.41Sasol share price 274.6 269.98 461 266 275Relative valuation sum of parts 278.8 467.5 488.6 382.9 315.9

2006

2010 2009 2008 2007 2006

2010 2009 2008 2007

Figure 7.13 Sum of parts relative valuation

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8. Results discussion

8.1 Summary of results

Twenty seven different valuation approaches were undertaken in total, including four

discounted free cash flow valuations, three dividend growth valuations and twenty

relative valuations. The complete list with valuation results and comparable accuracies

are presented in Appendix L (grouped per valuation method).

The results varied substantially in accuracy, with the most accurate method valuing the

Sasol year end share price with an error of only 5.4% (around R16 per share), whilst the

most inaccurate method was off by 130%.

In the table below the most accurate valuation methods (as calculated by this study) are

listed:

2010 2009 2008 2007 2006

Average offset from spot price

Percentage offset

Sasol year end share price 275.0 266.0 461.0 270.0 274.6 0 0

Sasol average share price in June 280.97 291.46 468.06 258.90 249.37 14.96 5.3%DCF SOP share price (last 5 years average split) 277.48 270.02 498.51 242.65 257.83 17.62 5.4%

DCF SOP share price (split every year) 277.48 270.02 498.47 242.62 257.79 17.63 5.4%Valuation with Dividend growth (8.25% growth and dividend cover ratio of 2.5 ) 257.58 274.59 456.48 237.11 258.22 15.96 5.7%

DCF SOP share price (2010 average split) 285.365 278.47 512.248 250.502 267.038 20.22 5.9%Using Oil (edited) Price / Earnings multiplier (Rands) 264.265 298.387 429.323 326.103 230.473 35.01 12.0%

DCF Group share price 237.204 227.314 437.787 214.597 225.13 40.91 14.4%Using Sum of Parts Price / Earnings multiplier - (Rands) 297.95 331.22 458.09 332.95 322.13 40.32 14.8%

Figure 8.1: Most accurate valuation methods

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8.2 Discounted cash flow valuation – Sasol group and sum of parts

Below is a summary of the valuation results for the DCF approach:

2010 2009 2008 2007 2006


Percentage offset

Sasol year end share price 275.0 266.0 461.0 270.0 274.6

DCF Group share price 237.20 227.31 437.79 214.60 225.13 40.91 14.4%

DCF Sum Of Parts share price (2010 average split) 285.37 278.47 512.25 250.50 267.04 20.22 5.9%

DCF Sum Of Parts (last 5 years average split) 277.48 270.02 498.51 242.65 257.83 17.62 5.4%

DCF Sum Of Parts share price (split every year) 277.48 270.02 498.47 242.62 257.79 17.63 5.4%

Figure 8.2: DCF Valuation summary

A peak in all the prices (actual and calculated) occurs in 2008 due to the exceptional high

oil price at that stage, driving up actual earnings and forecasted earnings. Due to earnings

being such a strong driver of value for Sasol, the peak occurred. The dip in prices and

calculated prices in the next year was due to the world wide recession.

Discounted Cash Flow Valuation

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2005 2006 2007 2008 2009 2010 2011

Sasol year end share priceDCF Group share priceDCF Sum Of Parts share price (2010 average split)DCF Sum Of Parts (last 5 years average split)DCF Sum Of Parts share price (split every year)

Figure 8.3: Discounted cash flow summary

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The DCF approach for the group resulted in valuations that were constantly lower than

the actual share price. However, when applying the sum of parts approach with the free

cash flow split (EBIT, DandA, net WC, Capex and Tax) taken as the 2010 values, the

percentage difference reduced from 14.4% to 5.9%. When the average split into the free

cash flow entries of the last 5 years was used instead the difference between the actual

share price and hypothesised share price decreased to 5.5%.

8.3 Dividend discount approach

When using a growth rate of 5% and a dividend cover ratio of 3 (as discussed in Section

7.2), the calculated share price is considerably lower than the actual share price for the

years of 2006 through to 2010. When adjusting the growth rate forecast and the dividend

cover ratio in order to more accurately fit to a least one data point, the overall valuation

accuracy increased considerably. A graphical representation of the results can be seen

below in figure 8.4.

Dividend growth model summary

0

100

200

300

400

500

2005 2006 2007 2008 2009 2010 2011

Date

Sh

are

pri

ce

Sasol year end share priceValuation with Dividend growth (8% growth and dividend cover ratio of 3 )Valuation with Dividend growth (8.25% growth and dividend cover ratio of 2.5 )Valuation with Dividend growth (5% growth and dividend cover ratio of 3 )

Figure 8.4: Summary of Dividend growth model results

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8.4 Relative valuation Sasol Group and sum of parts

Relative valuation remains the simplest of the methods used in this analysis and thus

suffers from the broadest array of results, ranging from relatively accurate (using price

per earnings from oil companies as a proxy) to results that are significantly inaccurate.

8.4.1 Oil Companies as a Proxy

The price per earnings ratio is the most common relative valuation ratio used and yielded

the most accurate results when used in this study, resulting in a difference between the

actual share price and hypothesised share price of 12%.

2010 2009 2008 2007 2006


Percentage offset


Using Oil Price / Earnings multiplier (Rands) 265.33 375.45 331.32 358.29 199.22 82.50 26.6%

Using Oil (edited) Price / Earnings multiplier (Rands) 264.27 298.39 429.32 326.10 230.47 35.01 12.0%

Using Oil Price/cash from operations multiplier (Rands) 293.69 1310.71 545.72 430.26 307.93 268.34 97.9%

Using Oil (edited) Price/cash from operations multiplier (Rands) 276.61 481.05 550.70 351.80 298.67 82.45 28.0%

Figure 8.5: Oil company relative valuation - table

Due to the economic recession in 2009, many companies were under pressure financially.

In particular their cash flows were significantly reduced, most likely due to customers

unable to commit to payments within that year. The relevant share prices did however not

adjust in the same significant way (downward) with the lower cash flows, thus the price

to cash flow ratios were unrealistically high for some companies.

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Relative valuation as an oil company

0

200

400

600

800

1000

1200

1400

2005 2006 2007 2008 2009 2010 2011

Sasol year end share priceUsing Oil Price / Earnings multiplier (Rands)Using Oil Price/cash from operations multiplier (Rands)Using Oil (edited) Price / Earnings multiplier (Rands)Using Oil (edited) Price/cash from operations multiplier (Rands)

Figure 8.6: Oil company relative valuation - graph

8.4.2 Chemical Companies as a Proxy

DOW Chemicals and an average of the chemical companies on the JSE were used as

proxies for the relative valuation. Once again the price per earnings ratio produced the

most accurate valuation result (figure 8.7) However, using the average price per cash

flow ratio of the South African chemical companies resulted in an improved valuation

accuracy (figure 8.7). Thus when valuing Sasol as a chemical company, using the average

of the JSE listed South African companies gave a more accurate result than the

international proxies, possibly reflecting the impact of regional disparities. See figure 8.7

below for results:

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2010 2009 2008 2007 2006


Percentage offset


Using DOW Price / Earnings multiplier - (Rands) 377.29 331.25 488.57 311.54 212.10 59.83 21.2%Using DOW Price/cash from operations multiplier - (Rands) 255.82 1761.35 577.96 368.71 330.05 357.13 130.3%Using SA Chemical Price / Earnings multiplier - (Rands) 1150.88 298.09 386.97 318.44 156.61 229.69 81.5%Using SA Chemical Price/cash from operations multiplier - (Rands) 249.48 306.55 350.38 381.25 55.18 101.48 33.9%Using SA Chemical (edited) Price / Earnings multiplier - (Rands) 314.85 298.09 386.97 318.44 231.59 47.49 15.2%Using SA Chemical (edited) Price/cash from operations multiplier - (Rands) 249.48 244.76 350.38 381.25 260.48 56.56 17.5%

Figure 8.7 Chemical company relative valuation - table

A peak is again seen in the relative valuation in 2009. The reason for this is similar to the

explanation in section 8.4.1 above where oil companies were used as proxies.

