Iceland - benefit of inflated sales will reverse, but no trigger to cause bonds to widen

All,

Please find our updated model here.

We currently do not have an active position in Iceland but continue to monitor the situation.

We expect the Company to deleverage to 3.5x into FY21 numbers (March-21) but it is likely to increase in leverage there after, with top line sales and EBITDA reducing to more normal levels.

Price competition:
Throughout the various lockdowns and restrictions due to Covid-19, there was limited price competition which has inflated margins. A return to intense grocery competition is likely in a post Covid world. This will inevitable hit margins and EBITDA levels.

Leverage:
We have modelled a return to average store sales and Gross Profit margin per FY19 for FY22 and beyond, which increases leverage back up to 5.0x at March 2022 from an expected 3.6x at March 2021. Note, the Company are likely to have c. £200m of liquidity.

CapEx:
The largest unknown in the projections is the ongoing level of CAPEX required by Iceland. Iceland have historically averaged £60m CAPEX but with fewer store openings likely in the future this number is likely to drop. The flip side is further investment in online delivery as this style of shopping is likely to remain in the market. We have modelled a c. £50m CAPEX spend in FY22 and FY23.

Positioning:
We are thinking of Iceland from. short perspective. However, shorting the bonds now is a difficult prospect, given that even under an FY22 £120m EBITDA, the business still generates cash. The Company has no short term maturities (apart from £20m in July 2021) and although the bonds currently trade tight (5-6%) the momentum over the next 3-6 months should still be favourable for the Company.

Happy to discuss.


Tomás

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