Antonio Garufi of Decalia Asset Management presented his investment thesis on Neste (Finland: NESTE) at European Investing Summit 2021.

Thesis summary:

Neste is a leader in the renewable diesel business. The company has a dominant market position in a fast-growing market. Renewable diesel is refined from food waste and waste cooking oil and reduces emissions by 80%.

More than seven years ago the company started transitioning from an oil-driven business to a renewables-focused one, with a forward-looking attitude. Today, the underlying market is growing at a CAGR of more than 25%.

The hyper-growth opportunity (~70% CAGR) comes from the sustainable aviation business (SAF). Airplanes will be required to fill their tanks with a fixed and growing percentage of SAF in the next few years.

The company recently sold its oil assets to Chevron and is set to improve its capital allocation policy by increasing buybacks, due to a clean balance sheet. Antonio estimates that the high ROIC of the renewables business (18-20% adjusted) and strong cash generation will allow management to optimize the capital structure by buying back around 12%-15% of outstanding shares.

Antonio sees a compelling growth runway for this market leader, as well as a catalyst following the sale of oil assets. Neste has become a “pure play” in a green business and may enjoy a scarcity premium.

While the recent valuation may seem expensive (2022E P/E of 26x and 2022E EV/EBITDA of 16x), Antonio believes a five-year estimated exit value justifies a high-teens annual investment return over the period.

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About the instructor:

Antonio Garufi is the Fund Manager of the Decalia Circular Economy Fund, based in Geneva since 2017. Previously, he worked eight years with Astor Investment as PM and analyst of a multi-thematic hedge fund. Before that, he spent three years at JPMorgan in London. He holds a master degree in Corporate Finance from Bocconi University, a PhD in Economics, and executive degrees from Columbia and Harvard Business School.

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