Relative valuation as a chemical company

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2005 2006 2007 2008 2009 2010 2011

Sasol year end share priceUsing DOW Price / Earnings multiplier - (Rands)Using DOW Price/cash from operations multiplier - (Rands)Using SA Chemical Price / Earnings multiplier - (Rands)Using SA Chemical Price/cash from operations multiplier - (Rands)Using SA Chemical (edited) Price / Earnings multiplier - (Rands)Using SA Chemical (edited) Price/cash from operations multiplier - (Rands)

Figure 8.8: Chemical company relative valuation - graph

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8.4.3 Sum of Parts Relative Valuation

The results of the sum of parts relative valuation calculations show that Sasol can be

considered to be more of an oil company than a combination of oil, chemical, coal

mining, gas and support services. This is due to the sum of parts relative valuation being

less accurate than the relative valuation using oil companies as proxies.

2010 2009 2008 2007 2006


Percentage offset


Using Oil (edited) Price / Earnings multiplier (Rands) 264.27 298.39 429.32 326.10 230.47 35.01 12.0%Using SA Chemical (edited) Price / Earnings multiplier - (Rands) 314.85 298.09 386.97 318.44 231.59 47.49 15.2%Using Sum of Parts Price / Earnings multiplier - (Rands) 297.95 331.22 458.09 332.95 322.13 40.32 14.8%Using Oil (edited) Price/cash from operations multiplier (Rands) 276.61 481.05 550.70 351.80 298.67 82.45 28.0%Using SA Chemical (edited) Price/cash from operations multiplier - (Rands) 249.48 244.76 350.38 381.25 260.48 56.56 17.5%Using Sum of Parts Price/cash from operations multiplier - (Rands) 278.79 467.50 488.58 382.90 315.93 77.42 28.0%

Figure 8.9: Sum of parts company relative valuation - table

Sum of parts relative valuation comparison

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2005 2006 2007 2008 2009 2010 2011

Sasol year end share priceUsing Oil (edited) Price / Earnings multiplier (Rands)Using Oil (edited) Price/cash from operations multiplier (Rands)Using SA Chemical (edited) Price / Earnings multiplier - (Rands)Using SA Chemical (edited) Price/cash from operations multiplier - (Rands)Using Sum of Parts Price / Earnings multiplier - (Rands)Using Sum of Parts Price/cash from operations multiplier - (Rands)

Figure 8.10: Sum of parts company relative valuation - graph

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9. Conclusion and Recommendations

The primary aim of this research report is to find the valuation technique or combination

of techniques that most accurately predict the Sasol share price. Secondary to that, the

feasibility and accuracy of a sum of parts approach is tested and the main value drivers

for Sasol determined. The aim of this report is not to value Sasol as a company or to

determine what the share price should theoretically be, but rather to evaluate methods

used by analysts and test their accuracy against the actual Sasol share price.

The methodology in which to achieve these aims is to take proven valuation methods and

apply their fundamentals to the Sasol financial parameters. All inputs to these valuation

methods are obtained from publicly available information (Sasol Annual Financial

Statements). An adjustment of the normal approach is tested though, in that the Sasol

business is broken down into sub sections and each of these valued separately in order to

increase the accuracy of the valuation methods.

The results of the discounted free cash flow calculations produce results that are

reasonably close to the actual share price. However, greater accuracy was obtained by

undertaking the calculations on a sum of parts basis rather than on an aggregate basis.

The dividend growth model did not yield significantly accurate valuation results.

However, greater accuracy was obtained when using adjusted growth and dividend cover

figures.

Finally, the relative valuation approach produced the most varied results depending on

the valuation multiple used. The most accurate results were obtained using a comparable

price per earnings ratio of international oil companies (using the ratios of domestic and

international chemical companies did not improve the accuracy of the valuation results).

A sum of parts approach did not increase the accuracy of the relative valuation. When

using the price to earnings ratio of major oil companies (BP, RDS, Chevron and Exxon

Mobil) and ignoring outliers in a systematic approach, the relative valuation of the Sasol

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share price is very accurate, even more than a discounted cash flow valuation on the

Sasol group (not more accurate than the DCF sum of parts approach though).

Hence these results are able to answer the primary research question: The most accurate

valuation method for the Sasol share price is a sum of parts Discounted Cash Flow

valuation. Using the dividend growth model method and the relative valuation method

(using oil companies as proxies) also gives relatively accurate results when compared to

the actual Sasol share price.

Secondary questions are also answered in that a sum of parts approach is indeed feasible

and does increase the accuracy of the valuation, but only in the DCF method. It fails to do

so in the relative valuation method. Sasol‟s main profit drivers are the US$ oil price and

the Rand/US$ exchange rate. These are the primary determinants of the earnings which in

turn is the main contributor the share price valuation in all the tested methods.

This study thus recommends three distinct approaches to be used when valuing the Sasol

share price, depending on the individual valuator‟s time constraints and preference from a

valuation perspective:

1. For longer (but more accurate) studies, use a sum of parts discounted cash flow

valuation as set out in this study.

2. For shorter studies, use the price earnings ratios of international oil companies

(disregarding obvious outliers in data) and multiply by Sasol‟s earnings to

calculate a share price.

3. For a purely quantitative approach that does not necessarily take valuation

principals into account, use the Dividend discount approach, but fit past data to a

calculated share price by manipulating growth and dividend cover ratios, using

future earnings forecasts as described in this study.

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10. Recommendations for Future Research

For future research purposes, it is recommended that the Discounted Cash Flow method

is further refined. Some uncertainty exists (between analysts) as to what Sasol‟s future

growth plans are at any given time and more importantly when exactly they (especially

larger capital projects) will materialise. Although this study took an averaged approach

from the different views as to what the future earnings and growth in these earnings will

be, it is envisaged that incorporating more detail into these predictions will result in a

further improvement of the share price valuation. These earnings will basically more

clearly define the long term growth number as well, a key parameter in the share price

valuation.

As Sasol continues to grow its business into foreign countries, a bigger portion of their

operational profit and revenue will be generated from operations in those countries. At a

point in the future the risk factors arising from operations in these countries (higher and

lower risk, depending on the relative political and social position of that country to South

Africa) will start having a tangible effect on the Sasol share price valuation. Detail

financial reports of the operations in these countries are needed for an accurate valuation

using this approach though.

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11. References

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Industry: 1980-1990. Financial Markets. Institution & Instruments Vol 3.

Blackwell Publishing

Comer, A (2010). Sasol – Weakening Macro but self help ahead. JP Morgan South

African Equity Research

Cormier, D., & Magnan, M. (2002). Performance reporting by oil and gas firms:

contractual and value implications. Journal of International Accounting, Auditing

& Taxation 11, 131-153

Damodaran, A. (2002). Investment Valuation: Tools and Techniques for Determining the

Value of Any asset – 2nd

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Damodaran, A. (2003). Country Risk and Company Exposure: Theory and Practice.

Journal of applied finance- Fall/Winter 2003, 63-76

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Quarterly 18:6-11

Deutsche Bank (2004). Major Oils, annual assessment of strategies and valuation of the

world's largest integrated oil companies

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Financial ratios – Retrieved November 20, 2010 from http://ycharts.com/companies/

Geldenhuys, J. & Kushnir, P. (2010) Bull in a China Shop, Buy. Deutsche Securities

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analysis of methodologies and empirical practices

McCormack, J. L., & Vytheeswaran, J. (1998). How to Use EVA in the Oil and Gas

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Oil price (2003 to 2010) – Retrieved Aug 26, 2010, from http://production.investis.com

Osmundsen, P., Asche, F., Misund, B.,& Mohn, K. (2006) Valuation of International Oil

Companies. The Energy Journal, 27(3), 49-64

Quirin, J. J., Berry, K. T. & O'Bryan, D. (2000). A Fundamental Analysis Approach to

Oil and Gas Firm Valuation. Journal of Business Finance and Accounting 27(7),

785-820

Refinery figure – Retrieved Aug 15, 2010 from www.uop.com/refining/

Sasol overview figure - Sasol overview presentation – Author unknown

Sasol Ltd – ADR (2010). Zacks Investment research.

http://www.uop.com/refining/

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Sasol annual financial reports – 2006 to 2010

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Environmental Policy Research

Standard Bank Analyst Review 2010: Sasol Ltd – Retrieved November 10, 2010 from

http://www.profile.co.za/standardbank/sdt/data/000652/Fin0609.htm

Standard & Poor‟s (2007) 2007 Annual Global Corporate Default Study and Rating

Transitions. New York: Standard & Poor‟s

Swart, C.J. (2009) The South African liquid fuels Market: Yesterday, Today and

Tomorrow

Stein, J. (2003). Agency, Information, and Corporate Investment., Handbook of the

Economics of Finance. North-Holland

Sylvester, A. (2003). Using profitability measures in competition analysis in South

Africa. Retrieved November 17, 2010 from http://www.ftomasek.com/rates.html

Uhambo.2006 Uhambo Merger Findings. In the Competition Tribunal of South Africa.

