Neste Q4'24: The wait is (too) long

Translation: Original published in Finnish on 02/17/2025 at 07:00 am EET

We made exceptionally large estimate cuts for the short and medium term, as we adopted a more pessimistic view on the recovery of Renewable Products' margins and consider the postponement of the Rotterdam expansion. With our updated forecasts, we believe the stock's lower expected return is not sufficient to cover the risks of the distant upside potential, especially considering the weakened financial position. Hence, we lower our recommendation to Reduce (was Accumulate) and our target price to EUR 11.50 (was EUR 15.5).

The sales margin for Renewable Products fell more than expected

Neste's Q4 result fell short of expectations by a clear margin, which was due to Renewable Products' weak sales margin that undercut expectations. The sales margin suffered throughout 2024 from the low price of conventional diesel, which affected the pricing of renewable diesel, as well as elevated raw material prices and weaker-than-expected demand. These factors remained largely unchanged for Q4, but the impact of the segment's production challenges and the resulting cost and efficiency losses on the sales margin was clearly stronger than expected.

Cost savings and lower investments through the transformation program

On the earnings day, Neste also reported the conclusions of the full potential analysis. The company announced it is initiating change negotiations aimed at reducing 600 roles as part of a 350 MEUR EBITDA improvement program. Personnel reductions account for about a quarter of the targeted 250 MEUR cut in operating expenses, while the company aims for about a 100 MEUR improvement through commercial successes and more efficient refinery operations. The earnings improvement is part of the company’s updated financial targets, in addition to which Neste aims to keep its net gearing below 40%. Furthermore, investments in 2025-2026 are at most 2.4 BNEUR, even though the ongoing investment period in Rotterdam was extended by one year to 2027, and its investment cost increased to 2.5 BNEUR (was ~1.9 BN).

We cut our estimates heavily

Neste abandoned its margin guidance and now only guides for Renewable Products and Oil Products sales volume growth for 2025. The guidance has a limited impact, as sales volume growth is a given considering last year's expected and unexpected maintenance shutdowns. We cut our EBITDA forecasts for 2025-2026 by a good one-third on average, as we took a significantly more pessimistic view on Renewable Products’ sales margin and moved the Rotterdam expansion volumes forward, in line with the updated investment schedule. The predictability of Renewable Products’ sales margin remains very difficult, and we see estimate risks related to it in both directions due to the oversupply situation, both in the short and medium term.

Lower long-term potential does not incentivize risk-taking

The stock's valuation is quite high with our 2025-2026 forecasts (P/E ratio 37x and 19x). With our updated estimates, the expected return based on the stock's medium-term earnings improvement potential has also decreased clearly. In return for this longer-term return expectation, investors must also bear more risks than in our previous estimates. We feel this also makes the long-term risk/reward ratio weak.