Renewable Fuel Mandates And Capacity Expansion Will Support A Stable Long Term Outlook

Catalysts

About Neste Oyj

Neste Oyj is an energy company focused on renewable fuels and oil products, including renewable diesel and sustainable aviation fuel.

What are the underlying business or industry changes driving this perspective?

• Expanding global mandates for renewable diesel in Europe, North America and emerging mandates in Asia are increasing required volumes for low carbon fuels. This can support demand for Neste's renewable diesel and influence revenue over time.
• Rising policy focus on sustainable aviation fuel in Europe and Asia, together with airlines' need to comply with SAF blending rules, is creating a dedicated market for SAF where Neste already has meaningful volumes. This can affect long term earnings contribution from aviation customers.
• Ongoing regulatory work in Europe on antidumping duties for imported SAF and existing measures on renewable diesel imports are aimed at a more level playing field. If maintained or expanded, these measures can support margins by limiting underpriced imports and stabilizing pricing power.
• The Rotterdam capacity growth project targeting startup in 2027 and planned debottlenecking work at Rotterdam and Singapore provide a visible path to higher renewable production capacity. This can increase potential sales volumes and help spread fixed costs, impacting EBITDA and net margins.
• The performance improvement program, already at a €376m run rate with continued focus on refineries, logistics and procurement, is structurally lowering the cost base and optimizing commercial terms. This can support operating leverage and earnings resilience if market conditions fluctuate.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Neste Oyj's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 7.2% in 3 years time.
• Analysts expect earnings to reach €1.8 billion (and earnings per share of €2.28) by about July 2029, up from €717.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.1 billion in earnings, and the most bearish expecting €1.3 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 15.3x on those 2029 earnings, down from 31.2x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 31.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Regulatory support for renewable diesel and SAF is currently described as a tailwind in Europe, North America and Asia, and management talks about mandates rising towards 2030 and potential antidumping duties on imported SAF. If these frameworks are implemented as discussed, stronger policy support could feed through to higher demand, firmer pricing and potentially higher revenue and EBITDA than a flat share price would imply.
• The performance improvement program has already reached a €376m run rate, ahead of the original 2 year target, and management plans to keep pushing especially in refineries during 2026. If further cost savings and margin optimization come through on top of what is already in the income statement, that could lift net margins and earnings and support a higher valuation multiple.
• Management repeatedly highlights capacity additions and debottlenecking, including the large Rotterdam expansion targeting startup in 2027 and future debottlenecking work in Rotterdam and Singapore. If these projects start up broadly as described and utilization improves from current levels, higher renewable volumes and better fixed cost absorption could increase revenue and operating profit beyond what a flat share price suggests.
• Neste is described as the largest buyer of key feedstocks with a global sourcing network and appears focused on optimizing feedstock mix under the performance program. If this scale advantage allows the company to secure more favorable feedstock costs than peers over time, gross margins and EBITDA could improve and the share price could react positively rather than staying flat.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €29.53 for Neste Oyj based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €36.0, and the most bearish reporting a price target of just €12.1.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €24.3 billion, earnings will come to €1.8 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 6.0%.
• Given the current share price of €29.1, the analyst price target of €29.53 is 1.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.