Case no:101

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oil industry. Journal of Energy Finance and Development 149-183

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Appendices

Appendix A – Sasol 5 Year Balance Sheet

2010 2009 2008 2007 2006Rm Rm Rm Rm Rm

Statement of financial position

Property, plant and equipment 72,523 70,370 66,273 50,611 39,929Assets under construction 21,018 14,496 11,693 24,611 23,176Other intangible assets 1,193 1,068 964 629 775Non-current assets 8,027 6,920 6,359 4,839 3,235Current assets 53,723 53,011 54,833 38,375 36,043Total assets 156,484 145,865 140,122 119,065 103,158Total equity 97,242 86,217 78,995 63,269 52,984Equity/Assets 0.62 0.59 0.56 0.53 0.51Debt/Assets 0.38 0.41 0.44 0.47 0.49Interest bearing debt/(market cap + IBD) 0.08 0.09 0.06 0.10 0.09Debt/Equity (for WACC calc) 0.08 0.10 0.06 0.11 0.10Interest-bearing debt 15,032 17,814 19,455 18,925 17,884Interest-free liabilities 44,210 41,834 41,672 36,871 32,290Total equity and liabilities 156,484 145,865 140,122 119,065 103,158Market Cap + Interest Beraing debt + Preference shares 195,966 195,218 314,311 181,930 189,182

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Appendix B – Sasol 5 year Income statement

Income statement 2010 2009 2008 2007 2006

Turnover 122256 137836 129943 98127 82395Operating profit 23937 24666 33816 25621 17212Share of profit of associates (net of tax) 217 270 254 405 134Finance (expenses)/income -782 -741 -413 -323 -230Profit before tax 23372 24195 33657 25703 17116Taxation -6985 -10480 -10129 -8153 -6534Profit 16387 13715 23528 17550 10582Attributable toOwners of Sasol Limited 15941 13648 22417 17030 10406Non-controlling interests in subsidiaries 446 67 1111 520 176Total 16387 13715 23528 17550 10582

Appendix C – Sasol 5 Year Cash Flow Statement

Statement of cash flows 2010 2009 2008 2007 2006

Cash from operations 30762 37194 42558 28618 28284(Increase)/decrease in working capital -3424 10993 -7818 -186 -3749Cash generated by operating activities 27338 48187 34740 28432 24535Finance income received 1372 2264 957 1059 444Finance expenses paid -1781 -2168 -2405 -1816 -1745Tax paid -6040 -10252 -9572 -7251 -5389Cash available from operating activities 20889 38031 23720 20424 17845Dividends and debenture interest paid -5360 -7193 -5766 -4613 -3660Cash retained from operating activities 15529 30838 17954 15811 14185Additions to non-current assets -16108 -15672 -10855 -12045 -13296Acquisition of businesses – -30 -431 -285 -147Other movements -596 3184 442 1785 1160(Increase)/decrease in funding requirements -1175 18320 7110 5266 1902Finance expenses paid/Interest bearing debt 11.8% 12.2% 12.4% 9.6% 9.8%After tax cost of debt 8.4% 8.6% 8.8% 6.8% 6.9%

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Appendix D – Sasol 5 Year Market Figures

Market position 2010 2009 2008 2007 2006

ShareholdersNumber of shareholders – beneficial (at year end) 67885 56873 52580 42591 40336The increase in the number of shareholders,when compared to the 2002 and prior years’disclosure,is due to disclosing the beneficial ownership since 2003 compared to the registered ownership in previous years.

Share performance Measures the annual movement of the shareholding in the groupShares in issue* – million 667.7 665.9 676.7 627.7 683Shares repurchased – million 8.8 8.8 37.1 14.9 60.1Sasol Inzalo share transaction – million 63.1 63.1 44.2 0 0Net shares in issue** – million 595.8 594 595.4 612.8 622.9Weighted average shares in issue** – million 597.6 596.1 601 622.6 620Market capitalisation Closing market price per share x shares in issue (before share repurchase)– R million 183350 179780 311959 166968 187825JSE Limited statistics Measures the performance of the group’s shares listed on the JSE

Shares traded*** – million 535.5 568.5 555 612.6 617.5Traded to issued – % 80.2 85.4 82 97.6 90.4Value of share transactions – R million 154687 171651 198348 151088 141206Market price per share year end – Rand 274.6 269.98 461 266 275 high – Rand 318 454 514 278.49 279 low – Rand 255.56 221 259.49 215 183Key market performance ratiosEarnings yield – % 9.72 8.48 8.09 10.28 6.1Dividend yield – % 3.82 3.15 2.82 3.38 2.58Price to net asset value – :1 1.73 1.91 3.59 2.65 3.26NYSE statistics****Shares traded – million 90,0 209,0 174,6 147,9 107,2Value of share transactions – US$ million 3417 7101 8665 5034 3856Market price per shareyear end – US$ 35.27 34.82 38.4 37.54 38.64high – US$ 43.68 57.95 66.09 37.54 46.1low – US$ 31.15 19.23 35.66 32.2 27.3

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Appendix E – DCF Valuation for Sasol Group (2006- 2010)

DCF Valuation standing in 2010 RmYear count 1 2 3 4 5 TerminalYear 2011 2012 2013 2014 2015EBIT R 24,190 R 34,959 R 40,631 R 41,248 R 42,466Depreciation and Ammortisation R 6,999 R 7,603 R 8,383 R 8,984 R 9,775Changes in working capital -R 2,061 -R 4,314 -R 2,931 -R 1,685 -R 1,444Capital expenditure -R 17,345 -R 16,147 -R 14,283 -R 10,731 -R 12,005Tax -R 7,219 -R 9,928 -R 11,344 -R 11,433 -R 11,854Free cash flow R 4,564 R 12,173 R 20,456 R 26,383 R 26,938 R 276,106Discounted cash flows R 4,078 R 9,720 R 14,597 R 16,823 R 15,349 R 157,328WACC 11.9%Long term growth 2.2%PV R 217,895Debt -R 59,242Minority interest -R 17,327Value of equity R 141,326Shares in issue 595.8Value per share R 237.20

DCF Valuation standing in 2009 RmYear count 1 2 3 4 5 TerminalYear 2010 2011 2012 2013 2014EBIT R 23,937 R 24,190 R 34,959 R 40,631 R 41,248Depreciation and Ammortisation R 6,712 R 6,999 R 7,603 R 8,383 R 8,984Changes in working capital -R 3,424 -R 2,061 -R 4,314 -R 2,931 -R 1,685Capital expenditure -R 16,108 -R 17,345 -R 16,147 -R 14,283 -R 10,731Tax -R 6,040 -R 7,219 -R 9,928 -R 11,344 -R 11,433Free cash flow R 5,077 R 4,564 R 12,173 R 20,456 R 26,383 R 285,493Discounted cash flows R 4,558 R 3,678 R 8,807 R 13,287 R 15,384 R 166,472WACC 11.4%Long term growth 2.2%PV R 212,186Debt -R 59,648Minority interest -R 17,036Value of equity R 135,502Shares in issue 596.1Value per share R 227.31

DCF Valuation standing in 2008 RmYear count 1 2 3 4 5 TerminalYear 2009 2010 2011 2012 2013EBIT R 37,209 R 40,929 R 45,022 R 49,525 R 54,477Depreciation and Ammortisation R 6,245 R 6,712 R 6,999 R 7,603 R 8,383Changes in working capital R 10,993 -R 3,424 -R 2,061 -R 4,314 -R 2,931Capital expenditure -R 15,672 -R 16,108 -R 17,345 -R 16,147 -R 14,283Tax -R 10,252 -R 6,040 -R 7,219 -R 9,928 -R 11,344Free cash flow R 28,523 R 22,069 R 25,397 R 26,739 R 34,303 R 378,172Discounted cash flows R 25,645 R 17,841 R 18,460 R 17,474 R 20,156 R 222,210WACC 11.2%Long term growth 2.2%PV R 321,786Debt -R 61,127Minority interest 0Value of equity R 260,659Shares in issue 595.4Value per share R 437.79

