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JDE Peets (Baa3/BBB-/BBB) planned implementation of EU regulation causes concern

CONSUMER STAPLES

As we have said before free-float for equities is small (~20%) so it tends to be volatile. The weakness this morning is on this FT article which has quotes from JPeet's Coffee & Tea sourcing director.

  • EU will restrict importing commodities including cocoa, palm oil, rubber & coffee if it comes from land that was deforested after 2020 - this is under the EUDR regulation and is planned to come into effect at the end of this year.
  • The regulation is NOT new, companies like Peets HAVE been preparing for it. The only complaint is EU not putting detailed guidelines to meet up yet. FT cites internals who say a "online compliance system will be unveiled soon".
  • Peets and others in the industry apparently currently use Envertias's high resolution satellite imagery that identifies deforested growing areas to replant and declare them deforestation-free. But concern is EU will be more specific and require tracking to specific plots of land.
  • The JPeet's director adds "prepared for all scenarios but IF Enveritas’s mapping was deemed non-compliant by Brussels, some producers using it might not be able to sell to the EU after December 30."
  • NGO quoted in the article rebuts by saying "companies have known this regulation was coming for several years now".

We do not have much concern for 'one' of the world's largest coffee (84%) and tea (3%) producers who has flagged in the past it targets " no deforestation across its primary deforestation-linked commodities, coffee, pulp & paper, palm oil and cocoa with a target date of December 31st 2025 (or earlier if and to the extent applicable laws and regulations such as EUDR so prescribe)." Our only negative to note; JPeet's has 54% of its revenue exposed to Europe and not well diversified into the US (14%) or APAC (9%). The mix has not shifted much over the years. FY guidance is firm; organic sales at high end of MT target (+3-5%), adj. EBIT growth of around 10% (~€1.24b), FCF >€850m, net leverage <3x and dividend stable (paid €0.7/share/€340m last year). We have generally been skewed to see value on its curve (5Y/30s Z+103).

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