Iceland - Not yet on ice

All,

Please find our updated Iceland model here.

Iceland, as with all food retailers, have enjoyed increased sales and profitability over the Covid crisis. As the world, hopefully, starts to unwind restrictions to "normal" life, food retailers will have to contend with reducing top-line sales and unwind of bloated working capital.

Leverage:
- We currently do not have an active position in Iceland but continue to monitor the name. We expect Iceland's leverage to increase only marginally into FY (March 2021) to 4x. Aside from distortions in the timing of quarter end payments, we think it likely that Iceland's leverage rises during FY22 with top-line sales and EBITDA reducing to more normal levels.
- 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 5.7x in March 2022 from an expected 4x in March 2021.

Working Capital:
- Retailers benefit from Working Capital inflow as sales increase, (from Covid-19) but as sales decline working capital will compound the outflow.

- Additionally, 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 and will inevitably hit margins and EBITDA levels.

Positioning:
- We are thinking of Iceland from a 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 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

_______________________

E: tmannion@sarria.co.uk

T: +44 20 3744 7009

M:+44 7786 705 806

www.sarria.co.uk