Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Ioannis Pontikis. He is an equity analyst at Morningstar in Amsterdam. Hello.
Ionnis Pontikis: Hello. Thanks for having me.
Black: So, we're talking today about a business called JDE Peet's. This is quite an unusual one for you to be looking at because it only recently floated on the stock exchange. Can you tell us a bit about this firm?
Pontikis: Yes, that's exactly right. So, JDE Peet's is the owner of more than 50 brands including Jacobs, Peet's Coffee, L’OR and Tassimo and is the second largest coffee maker in the world behind Nestlé. So, we think the most important element in JDE Peet's equity story is its unique exposure in the coffee category being the largest publicly-listed coffee pure play after completing a very successful IPO a couple of months ago, as you said. That's very important because coffee is one of the most attractive global food and beverage categories and for good reasons. In emerging markets, the main growth driver over the last several years has been high penetration through stronger coffee consumption per capita which is still low when compared to developed countries, while in developed countries the main growth driver is premiumization through growth of higher price per sub-categories such as single-serve pods, pads, aluminum capsules and fresh whole beans.
Black: Okay. So, it's a super interesting business. But in terms of competitive advantages, can a coffee company have an economic moat?
Pontikis: Yes. So, we think JDE Peet's commands a narrow moat supported by (some trends) positioning in the supply chain, well-known global, regional and local brand names and the cost advantage. In particular, we believe JDE Peet's moat is supported by high shelf space service in supermarkets. This is a function of strong retail relationships which are intangible assets, above average prices per unit sold for comparable products as well as greater than average pricing contribution both of which are functions of brand strength which is also an intangible asset.
Black: And does the Covid-19 crisis change the outlook here to all the investment case of the business?
Pontikis: Yeah, that's a good question. We do not see the slowdown in the non-retail CPG market of the group due to the disruptive effects, as you said, of the Covid-19 pandemic contributing to a weakening of JDE Peet's competitive position or competitive advantage. Out-of-form and retail coffee stores account for about 20% of sales. But lower consumption of coffee out-of-form has boosted coffee consumption at home where the group derives almost 80% of its top-line. Now, this adds as a sort of natural hedge in the short term. In addition, we believe that although a small portion of that food service coffee demand could permanently migrate to the retail CPG channel in the supermarkets, we do not really see large pandemic-related disruptive events return in longer term.
Black: So, the share price is already up quite a way since the company IPO-ed. So, what's the investment case from here? What's the outlook do you think?
Pontikis: Yeah, that's exactly right. So, currently, the company's shares are trading very close to our fair value estimate. But we do think that JDE Peet's investment case has more than that. It's more about a sustainable dividend growth story for three main reasons. First, the underlying market defensive characteristics over a full business cycle; second, the group's robust free cash flow generation and finally, JDE Peet's growth potential, especially through premiumization in developed markets and further development of its presence in emerging markets through further partnerships and acquisitions.
Black: Ionnis, thank you so much for your time. For Morningstar, I'm Holly Black.
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