Neste downgraded to "hold" as margin pressure and overcapacity weigh on outlook

Investing.com -- Neste Oyj (HE:NESTE)has been downgraded to a "hold" rating by Berenberg analysts, reflecting ongoing margin pressure and industry overcapacity concerns that are expected to persist in the coming years. 

Shares of the oil refining and marketing company were down 2.6% at 07:31 ET (12:31 GMT).

The brokerage has also slashed its price target for Neste to €10  from €19, signaling a far more cautious outlook on the company’s near-term performance.

At the company’s recent Capital Markets Day, Neste outlined a new strategy aimed at strengthening its financial position amid a deteriorating market environment. 

The Finnish renewable fuels producer is targeting a €350 million improvement in EBITDA run-rate by 2026, with €250 million of this coming from cost reductions. 

However, despite these efforts, Berenberg remains pessimistic about the company’s ability to counteract broader industry challenges in the short term.

The primary issue remains the significant overcapacity in the renewable fuels market. According to Neste, global demand for renewable transport fuels is estimated at 16 million tonnes per annum (mtpa) in 2024, projected to rise to 46 mtpa by 2030. 

However, the supply side is outpacing demand growth, with overcapacity of roughly 3 mt in 2024 expected to double to 6 mt in 2025. 

If all planned projects under construction or with a final investment decision move forward, global capacity could reach 37 mtpa by 2028. 

Even in a scenario of strong demand growth, the market is expected to remain oversupplied until at least 2028, barring major capacity cuts or stronger regulatory support for renewable fuels.

Margins have already come under severe strain, with Neste’s Renewable Products segment reporting a sales margin of just $242 per ton in Q4 2024. 

This left the business close to breakeven at the EBITDA level, further exacerbated by weak sales volumes. Adding to the uncertainty, the fate of the Clean Fuel Production Credit (CFPC) in the U.S. remains unclear. 

The CFPC, which is set to replace the Blenders Tax Credit (BTC), appears likely to exclude biofuels imported into the U.S., a potential blow to Neste given that roughly 50% of its U.S. sales in 2024 came from its Singapore facility. 

The BTC contributed €590 million to Neste’s EBITDA in 2024, and losing access to a similar credit structure could significantly impact margins.

In response to these challenges, Berenberg has made substantial cuts to its earnings forecasts.

The brokerage now expects Neste to post an EPS of -€0.03 for 2025, €0.40 for 2026, and €0.42 for 2027, down sharply from its previous estimates of €0.33, €0.83, and €1.73, respectively.

With these revisions, the price target was lowered to €10, reflecting the weaker earnings outlook.

Despite the near-term headwinds, Berenberg acknowledges that there is longer-term upside potential if margins recover. 

However, given the current state of the market, the brokerage remains below consensus expectations for 2025 and 2026.