DCF Valuation standing in 2007 RmYear count 1 2 3 4 5 TerminalYear 2008 2009 2010 2011 2012EBIT R 31,001 R 34,101 R 37,512 R 41,263 R 45,389Depreciation and Ammortisation R 5,212 R 6,245 R 6,712 R 6,999 R 7,603Changes in working capital -R 7,818 R 10,993 -R 3,424 -R 2,061 -R 4,314Capital expenditure -R 10,855 -R 15,672 -R 16,108 -R 17,345 -R 16,147Tax -R 9,572 -R 10,252 -R 6,040 -R 7,219 -R 9,928Free cash flow R 7,968 R 25,415 R 18,652 R 21,637 R 22,603 R 218,160Discounted cash flows R 7,082 R 20,077 R 13,096 R 13,503 R 12,537 R 121,005WACC 12.5%Long term growth 2.2%PV R 187,301Debt -R 55,796Minority interest 0Value of equity R 131,505Shares in issue 612.8Value per share R 214.60

DCF Valuation standing in 2006 RmYear count 1 2 3 4 5 TerminalYear 2007 2008 2009 2010 2011EBIT R 25,621 R 31,001 R 34,101 R 37,512 R 41,263Depreciation and Ammortisation R 4,022 R 5,212 R 6,245 R 6,712 R 6,999Changes in working capital -R 186 -R 7,818 R 10,993 -R 3,424 -R 2,061Capital expenditure -R 12,045 -R 10,855 -R 15,672 -R 16,108 -R 17,345Tax -R 7,251 -R 9,572 -R 10,252 -R 6,040 -R 7,219Free cash flow R 10,161 R 7,968 R 25,415 R 18,652 R 21,637 R 228,774Discounted cash flows R 9,104 R 6,397 R 18,282 R 12,021 R 12,495 R 132,109WACC 11.6%Long term growth 2.2%PV R 190,407Debt -R 50,174Minority interest R 0Value of equity R 140,233Shares in issue 622.9Value per share R 225.13

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Appendix F – Dividend Growth Model for Sasol Group (2006-

2010)

2006

2007 2006 2005 2004 2003 2002 2001Dividend per share R 7.10 R 5.40 R 4.50 R 4.50 R 4.50 R 3.20Earnings Attributable R 10,406.00 R 9,449.00 R 5,795.00 R 7,674.00 R 9,705.00 R 7,053.00Earnings per share R 27.05 R 16.71 R 15.32 R 9.48 R 12.60 R 15.94 R 11.41Dividend cover 3Dividend per share R 9.02Growth 5.00%Cost of equity 12.5%Share price R 121.01

2007

2008 2007 2006 2005 2004 2003 2002 2001Dividend per share R 9.00 R 7.10 R 5.40 R 4.50 R 4.50 R 4.50 R 3.20Earnings Attributable R 17,030.00 R 10,406.00 R 9,449.00 R 5,795.00 R 7,674.00 R 9,705.00 R 7,053.00Earnings per share R 35.70 R 27.80 R 16.71 R 15.32 R 9.48 R 12.60 R 15.94 R 11.41Dividend cover 3Dividend per share R 11.90Growth 5.00%Cost of equity 13.5%Share price R 140.82

2008

2009 2008 2007 2006 2005 2004 2003 2002 2001Dividend per share R 13.00 R 9.00 R 7.10 R 5.40 R 4.50 R 4.50 R 4.50 R 3.20Earnings Attributable R 22,417.00 R 17,030.00 R 10,406.00 R 9,449.00 R 5,795.00 R 7,674.00 R 9,705.00 R 7,053.00Earnings per share R 42.22 R 37.65 R 27.80 R 16.71 R 15.32 R 9.48 R 12.60 R 15.94 R 11.41Dividend cover 3Dividend per share R 14.07Growth 5.00%Cost of equity 12.0%Share price R 202.52

2009

2010 2009 2008 2007 2006 2005 2004 2003 2002 2001Dividend per share R 8.50 R 13.00 R 9.00 R 7.10 R 5.40 R 4.50 R 4.50 R 4.50 R 3.20Earnings Attributable R 13,648.00 R 22,417.00 R 17,030.00 R 10,406.00 R 9,449.00 R 5,795.00 R 7,674.00 R 9,705.00 R 7,053.00Earnings per share R 27.86 R 22.98 R 37.65 R 27.80 R 16.71 R 15.32 R 9.48 R 12.60 R 15.94 R 11.41Dividend cover 3Dividend per share R 9.29Growth 5.00%Cost of equity 13.0%Share price R 116.82

2010

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001Dividend per share R 10.50 R 8.50 R 13.00 R 9.00 R 7.10 R 5.40 R 4.50 R 4.50 R 4.50 R 3.20Earnings Attributable R 15,941.00 R 13,648.00 R 22,417.00 R 17,030.00 R 10,406.00 R 9,449.00 R 5,795.00 R 7,674.00 R 9,705.00 R 7,053.00Earnings per share R 33.57 R 26.76 R 22.98 R 37.65 R 27.80 R 16.71 R 15.32 R 9.48 R 12.60 R 15.94 R 11.41Dividend cover 3Dividend per share R 11.19Growth 5.00%Cost of equity 13.5%Share price R 132.42

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Appendix G – Inputs for Relative Valuation

International companies - Oil and Chemical

BP 2010 2009 2008 2007 2006


Shell 2010 2009 2008 2007 2006


Chevron 2010 2009 2008 2007 2006


Exxon Mobil 2010 2009 2008 2007 2006


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South African chemical companies

Company 2010 2009 2008 2007 2006

A E C I

Price / Book Value - 2.49 2.11 3.45 3.25Price / Cash Flow - 4.61 3.36 8.09 4.6Price / Earnings - 17.12 11.54 21.83 7.97AFROX

Price / Book Value - 2.15 2.44 4.09 4.66Price / Cash Flow - 11.02 10.11 12.65 14.03Price / Earnings - 29.16 17.43 21.7 15.83DELTA

Price / Book Value - 0.82 0.67 0.91 1.29Price / Cash Flow - 4.52 2.63 5.33 -21.28Price / Earnings - 2.98 4.85 -4.23 -8.71FREEWORLD

Price / Book Value - 4.89 5.44 - -Price / Cash Flow - 7.32 6.17 - -Price / Earnings - 12.96 7.01 - -OMNIA

Price / Book Value 1.86 1.18 2.88 3.29 3.09Price / Cash Flow 4.34 2.19 5.86 8.41 7.98Price / Earnings 74.78 3.97 9.98 11.44 12.23SPANJAARD

Price / Book Value 0.73 0.66 - 0.43 -Price / Cash Flow 6.49 3.27 - 5.82 -Price / Earnings 11.85 4.17 - 12.02 -

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Appendix H – Inputs for Relative Valuation – Sum of Parts

South African coal mining companies

Company 2010 2009 2008 2007 2006

HWANGE (December)

Price / Book Value - 1.45 - 0 0

Price / Cash Flow - 7.64 - - -

Price / Earnings - 41.85 28.53 0.01 0.66

KEATON (March)

Price / Book Value 1.95 3.39 - - -

Price / Cash Flow 69.89 150.43 - - -

Price / Earnings 109.82 162.34 - - -

SACMH (December)

Price / Book Value - - 2.52 1.73 -

Price / Cash Flow - - -24.37 7.69 -

Price / Earnings - - -8.51 110 -

WESCOAL (March)

Price / Book Value 0.94 0.56 1.73 1.7 1.46

Price / Cash Flow 10.59 3.14 5.79 14.37 9.66Price / Earnings 25.12 4.44 8.26 19.47 14.29

South African gas companies - Afrox

Afrox - Gas company 2009 2008 2007 2006

Price / Book Value 2.15 2.44 4.09 4.66Price / Cash From operations 11.02 10.11 12.65 14.03Price / Earnings 29.16 17.43 21.7 15.83

