Delivering value through our capital allocation principles
In 2017, we defined a capital allocation framework as a catalyst for improving shareholder returns. Our aim is to drive a process that is disciplined as well as transparent so that the principles are clear to all stakeholders as to how we allocate capital. In this way, we hope to close the perceived ‘value gap’ in the Sasol share price, supporting an appreciation of the share price to more accurately reflect the Group’s value.
The new framework will also assist us in allocating capital and is particularly important as the LCCP reaches beneficial operation, as this game-changing project will transform Sasol’s earnings profile. The first units of the LCCP are expected to come on line in the second half of 2018. We expect our balance sheet to deleverage two years post the completion of the LCCP, with our gearing and net debt:EBITDA declining rapidly. As a result, we will need to carefully evaluate our capital choices to yield maximum return to shareholders by way of further growth or additional dividend payouts. Our appetite for another project of the scale of the LCCP is limited. Instead, we will consider small-scale projects, joint ventures and mergers and acquisitions, but will be selective in our consideration of opportunities, measuring them up against our established investment criteria and ensuring that they give us flexibility and a quicker cash return, without any large balance sheet impact. The Board will consider each of the capital allocation decisions against our financial risk metrics and strength of the balance sheet before approving such decisions.
The two key overarching objectives are to firstly, protect and strengthen the balance sheet and then to focus on value-based capital allocation
Protecting our licence to operate and ensuring the integrity and reliability of our assets is our first priority.
Following this we remain committed to a dividend payment of at least 2,8 HEPS cover or 36% payout ratio, provided we can maintain our investment grade credit rating.
Our next priority is to evaluate between value levers from which we can derive the most value for our shareholders. Items which can be considered include:
- value-based growth delivered from our portfolio of projects which may include merger and acquisitions transactions,
- value returned to shareholders through targeted and increased dividend payout ratios, however still remaining within our 2,2 – 2,8 times range, and
- value returned to shareholders through special dividends and/or share buy-back programmes.
It is important to note that these levers will be competing equally for capital.
As we consider these capital allocation decisions, we are guided by key financial risk and return metrics such as our gearing and liquidity levels and the return on invested capital, with the ultimate objective to aim to deliver maximum sustainable return to shareholders.
Using defined investment criteria before committing capital to growth projects
To meet our growth targets, we need to consider both organic and inorganic growth opportunities that fit with our capital allocation framework. Before pursuing a project, we use our carefully defined investment criteria to determine whether the project’s economics are sufficiently robust. The process can be simplified as follows: