SASOF - Sasol Limited: A Potential Inflection Story

2024-06-23 21:18:57 ET

Summary

• Sasol, a diversified company in mining, energy, and chemicals, is at a potential inflection point due to chemical sector recovery and political changes in South Africa.
• Operational cost optimizations and the absence of further shareholder value-eroding expansive plans are likely to lead to a significant increase in free cash flow generation.
• The increased free cash flow can be used to fund both greater shareholder returns and green energy investments.
• Despite high political and operational risks, given the material discount to the replacement value of its assets, the margin of safety seems sufficient to warrant a buy rating.

Inflection investing aims at identifying inflection points, i.e., changes in trend from negative to positive (or at least to neutral). It has connections with capital cycle theory. This theory focuses on the creative destruction process that dominates cyclical sectors: periods of high prices spur producers to expand production in excess of demand, which leads to a glut and a collapse in prices, to which producers respond by cutting production, until prices recover, and the cycle can start again. Investing at the bottom of a cycle, before the inevitable recovery, is a form of inflection investing....

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