South African support services companies

Average Support services parameters 2010 2009 2008 2007 2006

Price / Cash From operations 5.00 10.65 5.05 10.18 8.04Price / Earnings 8.22 11.31 6.91 11.35 10.79

Average Support services parameters - edited 2010 2009 2008 2007 2006

Price / Cash From operations 5.00 3.66 4.40 9.04 6.88Price / Earnings 8.22 8.22 7.78 10.10 10.15

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Appendix I - Determining Most Accurate Chemical Proxy

Relative Chemical Valuation

0.050.0

100.0150.0200.0250.0300.0350.0400.0450.0500.0

2005 2006 2007 2008 2009 2010 2011

Sasol year end share price P/E DOW P/E SA Chemical

2010 2009 2008 2007 2006 AverageDOW offset 102.29 65.25 27.57 41.56 62.50 59.83SA Chemical Industry offset 39.85 32.09 74.03 48.46 43.01 47.49

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Appendix J – WACC in DCF Sum of parts

Oil Chemical

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

Gearing 14.8% 15.7% 13.1% 15.0% 14.1% Gearing 14.8% 15.7% 13.1% 15.0% 14.1%Cost of debt 6.7% 7.5% 6.4% 7.2% 7.6% Cost of debt 6.7% 7.5% 6.4% 7.2% 7.6%Risk free rate 7.5% 8.5% 7.0% 8.0% 8.5% Risk free rate 7.5% 8.5% 7.0% 8.0% 8.5%Beta 0.9 0.9 0.9 0.9 0.9 Beta 0.75 0.75 0.75 0.75 0.75Equity risk premium 4.5% 4.5% 4.5% 4.5% 4.5% Equity risk premium 4.5% 4.5% 4.5% 4.5% 4.5%Cost of equity 11.6% 12.6% 11.1% 12.1% 12.6% Cost of equity 10.9% 11.9% 10.4% 11.4% 11.9%Cost of pref shares 1.1% 1.1% 1.1% 1.1% 1.1% Cost of pref shares 1.1% 1.1% 1.1% 1.1% 1.1%Weight of equity 85.2% 84.3% 86.9% 82.1% 83.5% Weight of equity 85.2% 84.3% 86.9% 82.1% 83.5%Weight of debt 14.8% 15.7% 13.1% 9.1% 7.7% Weight of debt 14.8% 15.7% 13.1% 9.1% 7.7%Weight of pref shares 0.0% 0.0% 0.0% 8.7% 8.8% Weight of pref shares 0.0% 0.0% 0.0% 8.7% 8.8%WACC 10.84% 11.75% 10.44% 10.65% 11.15% WACC 10.27% 11.18% 9.85% 10.10% 10.59%Long trem growth 2.15% 2.15% 2.15% 2.15% 2.15% Long trem growth 2.15% 2.15% 2.15% 2.15% 2.15%

Coal Gas

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

Gearing 14.8% 15.7% 13.1% 15.0% 14.1% Gearing 14.8% 15.7% 13.1% 15.0% 14.1%Cost of debt 6.7% 7.5% 6.4% 7.2% 7.6% Cost of debt 6.7% 7.5% 6.4% 7.2% 7.6%Risk free rate 7.5% 8.5% 7.0% 8.0% 8.5% Risk free rate 7.5% 8.5% 7.0% 8.0% 8.5%Beta 1.01 1.01 1.01 1.01 1.01 Beta 0.69 0.69 0.69 0.69 0.69Equity risk premium 4.5% 4.5% 4.5% 4.5% 4.5% Equity risk premium 4.5% 4.5% 4.5% 4.5% 4.5%Cost of equity 12.0% 13.0% 11.5% 12.5% 13.0% Cost of equity 10.6% 11.6% 10.1% 11.1% 11.6%Cost of pref shares 1.1% 1.1% 1.1% 1.1% 1.1% Cost of pref shares 1.1% 1.1% 1.1% 1.1% 1.1%Weight of equity 85.2% 84.3% 86.9% 82.1% 83.5% Weight of equity 85.2% 84.3% 86.9% 82.1% 83.5%Weight of debt 14.8% 15.7% 13.1% 9.1% 7.7% Weight of debt 14.8% 15.7% 13.1% 9.1% 7.7%Weight of pref shares 0.0% 0.0% 0.0% 8.7% 8.8% Weight of pref shares 0.0% 0.0% 0.0% 8.7% 8.8%WACC 11.26% 12.17% 10.87% 11.06% 11.57% WACC 10.04% 10.95% 9.62% 9.88% 10.37%Long trem growth 2.15% 2.15% 2.15% 2.15% 2.15% Long trem growth 2.15% 2.15% 2.15% 2.15% 2.15%

Support Services

2006 2007 2008 2009 2010

Gearing 14.8% 15.7% 13.1% 15.0% 14.1%Cost of debt 6.7% 7.5% 6.4% 7.2% 7.6%Risk free rate 7.5% 8.5% 7.0% 8.0% 8.5%Beta 0.71 0.71 0.71 0.71 0.71Equity risk premium 4.5% 4.5% 4.5% 4.5% 4.5%Cost of equity 10.7% 11.7% 10.2% 11.2% 11.7%Cost of pref shares 1.1% 1.1% 1.1% 1.1% 1.1%Weight of equity 85.2% 84.3% 86.9% 82.1% 83.5%Weight of debt 14.8% 15.7% 13.1% 9.1% 7.7%Weight of pref shares 0.0% 0.0% 0.0% 8.7% 8.8%WACC 10.11% 11.03% 9.70% 9.95% 10.44%Long trem growth 2.15% 2.15% 2.15% 2.15% 2.15%

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Appendix K – DCF Sum of Parts

Oil Chemical Gas Coal mining Support servicesDCF Valuation standing in 2010 DCF Valuation standing in 2010 DCF Valuation standing in 2010 DCF Valuation standing in 2010 DCF Valuation standing in 2010

2010 Year count 1 2 3 4 5 Terminal 2010 Year count 1 2 3 4 5 Terminal 2010 Year count 1 2 3 4 5 Terminal 2010 Year count 1 2 3 4 5 Terminal 2010 Year count 1 2 3 4 5 TerminalYear 2011 2012 2013 2014 2015 Year 2011 2012 2013 2014 2015 Year 2011 2012 2013 2014 2015 Year 2011 2012 2013 2014 2015 Year 2011 2012 2013 2014 2015EBIT R 19,555 R 28,261 R 32,846 R 33,345 R 34,330 EBIT R 2,012.78 R 2,908.85 R 3,380.81 R 3,432.19 R 3,533.54 EBIT R 2,026.33 R 2,928.43 R 3,403.57 R 3,455.30 R 3,557.33 EBIT R 1,242.45 R 1,795.58 R 2,086.91 R 2,118.63 R 2,181.19 EBIT -R 647.19 -R 935.32 -R 1,087.07 -R 1,103.59 -R 1,136.18Depreciation and Ammortisation R 2,460 R 2,673 R 2,947 R 3,158 R 3,436 Depreciation and Ammortisation R 3,006.21 R 3,265.42 R 3,600.66 R 3,858.59 R 4,198.34 Depreciation and Ammortisation R 393.03 R 426.92 R 470.75 R 504.47 R 548.89 Depreciation and Ammortisation R 889.50 R 966.20 R 1,065.39 R 1,141.71 R 1,242.24 Depreciation and Ammortisation R 249.82 R 271.36 R 299.22 R 320.66 R 348.89Changes in working capital -R 1,023 -R 2,140 -R 1,454 -R 836 -R 716 Changes in working capital -R 846 -R 1,771 -R 1,203 -R 692 -R 593 Changes in working capital -R 57 -R 119 -R 81 -R 46 -R 40 Changes in working capital -R 89 -R 186 -R 127 -R 73 -R 62 Changes in working capital -R 46 -R 97 -R 66 -R 38 -R 33Capital expenditure -R 11,389 -R 10,602 -R 9,378 -R 7,046 -R 7,882 Capital expenditure -R 3,453.02 -R 3,214.52 -R 2,843.44 -R 2,136.31 -R 2,389.94 Capital expenditure -R 611.18 -R 568.97 -R 503.29 -R 378.13 -R 423.02 Capital expenditure -R 1,522.39 -R 1,417.24 -R 1,253.64 -R 941.87 -R 1,053.69 Capital expenditure -R 369.79 -R 344.25 -R 304.51 -R 228.78 -R 255.94Tax -R 5,836 -R 8,026 -R 9,171 -R 9,243 -R 9,583 Tax -R 600.64 -R 826.05 -R 943.92 -R 951.32 -R 986.36 Tax -R 604.69 -R 831.62 -R 950.27 -R 957.73 -R 993.00 Tax -R 370.77 -R 509.91 -R 582.66 -R 587.24 -R 608.86 Tax R 193.13 R 265.61 R 303.51 R 305.89 R 317.15Free cash flow R 3,769 R 10,166 R 15,790 R 19,379 R 19,584 R 217,488 Free cash flow R 119 R 363 R 1,991 R 3,512 R 3,763 R 44,576 Free cash flow R 1,147 R 1,836 R 2,340 R 2,577 R 2,650 R 32,259 Free cash flow R 150 R 648 R 1,189 R 1,658 R 1,698 R 18,034 Free cash flow -R 620 -R 840 -R 855 -R 744 -R 759 -R 9,150Discounted cash flows R 3,391 R 8,228 R 11,498 R 12,695 R 11,542 R 128,172 Discounted cash flows R 108 R 297 R 1,472 R 2,348 R 2,275 R 26,946 Discounted cash flows R 1,039 R 1,507 R 1,741 R 1,737 R 1,619 R 19,701 Discounted cash flows R 134 R 521 R 856 R 1,070 R 983 R 10,433 Discounted cash flows -R 562 -R 689 -R 635 -R 500 -R 462 -R 5,569WACC 11.2% WACC 10.6% WACC 10.4% WACC 11.6% WACC 10.4%Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15%

