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
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
