Translation: Original published in Finnish on 11/11/2024 at 7:57 am EET.

Neste lowered its sales volume guidance for Renewable Products on Friday, as an unexpected production outage at the Rotterdam refinery will reduce production and thus sales volumes. To reflect this, we have lowered our near-term estimates for the coming quarters. The valuation of the stock is quite low, provided that Renewable Products' performance recovers to at least satisfactory levels over the next few years. Given the back-loaded nature of the expected return in the coming years and the difficulty in predicting an improvement in the market outlook for Renewable Products, we do not take a stronger view on the stock despite its significant medium-term potential. We reiterate our Accumulate recommendation and lower our target price to EUR 15.5 (was EUR 17.5).

Fire at Rotterdam refinery cuts sales volumes

On Friday, Neste downgraded its sales volume forecast for Renewable Products following a fire at the old line in Rotterdam and the resulting production shutdown. The company has started an investigation into the incident and repair work will begin as soon as possible. It is therefore uncertain at this stage how long the production outage will ultimately last. However, an indicative estimate can be derived from the new sales volume forecast, which has been reduced by 200 ktons, as this is approximately one and a half months of production from the line. Neste now guides the sales volume of Renewable Products to increase to about 3.7 Mt (+/-5%) in 2024 (previously about 3.9 Mt). Renewable Products' full-year 2024 avg. comparable sales margin is expected to be in the range of
USD 360-480/ton (unchanged).

Operational challenges have piled up recently

Neste's historically good operational performance has taken a hit recently, as its production has suffered a series of setbacks. This raises concerns about a decline in operational performance, but on the other hand, it is difficult to draw major conclusions from the challenges faced mainly on individual refinery lines. The production shutdown comes at a bad time, as production capacity is now constrained by lower inventories due to maintenance shutdowns. Recently, the European market for renewable diesel in particular has strengthened, increasing the impact of lost sales volumes on earnings. In any case, the current year will be a lousy one for the company, and the presumably short production interruption will not change the overall picture. From an investor's point of view, the key issue remains the timeframe in which the supply/demand situation in the market for Renewable Products will stabilize and the level of the sales margin for Renewable Products in the long run. We have not made any forecast changes in this regard, but we did cut our projections for Q4'24 and Q1'25 slightly as a result of the production outage. As a result, our comparable EBITA estimate for 2024-2025 decreased by 5-2%.

Valuation is quite low as result recovers

The valuation of the stock is quite high (EV/EBIT >40x) given the weak current-year result. However, in the medium term, the valuation falls to quite attractive levels (2026e P/E 7x and EV/EBIT 7x), as we expect Renewable Products' result to improve significantly in the coming years, driven by volume growth from new capacity and a recovery in sales margins. The oversupply situation in the market makes it very challenging to accurately assess its recovery, but we do not expect this to happen to any significant extent before 2025. Thus, the expected return over the next few years is back-loaded, and we believe that this argues in favor of spreading purchases over time.