Sum of PV's R 241,895 PV R 175,525 PV R 33,445 PV R 27,343 PV R 13,997 PV -R 8,416Debt -R 59,242Minority interest -R 17,327Value of equity R 165,325Shares in issue 595.8Value per share R 277.48


2009 Year count 1 2 3 4 5 Terminal 2009 Year count 1 2 3 4 5 Terminal 2009 Year count 1 2 3 4 5 Terminal 2009 Year count 1 2 3 4 5 Terminal 2009 Year count 1 2 3 4 5 TerminalYear 2010 2011 2012 2013 2014 Year 2010 2011 2012 2013 2014 Year 2010 2011 2012 2013 2014 Year 2010 2011 2012 2013 2014 Year 2010 2011 2012 2013 2014EBIT R 19,351 R 19,555 R 28,261 R 32,846 R 33,345 EBIT R 1,991.77 R 2,012.78 R 2,908.85 R 3,380.81 R 3,432.19 EBIT R 2,005.17 R 2,026.33 R 2,928.43 R 3,403.57 R 3,455.30 EBIT R 1,229.48 R 1,242.45 R 1,795.58 R 2,086.91 R 2,118.63 EBIT -R 640.44 -R 647.19 -R 935.32 -R 1,087.07 -R 1,103.59Depreciation and Ammortisation R 2,360 R 2,460 R 2,673 R 2,947 R 3,158 Depreciation and Ammortisation R 2,882.93 R 3,006.21 R 3,265.42 R 3,600.66 R 3,858.59 Depreciation and Ammortisation R 376.92 R 393.03 R 426.92 R 470.75 R 504.47 Depreciation and Ammortisation R 853.03 R 889.50 R 966.20 R 1,065.39 R 1,141.71 Depreciation and Ammortisation R 239.58 R 249.82 R 271.36 R 299.22 R 320.66Changes in working capital -R 1,699 -R 1,023 -R 2,140 -R 1,454 -R 836 Changes in working capital -R 1,406 -R 846 -R 1,771 -R 1,203 -R 692 Changes in working capital -R 94 -R 57 -R 119 -R 81 -R 46 Changes in working capital -R 148 -R 89 -R 186 -R 127 -R 73 Changes in working capital -R 77 -R 46 -R 97 -R 66 -R 38Capital expenditure -R 10,576 -R 11,389 -R 10,602 -R 9,378 -R 7,046 Capital expenditure -R 3,206.76 -R 3,453.02 -R 3,214.52 -R 2,843.44 -R 2,136.31 Capital expenditure -R 567.60 -R 611.18 -R 568.97 -R 503.29 -R 378.13 Capital expenditure -R 1,413.82 -R 1,522.39 -R 1,417.24 -R 1,253.64 -R 941.87 Capital expenditure -R 343.42 -R 369.79 -R 344.25 -R 304.51 -R 228.78Tax -R 4,883 -R 5,836 -R 8,026 -R 9,171 -R 9,243 Tax -R 502.58 -R 600.64 -R 826.05 -R 943.92 -R 951.32 Tax -R 505.96 -R 604.69 -R 831.62 -R 950.27 -R 957.73 Tax -R 310.23 -R 370.77 -R 509.91 -R 582.66 -R 587.24 Tax R 161.60 R 193.13 R 265.61 R 303.51 R 305.89Free cash flow R 4,552 R 3,769 R 10,166 R 15,790 R 19,379 R 227,941 Free cash flow -R 240 R 119 R 363 R 1,991 R 3,512 R 44,186 Free cash flow R 1,214 R 1,147 R 1,836 R 2,340 R 2,577 R 33,363 Free cash flow R 211 R 150 R 648 R 1,189 R 1,658 R 18,617 Free cash flow -R 660 -R 620 -R 840 -R 855 -R 744 -R 9,536Discounted cash flows R 4,114 R 3,078 R 7,503 R 10,533 R 11,683 R 137,413 Discounted cash flows -R 218 R 98 R 272 R 1,355 R 2,171 R 27,315 Discounted cash flows R 1,105 R 950 R 1,384 R 1,605 R 1,609 R 20,833 Discounted cash flows R 190 R 121 R 473 R 782 R 982 R 11,019 Discounted cash flows -R 600 -R 513 -R 632 -R 585 -R 463 -R 5,935WACC 10.7% WACC 10.1% WACC 9.9% WACC 11.1% WACC 9.9%Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15%

Sum of PV's R 237,643 PV R 174,325 PV R 30,993 PV R 27,487 PV R 13,567 PV -R 8,728Debt -R 59,648Minority interest -R 17,036Value of equity R 160,959Shares in issue 596.1Value per share R 270.02


