AMDP Proposal Draft - Neste

 To: Clark Hansen, CEO of Anima Mundi Development Partners

From: Hai Tran, Research and Development

Date: October 18th, 2024

Subject: Investment Opportunity: Neste

Executive Summary

I strongly recommend that AMDP invest in Neste, a public Finnish oil company specializing in producing renewable diesel as a substitute for fossil fuels. Since 2019, Neste has already helped its customers reduce 50 million tons of GHG emissions, and it plans to scale its environmental impact even further.  In this memo, I will demonstrate how Neste meets AMDP’s investment criteria and why it will flourish in the future despite current challenges.


This memo includes:

  • Summary of AMDP’s investment criteria

  • Overview of Neste’s background and claims

  • Analysis of Neste’s financials and claims

  • Final recommendation

AMDP Investment Criteria

At AMPD, our mission is to support businesses that positively impact our planet. In alignment with this mission, our investment strategy is based on four key criteria:


Social Enterprise: a business that prioritizes social objectives over profit maximization for its owners and shareholders. These businesses reinvest excess profits and use business strategies to address pressing social concerns like climate change and poverty.


Corporate Social Responsibility: a self-regulating business model that holds a company responsible to its shareholders, stakeholders, and the public. A company committed to corporate social responsibility contributes positively to social, ethical, and environmental issues.


Triple Bottom Line: an accounting framework that is used to measure the performance of social enterprises through three dimensions:

  1. Profit: financial impact on their shareholders

  2. People: social impact on their customers, employees, and communities

  3. Planet: environment impact on the planet


Carbon Footprint: a company’s carbon footprint is the sum of greenhouse gas (GHG) emissions caused by a company’s activities. It is measured by summing direct emissions from the firm’s operations, and indirect emissions caused by the firm’s use of electricity and waste disposal. Companies should reduce their carbon footprint because GHG trap the sun’s heat in our atmosphere and contribute to climate change.

Company Background

The Finnish government founded Neste in 1948 to serve as the country’s primary oil supplier. Neste grew exponentially in the 20th century, building two large oil refineries in the Finnish cities Naantali and Porvoo. Neste also expanded overseas with retail facilities in the Baltics and Russia. The company went public in 1995 and was the largest Finnish company at the time.


In the early 2000s, Neste repositioned itself to focus on renewable fuels to align itself with growing public environmental consciousness. Neste’s proprietary renewable product is Neste MY Renewable Diesel, a hydrotreated vegetable oil (HVO) made from renewable organic waste and oils. Since the 2000s, Neste has constructed renewable diesel refineries in Singapore and Rotterdam, producing over a million tons of renewable diesel annually. Neste is the market leader in the global HVO market, with a market share of 35.6%. Its positive environmental impact has earned it multiple inclusions on the CDP and Global100 lists of the world’s most sustainable companies in recent years.


Company Mission and Claims

Neste’s mission is to “create a healthier planet for our children” through “combating climate change and driving a circular economy.” The company claims that its renewable diesel is strictly better than comparable fossil fuels:

  • Deliver the same or better performance

  • Is compatible with existing infrastructure.

  • Releases up to 75% less GHG emissions

  • Uses 100% renewable raw materials, specifically organic wastes and oils


According to Neste, it has helped its customers reduce 50 million tons of GHG emissions since 2019. Looking into the future, Neste has established milestones for how it wants to increase its environmental impact in the future:

  • 2030: help its customers reduce 20 million tons of GHG emissions per year

  • 2035: end its crude oil refining operations and reach carbon-neutral production

  • 2040: reduce the carbon footprint of its renewable fuel by 50% compared to 2020 levels

Fundamental Financial Analysis Against Comparables

Strong Investment Strategy and Execution

Neste’s current largest priority is investing further into its renewable product segments to combat climate change. In 2023, Neste invested EUR 1,365 million into its Renewable Products segment, equivalent to 59.9% of the company’s operating profits. This is 443 million more than how much Neste gave in dividends to its shareholders. This reinforces Neste’s status as a social enterprise dedicated to its environmental objectives, more so than maximizing profits for its shareholders.


