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Morgan Stanley Upgrades Sasol To Overweight, Says Valuation Failing To Price In Near-Term Catalyst

Morgan Stanley upgraded Sasol Limited (ADR) to Overweight from Equal-weight, saying that recent underperformance offers an attractive entry point to play a medium-term cyclical recovery in oil price.

Near-term U.S. chemical project capex downside is priced in and share appears to assign little eventual project upside value," analyst Christopher Nicholson wrote in a note.

The analyst noted the market is assigning very little upside to the Lake Charles Chemical Project (LCCP) in the US.

Nicholson forecast a 5-year 13 percent CAGR in EPS, the bulk (11pp) being driven by project uplift and cost savings. Further, the estimated FY16 dividend yield of 4 percent is attractive versus the SA market, and remains so even under conservative forward payout assumptions.

On the valuation front, the analyst said Sasol trades at 8.7x forward consensus P/E, and at a discount to its historical long-term average of 9.7x. At spot, Sasol trades at a still reasonable 10.5x forward P/E – in particular given relatively robust chemical margins and the premium valuation of chemical peers.