2008 Year count 1 2 3 4 5 Terminal 2008 Year count 1 2 3 4 5 Terminal 2008 Year count 1 2 3 4 5 Terminal 2008 Year count 1 2 3 4 5 Terminal 2008 Year count 1 2 3 4 5 TerminalYear 2009 2010 2011 2012 2013 Year 2009 2010 2011 2012 2013 Year 2009 2010 2011 2012 2013 Year 2009 2010 2011 2012 2013 Year 2009 2010 2011 2012 2013EBIT R 38,538 R 33,088 R 36,397 R 40,036 R 44,040 EBIT -R 3,385.07 R 3,405.69 R 3,746.25 R 4,120.88 R 4,532.97 EBIT R 3,656.60 R 3,428.61 R 3,771.47 R 4,148.62 R 4,563.48 EBIT R 2,403.04 R 2,102.27 R 2,312.50 R 2,543.75 R 2,798.12 EBIT -R 4,003.55 -R 1,095.07 -R 1,204.58 -R 1,325.04 -R 1,457.54Depreciation and Ammortisation R 2,066 R 2,360 R 2,460 R 2,673 R 2,947 Depreciation and Ammortisation R 2,993.00 R 2,882.93 R 3,006.21 R 3,265.42 R 3,600.66 Depreciation and Ammortisation R 310.00 R 376.92 R 393.03 R 426.92 R 470.75 Depreciation and Ammortisation R 619.00 R 853.03 R 889.50 R 966.20 R 1,065.39 Depreciation and Ammortisation R 257.00 R 239.58 R 249.82 R 271.36 R 299.22Changes in working capital R 5,313 -R 1,699 -R 1,023 -R 2,140 -R 1,454 Changes in working capital R 4,603 -R 1,406 -R 846 -R 1,771 -R 1,203 Changes in working capital R 318 -R 94 -R 57 -R 119 -R 81 Changes in working capital R 466 -R 148 -R 89 -R 186 -R 127 Changes in working capital R 293 -R 77 -R 46 -R 97 -R 66Capital expenditure -R 10,402 -R 10,576 -R 11,389 -R 10,602 -R 9,378 Capital expenditure -R 1,933.04 -R 3,206.76 -R 3,453.02 -R 3,214.52 -R 2,843.44 Capital expenditure -R 451.60 -R 567.60 -R 611.18 -R 568.97 -R 503.29 Capital expenditure -R 2,561.79 -R 1,413.82 -R 1,522.39 -R 1,417.24 -R 1,253.64 Capital expenditure -R 323.73 -R 343.42 -R 369.79 -R 344.25 -R 304.51Tax -R 10,618 -R 4,883 -R 5,836 -R 8,026 -R 9,171 Tax R 932.68 -R 502.58 -R 600.64 -R 826.05 -R 943.92 Tax -R 1,007.49 -R 505.96 -R 604.69 -R 831.62 -R 950.27 Tax -R 662.10 -R 310.23 -R 370.77 -R 509.91 -R 582.66 Tax R 1,103.09 R 161.60 R 193.13 R 265.61 R 303.51Free cash flow R 24,897 R 18,289 R 20,610 R 21,941 R 26,984 R 325,555 Free cash flow R 3,210 R 1,174 R 1,853 R 1,575 R 3,143 R 40,810 Free cash flow R 2,826 R 2,638 R 2,892 R 3,056 R 3,500 R 46,867 Free cash flow R 264 R 1,083 R 1,220 R 1,396 R 1,901 R 21,799 Free cash flow -R 2,675 -R 1,114 -R 1,178 -R 1,230 -R 1,225 -R 16,239Discounted cash flows R 22,544 R 14,995 R 15,301 R 14,749 R 16,425 R 198,161 Discounted cash flows R 2,922 R 973 R 1,398 R 1,081 R 1,965 R 25,510 Discounted cash flows R 2,578 R 2,195 R 2,195 R 2,117 R 2,211 R 29,612 Discounted cash flows R 238 R 881 R 895 R 924 R 1,135 R 13,014 Discounted cash flows -R 2,438 -R 926 -R 892 -R 849 -R 771 -R 10,224WACC 10.4% WACC 9.9% WACC 9.6% WACC 10.9% WACC 9.7%Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15%

Sum of PV's R 357,919 PV R 282,175 PV R 33,849 PV R 40,908 PV R 17,087 PV -R 16,101Debt -R 61,127Minority interest R 0Value of equity R 296,792Shares in issue 595.4Value per share R 498.47


2007 Year count 1 2 3 4 5 Terminal 2007 Year count 1 2 3 4 5 Terminal 2007 Year count 1 2 3 4 5 Terminal 2007 Year count 1 2 3 4 5 Terminal 2007 Year count 1 2 3 4 5 TerminalYear 2008 2009 2010 2011 2012 Year 2008 2009 2010 2011 2012 Year 2008 2009 2010 2011 2012 Year 2008 2009 2010 2011 2012 Year 2008 2009 2010 2011 2012EBIT R 23,151 R 35,319 R 30,325 R 33,357 R 36,693 EBIT R 6,055.23 -R 3,102.39 R 3,121.29 R 3,433.42 R 3,776.76 EBIT R 1,636.42 R 3,351.25 R 3,142.30 R 3,456.53 R 3,802.18 EBIT R 1,277.05 R 2,202.37 R 1,926.72 R 2,119.39 R 2,331.33 EBIT -R 1,118.45 -R 3,669.23 -R 1,003.63 -R 1,103.99 -R 1,214.39Depreciation and Ammortisation R 1,744 R 2,066 R 2,360 R 2,460 R 2,673 Depreciation and Ammortisation R 2,365.00 R 2,993.00 R 2,882.93 R 3,006.21 R 3,265.42 Depreciation and Ammortisation R 289.00 R 310.00 R 376.92 R 393.03 R 426.92 Depreciation and Ammortisation R 650.00 R 619.00 R 853.03 R 889.50 R 966.20 Depreciation and Ammortisation R 164.00 R 257.00 R 239.58 R 249.82 R 271.36Changes in working capital -R 4,040 R 5,313 -R 1,699 -R 1,023 -R 2,140 Changes in working capital -R 3,089 R 4,603 -R 1,406 -R 846 -R 1,771 Changes in working capital -R 197 R 318 -R 94 -R 57 -R 119 Changes in working capital -R 313 R 466 -R 148 -R 89 -R 186 Changes in working capital -R 179 R 293 -R 77 -R 46 -R 97Capital expenditure -R 8,214 -R 10,402 -R 10,576 -R 11,389 -R 10,602 Capital expenditure -R 1,478.19 -R 1,933.04 -R 3,206.76 -R 3,453.02 -R 3,214.52 Capital expenditure -R 482.87 -R 451.60 -R 567.60 -R 611.18 -R 568.97 Capital expenditure -R 339.75 -R 2,561.79 -R 1,413.82 -R 1,522.39 -R 1,417.24 Capital expenditure -R 340.18 -R 323.73 -R 343.42 -R 369.79 -R 344.25Tax -R 7,148 -R 10,618 -R 4,883 -R 5,836 -R 8,026 Tax -R 1,869.62 R 932.68 -R 502.58 -R 600.64 -R 826.05 Tax -R 505.26 -R 1,007.49 -R 505.96 -R 604.69 -R 831.62 Tax -R 394.30 -R 662.10 -R 310.23 -R 370.77 -R 509.91 Tax R 345.33 R 1,103.09 R 161.60 R 193.13 R 265.61Free cash flow R 5,493 R 21,679 R 15,526 R 17,571 R 18,598 R 193,690 Free cash flow R 1,983 R 3,493 R 889 R 1,540 R 1,231 R 13,625 Free cash flow R 740 R 2,521 R 2,351 R 2,577 R 2,710 R 30,774 Free cash flow R 880 R 64 R 908 R 1,027 R 1,184 R 11,818 Free cash flow -R 1,128 -R 2,340 -R 1,023 -R 1,077 -R 1,119 -R 12,599Discounted cash flows R 4,916 R 17,359 R 11,125 R 11,266 R 10,671 R 111,131 Discounted cash flows R 1,784 R 2,826 R 647 R 1,008 R 724 R 8,019 Discounted cash flows R 667 R 2,047 R 1,721 R 1,700 R 1,611 R 18,300 Discounted cash flows R 784 R 51 R 643 R 649 R 667 R 6,655 Discounted cash flows -R 1,016 -R 1,898 -R 747 -R 709 -R 663 -R 7,467WACC 11.8% WACC 11.2% WACC 11.0% WACC 12.2% WACC 11.0%Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15%



