Sasol Shares Downgraded on Cash Flow Concerns

Sasol shares (JSE:SOL) have shed 9.92% over the past five trading sessions, as the pullback from the recent high extends to 16%. The stock has recently been subject to a series of downgrades, reflecting worries about free cash flow generation and operational challenges.

The most recent came this week, when Morgan Stanley downgraded Sasol to “Equal Weight” from “Overweight.” Analyst Christopher Nicholson also lowered the price target from ZAR 125 to ZAR 120. This decision was primarily driven by the stock's recent outperformance, which may not be sustainable given the present economic headwinds. The downgrade highlights concerns about Sasol's ability to generate substantial free cash flow in the near term, particularly in a challenging macroeconomic environment.

Earlier in the year, Bank of America Securities also lowered Sasol's rating, moving from “Buy” to “Neutral” on June 2, 2025. This downgrade was accompanied by a significant 47% reduction in the price target, from ZAR 197 to ZAR 105. The firm cited a 23% decrease in EBITDA forecasts for fiscal years 2025 through 2027 as the primary reason for the downgrade.

Slower-than-expected recovery in chemical spreads and decreased production volumes were identified as key factors contributing to the reduced EBITDA projections. Additionally, Bank of America factored in a higher weighted average cost of capital (WACC) of 13.5%, further impacting the revised price target.

Operational challenges have further exacerbated the situation. In March 2025, Sasol reported a 9% drop in production volumes at its Secunda facility for the quarter ending March. This decline was attributed to reduced equipment availability and operational instability.

Consequently, the company adjusted its full-year production guidance downward, from the previous estimate of 7 to 7.3 million tons to a revised range of 6.9 to 7.1 million tons. The news of these operational issues triggered an 8.2% decline in the company's share price, marking the sharpest drop since January 2025.

Sasol's strategic initiatives, particularly its emission reduction plans, also face scrutiny. The company aims to reduce emissions by 30% by 2030, primarily through replacing coal with gas at its Secunda operation. However, the declining output from Sasol's gas fields in Mozambique raises questions about the feasibility of this strategy.

Furthermore, Sasol booked R56.7 billion in impairments on its US and South African operations and indicated that further write-downs at the Secunda plant might be necessary to meet emissions-reduction targets.

The combination of analyst downgrades, operational challenges, and strategic uncertainties paints a concerning picture for Sasol. Markets are closely watching how the company navigates these headwinds and whether it can regain investor confidence in the near future. The recent downgrades reflect a growing apprehension about Sasol's ability to generate sustainable free cash flow in a volatile market environment, potentially hindering its long-term growth prospects.