On Tuesday, Neste lowered its guidance for the sales margin of renewable products, reflecting primarily the impact of increased supply and market weakness. The company now expects the margin to be $480-650 per ton in 2024, down from the previous expectation of $600-800 per ton. This is mainly due to supply growth outpacing demand in North America, leading to a significant drop in the prices of biofuel credits. Additionally, the pressure on fossil diesel prices and the stable high costs of raw materials for renewable products have negatively impacted the margins.
The drop in Neste’s sales margin has also led to a reduction in earnings forecasts. The forecast for the entire year’s sales margin of renewable products is now approximately $530 per ton. The second half of the year’s margin is expected to improve slightly due to the growth in sustainable aviation fuel (SAF) sales volumes. However, Q2 is projected to be significantly lower than Q1, around $450 per ton. This has resulted in a reduction of about 20% in the forecast for the comparable operating profit, down to nearly 2 billion euros. The medium-term forecasts have also been lowered, which reflects in nearly a 20% drop in the group-level operating profit forecasts.
The current stock valuation appears pessimistic regarding long-term prospects. According to our sum-of-the-parts calculation, renewable products are valued at a high 25x EV/EBIT multiple based on the weak 2024 results. While there might be better buying opportunities in the short term, we expect strong profit growth in 2025-2027 driven by sales volume increases. However, the current share price might underestimate the long-term potential, as the forecasted demand growth for this decade requires significant investments, and low margins could at least delay these investments. 