2006 Year count 1 2 3 4 5 Terminal 2006 Year count 1 2 3 4 5 Terminal 2006 Year count 1 2 3 4 5 Terminal 2006 Year count 1 2 3 4 5 Terminal 2006 Year count 1 2 3 4 5 TerminalYear 2007 2008 2009 2010 2011 Year 2007 2008 2009 2010 2011 Year 2007 2008 2009 2010 2011 Year 2007 2008 2009 2010 2011 Year 2007 2008 2009 2010 2011EBIT R 18,205 R 23,151 R 35,319 R 30,325 R 33,357 EBIT R 4,293.00 R 6,055.23 -R 3,102.39 R 3,121.29 R 3,433.42 EBIT R 1,936.00 R 1,636.42 R 3,351.25 R 3,142.30 R 3,456.53 EBIT R 1,171.00 R 1,277.05 R 2,202.37 R 1,926.72 R 2,119.39 EBIT R 16.00 -R 1,118.45 -R 3,669.23 -R 1,003.63 -R 1,103.99Depreciation and Ammortisation R 1,442 R 1,744 R 2,066 R 2,360 R 2,460 Depreciation and Ammortisation R 1,529.00 R 2,365.00 R 2,993.00 R 2,882.93 R 3,006.21 Depreciation and Ammortisation R 271.00 R 289.00 R 310.00 R 376.92 R 393.03 Depreciation and Ammortisation R 659.00 R 650.00 R 619.00 R 853.03 R 889.50 Depreciation and Ammortisation R 121.00 R 164.00 R 257.00 R 239.58 R 249.82Changes in working capital -R 91 -R 4,040 R 5,313 -R 1,699 -R 1,023 Changes in working capital -R 78 -R 3,089 R 4,603 -R 1,406 -R 846 Changes in working capital -R 5 -R 197 R 318 -R 94 -R 57 Changes in working capital -R 8 -R 313 R 466 -R 148 -R 89 Changes in working capital -R 4 -R 179 R 293 -R 77 -R 46Capital expenditure -R 8,667 -R 8,214 -R 10,402 -R 10,576 -R 11,389 Capital expenditure -R 1,784.95 -R 1,478.19 -R 1,933.04 -R 3,206.76 -R 3,453.02 Capital expenditure -R 916.19 -R 482.87 -R 451.60 -R 567.60 -R 611.18 Capital expenditure -R 424.96 -R 339.75 -R 2,561.79 -R 1,413.82 -R 1,522.39 Capital expenditure -R 251.47 -R 340.18 -R 323.73 -R 343.42 -R 369.79Tax -R 5,152 -R 7,148 -R 10,618 -R 4,883 -R 5,836 Tax -R 1,214.96 -R 1,869.62 R 932.68 -R 502.58 -R 600.64 Tax -R 547.91 -R 505.26 -R 1,007.49 -R 505.96 -R 604.69 Tax -R 331.40 -R 394.30 -R 662.10 -R 310.23 -R 370.77 Tax -R 4.53 R 345.33 R 1,103.09 R 161.60 R 193.13Free cash flow R 5,736 R 5,493 R 21,679 R 15,526 R 17,571 R 202,181 Free cash flow R 2,744 R 1,983 R 3,493 R 889 R 1,540 R 18,975 Free cash flow R 738 R 740 R 2,521 R 2,351 R 2,577 R 32,680 Free cash flow R 1,066 R 880 R 64 R 908 R 1,027 R 11,267 Free cash flow -R 123 -R 1,128 -R 2,340 -R 1,023 -R 1,077 -R 13,530Discounted cash flows R 5,175 R 4,471 R 15,920 R 10,287 R 10,503 R 120,849 Discounted cash flows R 2,489 R 1,631 R 2,605 R 602 R 945 R 11,641 Discounted cash flows R 671 R 612 R 1,892 R 1,604 R 1,597 R 20,259 Discounted cash flows R 958 R 710 R 46 R 592 R 602 R 6,608 Discounted cash flows -R 111 -R 931 -R 1,753 -R 696 -R 666 -R 8,359WACC 10.8% WACC 10.3% WACC 10.0% WACC 11.3% WACC 10.1%Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15% Long term growth 2.15%


Copyright UCT


Appendix L – Overall Valuation Results Summary

2010 2009 2008 2007 2006


Percentage offset

Sasol year end share price 275.0 266.0 461.0 270.0 274.6 0 0

Sasol average share price in June 280.97 291.46 468.06 258.90 249.37 14.96 5.3%

DCF SOP share price (last 5 years average split) 277.48 270.02 498.51 242.65 257.83 17.62 5.4%

DCF SOP share price (split every year) 277.48 270.02 498.47 242.62 257.79 17.63 5.4%

Valuation with Dividend growth (8.25% growth and dividend cover ratio of 2.5 ) 257.58 274.59 456.48 237.11 258.22 15.96 5.7%

DCF SOP share price (2010 average split) 285.365 278.47 512.248 250.502 267.038 20.22 5.9%

Using Oil (edited) Price / Earnings multiplier (Rands) 264.265 298.387 429.323 326.103 230.473 35.01 12.0%

DCF Group share price 237.204 227.314 437.787 214.597 225.13 40.91 14.4%

Using Sum of Parts Price / Earnings multiplier - (Rands) 297.95 331.22 458.09 332.95 322.13 40.32 14.8%

Using SA Chemical (edited) Price / Earnings multiplier - (Rands) 314.85 298.09 386.97 318.44 231.59 47.49 15.2%

Using SA Chemical (edited) Price/cash from operations multiplier - (Rands) 249.48 244.76 350.38 381.25 260.48 56.56 17.5%

Using SA Chemical Price / Book Value multiplier - (Rands) 183.73 255.78 316.12 245.33 238.35 61.45 18.2%

Using Oil Price / Book Value multiplier (Rands) 237.29 237.32 241.64 292.81 214.88 73.66 20.5%

Using DOW Price / Earnings multiplier - (Rands) 377.29 331.25 488.57 311.54 212.10 59.83 21.2%

Using Oil (edited) Price / Book Value multiplier (Rands) 229.13 217.17 206.04 266.60 198.98 85.73 23.8%

Valuation with Dividend growth (8% growth and dividend cover ratio of 3 ) 202.59 218.33 356.33 187.61 205.31 75.28 24.5%

Using SA Chemical (edited) Price / Book Value multiplier - (Rands) 183.73 183.81 289.12 245.33 238.35 81.25 24.7%

Using Oil Price / Earnings multiplier (Rands) 265.33 375.45 331.32 358.29 199.22 82.50 26.6%

Using Oil (edited) Price/cash from operations multiplier (Rands) 276.61 481.05 550.70 351.80 298.67 82.45 28.0%

Using Sum of Parts Price/cash from operations multiplier - (Rands) 278.79 467.50 488.58 382.90 315.93 77.42 28.0%

Using SA Chemical Price/cash from operations multiplier - (Rands) 249.48 306.55 350.38 381.25 55.18 101.48 33.9%

Using DOW Price / Book Value multiplier - (Rands) 183.02 112.05 187.94 237.88 172.99 130.54 39.9%

Valuation with Dividend growth (5% growth and dividend cover ratio of 3 ) 121.01 140.82 202.52 116.82 132.42 166.60 53.5%

Using Oil Price/Revenue multiplier (Rands) 122.68 167.15 112.33 147.73 99.83 179.37 55.4%

Using Oil (edited) Price/Revenue multiplier (Rands) 127.25 159.38 87.37 128.19 89.87 190.90 58.9%

Using DOW Price/Revenue multiplier - (Rands) 97.04 80.73 105.61 131.32 95.30 207.32 65.6%

Using SA Chemical Price / Earnings multiplier - (Rands) 1150.88 298.09 386.97 318.44 156.61 229.69 81.5%

Using Oil Price/cash from operations multiplier (Rands) 293.69 1310.71 545.72 430.26 307.93 268.34 97.9%

Using DOW Price/cash from operations multiplier - (Rands) 255.82 1761.35 577.96 368.71 330.05 357.13 130.3%

Copyright UCT


Overall summary of results

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2005 2006 2007 2008 2009 2010 2011

Sasol year end share priceDCF Group share priceValuation with Dividend growth (5% growth and dividend cover ratio of 3 )Valuation with Dividend growth (8% growth and dividend cover ratio of 3 )Valuation with Dividend growth (8.25% growth and dividend cover ratio of 2.5 )Using Oil Price / Book Value multiplier (Rands)Using Oil Price / Earnings multiplier (Rands)Using Oil Price/Revenue multiplier (Rands)Using Oil Price/cash from operations multiplier (Rands)Using Oil (edited) Price / Book Value multiplier (Rands)Using Oil (edited) Price / Earnings multiplier (Rands)Using Oil (edited) Price/Revenue multiplier (Rands)Using Oil (edited) Price/cash from operations multiplier (Rands)Using DOW Price / Book Value multiplier - (Rands)Using DOW Price / Earnings multiplier - (Rands)Using DOW Price/Revenue multiplier - (Rands)Using DOW Price/cash from operations multiplier - (Rands)Using SA Chemical Price / Book Value multiplier - (Rands)Using SA Chemical Price / Earnings multiplier - (Rands)Using SA Chemical Price/cash from operations multiplier - (Rands)Using SA Chemical (edited) Price / Book Value multiplier - (Rands)Using SA Chemical (edited) Price / Earnings multiplier - (Rands)Using SA Chemical (edited) Price/cash from operations multiplier - (Rands)Using Sum of Parts Price / Earnings multiplier - (Rands)Using Sum of Parts Price/cash from operations multiplier - (Rands)DCF Sum Of Parts share price (2010 average split)DCF Sum Of Parts (last 5 years average split)DCF Sum Of Parts share price (split every year)

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Analysis of Valuation Methods: Sasol Share Valuation and ...gsblibrary.uct.ac.za/researchreports/2010/Jacobs.pdf · MBA Research Report Page 4 Table of contents List of ... Weighted