Neste: Renewable Products continue to flounder at the bottom

This report is a summary translation of the report “Pohjaonginta jatkuu Uusiutuvissa tuotteissa” published on 9/12/2024 at 8:12 am EEST.

Neste lowered its Renewable Products guidance for the current year on Wednesday. The underlying factors are more or less the same as before, and we continue to believe that such low margins will not last in the long run. We therefore believe that the segment's performance will recover in the medium term, although there is uncertainty about the timing of the stabilization of supply and demand. We see the stock as moderately priced relative to our longer-term forecasts and therefore reiterate our Accumulate recommendation. Reflecting our estimate changes, we lower our target price to EUR 19.0 (was EUR 21.0).

Renewable Products guidance lowered for margin and volume

Neste has revised its sales volume guidance for Renewable Products downwards and now expects sales volumes of around 3.9 Mt (+/- 5%) with a sales margin of USD 360-580/ton. Previously, the company expected sales volumes to reach around 4.4 Mt (+/- -10%), with a sales margin of USD 480-580/ton. The sales margin is burdened by the decline in the price of conventional diesel, which is used in the pricing of Renewable Products. At the same time, feedstock costs have not eased as demand for it has increased, putting pressure on the segment's sales margin from two directions. Furthermore, another factor weighing on sales volumes and margin is the reduction in the forecast for Sustainable Aviation Fuel (SAF) sales volumes, with the company now expecting SAF volumes to be only 0.35-0.55 Mt (previously 0.5-0.7 Mt).

We do not believe that the current margin levels are long term, but recovery will take time

In H1'24, Renewable Products has sold 1.8 Mt at a sales margin of USD 466/ton, so based on the updated guidance, sales volume growth in the second half of the year will be at a lower margin than in the first half. In the Renewable Products market, some companies have already reported losses in the first half of the year and profitability is generally low. We do not expect this to continue in the long term, as returns on capital are now poor and this is holding back the investment needed to meet the growth in demand. As a result, we believe that margin levels will be higher in the medium term, although it will take time for the oversupply to clear and the current weak economic situation still weighs on the oversupplied market. We have significantly trimmed our forecasts for this year and the next, especially for Renewable Products, and lowered our 2024-2025 comparable EBITDA forecasts at the group level by 41% and 15%, respectively. However, our medium-term forecasts remain unchanged and we expect Renewable Products' result to increase significantly in 2026 and 2027, driven largely by higher sales volumes, but also by a recovery of the sales margin from current levels.

Valuation is high in the short term, but we expect long-term earnings levels to strengthen

Our medium-term forecasts are unchanged, so we do not see any significant change in the valuation picture for the stock. The stock is expensive at current earnings levels, but the much higher medium-term earnings forecasts for Renewable Products push the longer-term valuation picture to attractive levels, as we forecast EV/EBIT multiples of 10-8x for Renewable Products in 2026 and 2027. Given the current market situation and the uncertainty surrounding its rebalancing, the realization of attractive longer-term expected return will require patience, and better buying opportunities may emerge if the sales margin continues to shrink in the current rather weak market environment.