UBS upgrades Neste to “buy,” citing stronger margins and tighter renewable diesel

Investing.com -- UBS in a recent note upgraded Finnish renewable fuels producer Neste Oyj (HE:NESTE) to “buy” from “neutral” and lifted its price target to €20.5 from €16, arguing that market expectations have not captured the improving outlook for the group’s renewable products and refining businesses. 

The brokerage highlights sustained strength in diesel and renewable diesel pricing and a tightening European supply-demand balance.

Shares of the Helsinki-listed company were trading at €16.10 on Nov. 24,, implying a market capitalization of €12.4 billion. UBS estimates the stock trades at 6.7x 2026 EV/EBITDA, below Neste’s three-year average multiple of 8.3x.

UBS raised its earnings forecasts by 42% for 2025 and 41% for 2026. The brokerage now sits 63% above consensus for 2025 and 51% above for 2026. The analysts previously anticipated a rapid normalization in diesel pricing that would pressure renewable product margins. 

Instead, diesel margins have remained elevated following Neste’s third-quarter results, while spot renewable product margins have held above $800 per tonne.

UBS expects Neste’s comparable sales margin to reach $467 per tonne in Q4 2025, ahead of the $454 per tonne consensus. For 2026, the brokerage forecasts $580 per tonne compared with $540 consensus. 

Approximately two-thirds of Nestlé’s renewable diesel volumes in 2025 are tied to diesel-linked term contracts, amplifying profit sensitivity to fuel pricing.

Demand for renewable diesel in Europe is forecast to grow more than 2 million tonnes per year in 2026, versus 1.4 million tonnes of new capacity additions. 

UBS expects 2.5 million tonnes of global new supply to start in 2025, down from a previous expectation of 3.3 million tonnes, 3 million tonnes in 2026, and under 2 million tonnes in 2027 as project delays accumulate.

This tightening underpins UBS’s bullish stance that the European market is shifting faster than investors assume.

European diesel refining margins have surged due to heavy maintenance activity, slower new refinery ramp-ups, Russian supply disruptions and resilient consumption. 

UBS forecasts margins above $30 per barrel in Q4 2025, declining to around $19 per barrel in 2026. Neste plans to keep greater pricing exposure by reducing long-term contract commitments, with spot exposure modeled to rise to 45% in 2026 from about one-third this year.

Supportive policies across Germany, the Netherlands, Spain and Italy under the EU’s Renewables Directive III, which requires a 14.5% emissions reduction in transport by 2030, are expected to sustain demand. 

Germany’s proposal to eliminate double-counting on certain biofuels could drive incremental demand if approved in early 2026.

UBS projects leverage to fall from 38% in Q3 2025 to 30% by end-2026 and near 20% by 2027, while free cash flow is expected to climb from €0.4 billion in 2025 to €1 billion in 2026 and €1.7 billion in 2027, implying yields of 3%, 8% and 14%.

Potential risks include a Russia-Ukraine peace agreement reducing diesel risk premia, shifts to EU mandates, and increased Chinese renewable fuel exports, particularly sustainable aviation fuel, currently excluded from EU anti-dumping duties.