Neste’s past investments give investors confidence that its future investments will be successful. Between 2018 and 2023, Neste’s annual return on investment was 14.08%. For context, its competitors Shell and Chevron had returns on investment of 6.02% and 6.24%, respectively, over the same period. This reflects well on Neste’s investment strategy and management efficacy relative to competitors.


Strong Long-term Growth, Challenging Short-term Circumstances

Neste has been significantly outperforming the market. In 2023, its revenue from renewable products was EUR 8,466 million, a 98.3% increase from 2020. Neste’s growth rate is currently significantly greater than that of the global HVO industry, which grew 56.1% over the same period. This reflects the success of its past investments and shows that Neste is further establishing its market leadership in the HVO market.


However, Neste has recently faced unfavorable market conditions that have affected its operational efficiency. In 2023, Neste’s revenue from renewable products decreased 14.5% from 2022. Likewise, Neste’s operating profit margin of 6.7% in 2023 decreased from 10.6% in 2022. This is due to decreasing prices of fossil fuels and high prices of raw materials, which has affected Neste’s margins and volume. 


Liquidity Risks

Neste is currently facing liquidity risks due to an increase in short-term debt. In 2023, Neste’s Quick ratio was 0.65, indicating that Neste doesn’t have enough current assets to cover its current liabilities. This puts Neste at risk of bankruptcy, as it may default on its loan interest payments. This can also affect Neste’s future investments, as banks may not be willing to offer Neste loans at desirable interest rates.


However, Neste is aware of its financial risks and is taking precautionary measures to manage them. Neste ensures it has at least EUR 700 million in cash reserves to cover all forecasted negative free cash flows and interest-bearing liabilities maturing within the next 12 months. Furthermore, it works with credit agency Moody to frequently make credit assessments, have clear limits and protocols on taking loans, hedge its forecasted cash flow exposures, and work with insurance firms to get protection against significant monetary losses. This demonstrates that Neste has a clear set of preventative, mitigation, and contingency strategies to combat its financial risks.

Expert Opinion

BCC Research

BCC Research, a trusted research partner headquartered in Massachusetts, United States, is confident in the future of HVO and the global HVO market.


BCC Research reinforces Neste’s positive claims about HVO, and its research indicates that it is an effective and sustainable alternative to fossil fuels. Many governments, like the US and China, are supporting the growth of renewable fuels like HVO through subsidies and grants. Neste is one such recipient, receiving EUR 27.7 million from the Finnish government and EUR 135 million from the European Commission. BCC’s expert opinion and the European government's support for Neste add credibility to Neste’s claims about its renewable diesel's effectiveness and forecasted growth. 


—- will add more info —-


GlobalData

GlobalData, an established and reputable consulting firm headquartered in London, England, is confident in Neste’s future if it can overcome its current market challenges.


Neste is an existing market leader in the HVO market but still has promising growth prospects. The commercial aviation industry is a major consumer of Neste’s renewable diesel as a form of sustainable aviation fuel. The sustainable aviation fuel market is growing at an accelerated rate due to decarbonization efforts. Neste is positioned to meet this growing demand, as its existing oil refineries in Rotterdam and Singapore can produce up to 2.3 million tons of renewable diesel annually – more than double their current annual output. It is also investing in new refineries and transforming existing refineries to produce renewable diesel to supplement production.


Besides increased debt, liquidity issues, and unfavorable market conditions, another major threat to Neste’s future is increased competition. Due to governmental efforts to encourage sustainability, many major US, Europe, and Asia energy companies are entering Neste’s markets. For example, Shell and Chevron entered the global SAF market and are vying with Neste for market share. These firms, bigger in scale than Neste, are more vertically integrated, capable of employing greater economies of scale, and may push Neste out of the market. Neste needs to establish itself as a market leader or carve a niche to ensure its future survival in a market with greater competition. 


Conclusion and Recommendation

___________

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