Neste's Q1 figures were well below our expectations, driven by Renewable Products. Given the trajectory of sustainable aviation fuel sales, this is not particularly dramatic as long as sales volumes start to rise as expected in the coming quarters. We believe the conditions are in place for this to happen, but evidence is needed to restore market confidence. Our short-term forecasts were lowered, so we are reducing our target price to EUR 30.0 (was EUR 35.0), but we reiterate our Buy recommendation given the low valuation. Sales volumes and margins for Renewable Products underperformed Neste achieved a comparable EBITDA of 551 MEUR in Q1, which was clearly below our and consensus forecasts. The underperformance was driven by Renewable Products, which plays a substantially large role in the company's value creation. Its results were markedly below expectations, due to a slightly larger than expected decline in sales margin in a weak market and a smaller than expected increase in sales volumes. This was due to the usual seasonal nature of inventory build-up in preparation for the increase in sustainable aviation fuel (SAF) sales volumes and maintenance turnarounds. Renewable Products' volume growth rate and margin level indicating future direction As expected, Neste kept its guidance unchanged: The guidance for Renewable Products is for sales volumes of 4.4 Mt (+/-10%) and margins of USD 600-800/ton and for Oil Products for declining sales volumes and refining margins. The impact of lower-than-expected Q1 sales volumes on the Renewable Products sales volume forecast was moderate (3%) year-on-year, but the pace will need to pick up sharply already in Q2 to reach the full-year sales volume guidance. This should be made possible by SAF's growing sales volumes, and the company reiterated its guidance of 0.5-1 Mt SAF sales volumes for the current year. SAF's production already exceeded sales volumes in Q1 and this pace should accelerate in the current year as the ramp-up in Singapore progresses and the investment in Rotterdam brings more capacity. Thanks to SAF's higher sales margin, the margin outlook should also improve, although the Q1 performance and continued market weakness will test confidence in this. We have lowered our sales forecast for Renewable Products for the current year to 4.2 Mt and our sales margin forecast to around USD 650/ton. Mainly reflecting the Q1 result and these forecast changes, our forecast for operational EBITDA for the current year has been reduced by 9%, while the forecast revisions for next year remain more moderate (-4%). Market does not price earnings growth when expectations have been missed The market is pricing Renewable Products at an EV/EBIT multiple of about 16x on our current year earnings forecast, reflecting sales margins dragged down by a sluggish market and sales volumes well below potential. We believe this valuation multiple is slightly elevated, but its downside is more than offset by the earnings growth we forecast in the coming years, driven by significantly higher sales volumes. In our view, the current valuation of the stock is also moderate based solely on the projections for the next few years in the Renewable Products segment, with no value left for the Oil Products or Marketing & Services businesses. Thus, we believe that the current valuation level keeps the risk/reward ratio attractive, even if the long-term margin risks in Renewable Products remain in place.

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