South Africa Fuels Up on Sasol

05/15/2014 10:00 am EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Without a clear trend in emerging markets, we're going to push in a new direction, selecting our first South African stock, suggests global stock expert Paul Goodwin, editor of Cabot China & Emerging Markets Report.

The company is Sasol (SSL), a technologically innovative company with a global reach that produces liquid fuels, fuel components, and chemicals.

Sasol was incorporated in 1950 to meet the country's growing energy needs. Its founders developed pioneering techniques to produce suitable oils and other compounds from the country's enormous coal reserves.

By relentless research, ways were found to produce a high enough volume of cheap coal and to turn that coal into a gas, and then into oil, gasoline, and other compounds.

The company was founded as a state-owned business; there was simply no other entity that could meet the capital requirements of founding such a large-scale mining/refining/synthesis enterprise. But after nearly 30 years, Sasol was privatized in 1979.

Sasol is now a big, integrated energy and petrochemical firm, with a market cap of over $33 billion; its research-driven coal-to-liquid (CTL) and gas-to-liquid (GTL) technologies turn coal and natural gas into valuable fuels and petrochemicals.

Using its excellent cash flow, it's expanding its horizons, including the construction of a $20 billion petrochemical plant in southwest Louisiana that will take advantage of abundant natural gas supply.

The company's expertise in gas liquefaction and organic synthesis will turn that natural gas into a wide array of chemicals in addition to exportable liquefied natural gas (LNG). The company also owns acreage in US shale fields that will secure future supplies at attractive valuations.

Revenue growth has been down by single digits for the last two years as these programs have ramped up. But earnings have stayed high, with 2014 estimates up 16%. The company's after-tax profit margins were 19.3% for the first half of 2013 and 12.9% for the second half.

SSL isn't a fast mover. But with its market-defying price consistency and 2.2% forward annual dividend yield, SSL is a great stock for these unsettled conditions.

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