UBS warns of near-term weakness, downgrades Neste to “neutral”

Investing.com -- Neste (HE:NESTE) has been downgraded by UBS Global Research to "neutral"  from "buy" amid mounting concerns over the company’s near-term outlook, in a note dated Tuesday. 

The downgrade is accompanied by a reduction in the price target to €10 from €15, reflecting heightened downside risks to consensus expectations. 

"We downgrade Neste to Neutral and cut our PT to €10 from €15 as we now see substantial downside risk to consensus expectations in the near-term," the analysts sad.

The primary concern stems from the sharp decline in Renewable Products margins, which have weakened considerably over the past month. 

UBS has lowered its first-quarter 2025 forecast by approximately 50% to $206 per ton—placing it 38% below consensus estimates. 

"Renewable Products (RP) margins have turned sharply weaker over the past month: we cut our 1Q25 forecast by ~50% to $206/t, putting us 38% below consensus for the quarter," UBS added.

While UBS expects RP margins to recover to around $400 per ton in 2026, near-term volatility is likely to weigh on the stock. 

"We still expect margins to rebound to ~$400/t next year but expect near-term weakness and further consensus downgrades to weigh on the shares, especially since the lower margin means gearing could rise slightly this year," the analysts said.

In Europe, renewable diesel prices have fallen while feedstock costs have risen, squeezing profit margins. Neste’s shift of volumes from the US to Europe has added further pressure. 

"We expect the RP margin to be down q/q because of weakness in both Europe and the US while SAF growth is back-end loaded this year," UBS said.

In the US, uncertainty over federal tax credits for renewable fuels has further dampened prospects. 

While biofuel credit prices (RINs and Californian LCFS credits) have increased, they have not fully offset the loss of federal support.

"The negative impact of uncertainty over the federal tax credit has not been fully compensated by an increase in biofuel credit prices (RINs and Californian LCFS credits)," UBS said.

Despite these short-term concerns, UBS maintains that Neste’s long-term growth potential remains intact, particularly with the increasing demand for Sustainable Aviation Fuel (SAF) in Europe and rising renewable diesel demand in California and under the EU’s Renewable Energy Directive III. 

However, these factors are currently overshadowed by immediate margin pressures. 

"We still see the longer-term outlook as favourable for Neste given the SAF targets in Europe and higher RD demand in Europe under RED III and in California. We see this long-term outlook as likely to be less a focus given near-term pressure on margins," the analysts said.

The price target cut reflects multiple factors, including a weaker near-term outlook, a reduced normalized RP margin assumption from $450 to $400 per ton, and currency fluctuations. 

"The PT cut reflects a combination of the much weaker near-term outlook (~60% of the cut), a lower normalised RP margin for valuation $400/t from $450/t (~25% of the cut), and the stronger € vs. $ (1.08 from 1.05; ~15% of the cut)," the analysts added. 

Earnings projections for Neste have also been reduced, with UBS cutting its 2025 EPS estimate by 93%. Given these developments, investors are expected to remain cautious until margins show clear signs of recovery. 

UBS analysts suggest that while the company retains a strong position, the current market conditions warrant a wait-and-see approach before revisiting long-term growth assumptions.