Translation: Original published in Finnish on 07/24/2025 at 11:59 pm EEST

The Renewable Products segment's better-than-expected result had Neste's Q2 result exceeding our forecast. Against this backdrop and the upward trend in market development, we made positive estimate revisions for the coming years. In our view, the risks associated with the company's elevated indebtedness have decreased following the estimate revisions. Despite recent developments, we believe that the medium-term market outlook is still subject to considerable uncertainty, reflecting the overcapacity situation. Thus, we reiterate our Reduce recommendation for Neste, which is challengingly priced in the short term, but in line with estimate revisions and a lowered required return, we raise our target price to EUR 14.0 (was EUR 9.0).

Source: Inderes & Vara Research (consensus, 16 estimates)

The Renewable Products segment surprised positively

Neste's Q2 comparable EBITDA climbed to 341 MEUR, which exceeded both our and consensus estimates by a significant margin. The earnings beat came in practice from Renewable Products, whose earnings level is still quite weak, reflecting the market situation. Sales volumes of Renewable Products grew at a double-digit relative rate compared to the reference period, and the comparable sales margin for Q2 was also better than expected. At the same time, Oil Products performed as expected, although the earnings performance was limited by a weak refining margin, reflecting the market situation. Normal inventory valuation losses pushed the reported result clearly into the red, but Neste's Q2 EPS, adjusted for this and other items affecting comparability, was EUR 0.06 per share, which was higher than expected.

The trend in estimates was upwards

We have significantly raised our estimates for the coming years following the Q2 report, with the increase in estimates for the Renewable Products segment being the main driver. We have accelerated the recovery of the segment's sales margin in our estimates. However, given the prevailing overcapacity situation, we do not expect the margin to recover anywhere near the record high levels of recent history in our medium-term forecasts. In addition to the recovering sales margin, the earnings growth of Renewable Products will be driven in the coming years by the continued growth in sales volumes in our forecasts, and we also expect ongoing efficiency measures to contribute to earnings growth. Following estimate revisions and the Q2 report, the 2025 comparable EBITDA estimate increased by 8% and the corresponding 2026 forecast increased by 11%.

Following an increase in earnings estimates, concerns related to Neste's indebtedness have decreased, as our estimated stronger cash flow caps the debt peak in the current year despite large investments in 2025-2026. Thanks to our forecasted earnings growth and a declining debt level, net debt/EBITDA will clearly fall into a comfortable range, i.e., below 2x by 2027 (cf. Q2’25: 4.9x).

Valuation is justified if significant earnings growth materializes

With our updated estimates, the share’s earnings-based valuation for the coming years is high (2025-2026e P/E 50-21x and EV/EBIT 39-20x). The earnings-based valuation looks reasonable only with significant earnings growth in our 2027 estimates, when the P/E and the EV/EBIT ratios are 14x. Following the share price increase, the balance sheet-based valuation has corrected to a level of 1.6x, which reasonably prices the medium-term market rebalancing in Renewable Products. In our view, however, balance sheet- or earnings-based valuation does not justify taking on the still-present market risks associated with Renewable Products, given the elevated level of indebtedness.