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Neste - Continuously strong performance from Renewable ProductsCredit metrics unchanged

  1. Strong operational performance in Renewable fuels, while Oil product margins are under pressure
  2. Unchanged credit metrics despite slightly weakened profitability
  3. Recommendation reiterated at Market Perform
Q1 adjusted EBITDA down 5% y-o-y
Neste reported a strong first quarter, driven by Renewable Products. Adjusted EBITDA however decreased slightly by 5% y-o-y to EUR 516m, as Q1 2018 contained EUR 140m of US Blenders tax credit. Renewable Products reported a record quarter with comparable operating profit increasing to EUR 337m (Q1 2018: 296m), thanks to a very high utilisation rate of 99%, leading to a 14% increase in production, coupled with a 25% y-o-y hike in sales. Oil products suffered from a weaker price discount of -0.26 USD/bbl (Q1 2018: -1.68) for Russian crude oil and profitability dropped to EUR 73m (Q1 2018: 99m).
Higher working capital pressuring cash flow
Neste’s operating cash flow decreased to EUR 100m (Q1 2018: 323m), mainly due to increasing working capital. Total adjusted debt increased slightly to EUR 1,373m and despite the slightly weaker profitability, credit metrics remain unchanged during the quarter. Neste’s adequate EUR 1,145m cash position coupled with EUR 2,942m in committed unutilised credit facilities leaves room for the coming EUR 583m dividend payments and the EUR 266m refinancing needs in 2019.
Upcoming EUR 1.4bn Singapore investment
Neste announced in late 2018 that it plans to invest in new 1.3 million tonne per year renewable fuel capacity in Singapore. Costs for the three-year project will total EUR 1.4bn, with 70% of the capex set for 2020 and 2021. When looking ahead in 2019, we expect Neste to benefit from continuous high profitability in Renewables, increasing regulatory support for renewable fuels and stable cash flow generation, coupled with a strong, albeit slightly weakening, cash position. In the longer term, we expect the dividend target, combined with the increase in capex (to around EUR 800m for 2020e and 2021e), to put pressure on debt levels.

Source: Company reports and Handelsbanken Capital Markets