The Long and Short
An attractive play on consumer staples
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Analyst forecasts for Keurig Dr. Pepper Inc. (KDP – Baa2/BBB) are for both higher net sales and improved operating margins when the company reports earnings at the end of October, meaning debt spreads could continue to grind tighter. KDP’s 3.35% 3/15/51 bonds, which trade at roughly 102 bp for a yield of 3.087%, have tightened roughly 10 bp since issue earlier this year and have traded as tight as 98 bp. Compared to the sector KDP 2051s trade roughly 34 bp through the consumer staples BBB curve. With its largest ownership in KDP, investing in JABHOL (Baa2/BBB+) is an attractive way to gain exposure to the KDP credit while picking up a notch in ratings. JABHOL 3.75% 5/28/51 bonds currently trade at 121 bp, for a nearly a 20 bp pick up from KDP.
Exhibit 1. Consumer Staples BBB Curve vs. KDP Curve
Source: Bloomberg TRACE; APS
What is JABHOL?
JABHOL (JAB Holdings BV) is an indirect, wholly owned financing subsidiary of JAB Holding Company. JAB Holding Company is an investment holding company which invests in consumer-focused industries that they believe are defensive in nature with attractive growth fundamentals, including both strong growth prospects and solid margin and cash flow characteristics. We note that JAB Holding Company unconditionally and irrevocably guarantees the debt of JAB Holdings BV. Across all of its equity portfolios, JABHOL is the largest shareholder of KDP. JABHOL differs from other investment company peers as it tends to focus on controlling stakes in a company which provide them with influence over both capital structures and dividend payments. JABHOL maintains controlling stakes in JDE Peet’s (coffee company), NVA (animal care services), Krispy Kreme (Donuts), Panera Bread (bakery-café company), Pret A Manger (ready-to-eat food markets), Caribou Coffee Company (high quality premium coffee), Einstein Noah Restaurant Group (bagel shops) and Espresso House (largest branded coffee shop in Scandinavia). Additionally, the company is the largest shareholder in Coty (beauty products).
As of 6/30/21, JABHOL’s portfolio of assets totaled roughly $34 billion (fair value) which was up from $30 billion at year-end 2020. Currently, 54% of the portfolio invested its coffee and beverages unit, which represents its stakes in both KDP and JDE Peets. JABHOL likes to focus on company’s that it can help take public as it took both JDE Peet’s public in May of 2020 and Krispy Kreme public in June of this year. It is estimated that JABHOL has retained approximately 41.5% of Krispy Kreme’s free float. Listed assets currently represent roughly 75% of JABHOL’s portfolio which helps to provide for strong dividend income. We expect this percentage to increase as JABHOL has aspirations to IPO the newly acquired animal care businesses.
Exhibit 2. JABHOL Portfolio Mix
Source: JABHOL First Half 2021 Presentation; APS
Management Commitment to Reducing Leverage
When analyzing an investment company, leverage is looked at on a loan-to-value (LTV) basis. At the end of 2Q21, JABHOL’s leverage was just under 25% which is high relative to peers. However, we note that JABHOL is able to maintain higher leverage relative to peers given its stream of dividend income. Currently the leverage ceiling for JABHOL is 25%, while peers are at 20%. Management has noted that they remain committed to reducing its LTV to below 20% by year end 2021. Historically, we note that leverage has been closer to mid-teens area for JABHOL, which is about five percentage points higher than peers and in line with the difference in leverage ceilings. However, given some one-time events in 2020 which included both the unwind of an SPV and the subsequent repayment of loans associated with the SPV, leverage peaked at 24%. We believe management will look to sell some assets before year-end and reduce leverage below the 20% range. Management targets a 15%-20% LTV range.
Liquidity Supports Ratings
Liquidity remains very strong as JABHOL ended 2Q with a cash position of $2.8 billion and access to an undrawn EUR3.0 billion revolver. Debt maturities remain very manageable with no more than EUR1.250mm maturing in any given year. We note that management has done a good job smoothing its maturity profile as it has tendered for portions of its next four debt maturities (2021-2024), with EUR475.8mm maturing on 11/24/21 (EUR750mm issued). We note that JABHOL issued EUR500mm in July 2021 which we believe will be used to repay the November maturity. Furthermore, the $500mm 30yr notes issued in May of this year will be used to retired existing debt. S&P estimates that JABHOL’s liquidity sources will exceed needs by nearly 6x over the next twelve months, with that level moving closer to 3.6x for the 7/1/22-7/1/23 period.
Dividend Income Continues to Grow
Despite the pandemic, JABHOL witnessed solid dividend income growth in 2020 which underscores its investment thesis. Last year we saw numerous companies suspend both dividends and share repurchases in order to shore up liquidity. Given that JABHOL focuses on investments in what it deems defensive/resilient sectors, none of its holdings had cut the dividend during the pandemic. That said, JABHOL saw its dividend income rise to roughly $530mm in 2020, up nearly 43% from the year-ago period. Furthermore, its dividend income is expected to grow this year to the $600mm-$650mm range given that JABHOL took JDE Peet’s public last year and the company started paying a dividend in 2021.
Exhibit 3. JABHOL Dividend Income (2014-2021E)
Source: S&P Global Ratings
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