Neste Q2'24: Finding bottoms in Renewable Products

This report is a summary translation of the report “Pohjaongintaa Uusiutuvissa tuotteissa” published on 7/25/2024 at 11:06 pm EEST.

Neste's Q2 comparable EBITDA was slightly below our forecasts, but the lower-than-expected sales margin in Renewable Products in particular made the overall picture negative. The very weak market for Renewable Products has probably bottomed out, but the rate of market recovery and its timing are of course unclear. We believe the segment's long-term sales margin will be higher than the recent lows, relative to which we believe the stock's valuation is moderate. Thus, we reiterate our Accumulate recommendation but cut our target price to EUR 21.0 (was EUR 21.5), reflecting estimate revisions.

Low sales margins in Renewable Products hit the result hard

Neste achieved a comparable EBITDA of 240 MEUR in Q2, slightly below our and clearly below rather fragmented consensus forecasts. The miss was mainly due to a sharper-than-expected decline in the main value driver, sales margin of Renewable Products, in an exceptionally weak market in the second quarter. As a result of this and slightly weaker-than-expected sales volume growth in the segment, the result was well below our expectations. This was slightly offset by an earnings beat in Oil Products, driven by sales volumes that were less impacted than expected by the maintenance shutdowns in Porvoo. Due to the group's low comparable result and inventory valuation losses driven by changes in commodity prices, the reported result for Q2 unexpectedly turned sharply negative.

Short-term forecasts remain under downward pressure

Neste reaffirmed its previous guidance for Renewable Products’ sales volumes of around 4.4 Mt/year (+/- 10%) but refined its sales margin guidance to USD 480-580/ton (was USD 480-650/ton). The lowering of the upper limit was not particularly surprising, given the recent weakness of the market and also the slightly downward revision of the guidance on responsible aviation fuel sales volumes to 0.5-0.7 Mt (was 0.5-1.0 Mt). The outlook for lower sales volumes and refining margins for Oil Products was reiterated. Against this backdrop and in light of the Q2 performance, we have lowered our full-year revenue forecast for Renewable Products to 4.1 Mt and our sales margin forecast to approximately USD 515/ton. This, combined with forecast revisions due to weak refining margins for Oil Products, reduced this year's comparable EBITDA forecast by 4%, and next year's operating forecasts were also impacted (4-6%) by higher fixed cost forecasts in Renewable Products. We did not make any changes to our medium-term estimates.

Valuation has declined with Renewable Products sales margin

Neste's share price has fallen sharply (-45% YTD) along with lower earnings forecasts for Renewable Products. This is the result of the collapse of the Renewable Products’ sales margin, which we believe is currently at an unsustainably low level. We therefore expect that the recovery of the sales margin, together with the increase in sales volumes from the known investments, will lead to a medium-term correction of the valuation, which is high compared to the current year's weak earnings. Our projections for next year value Renewable Products at a reasonable 13x EV/EBIT multiple in our sum-of-the-parts calculation, so we believe an investor can pick up good medium-term earnings growth prospects at the current price at an attractive valuation.