Iceland - Where to next?

All,

Please find our updated analysis of Iceland here.. 

Iceland has been requested by several clients but we don’t see a change in strategy or trajectory for the Company in the coming quarters. With the refinancing done over the summer, energy prices stabilising and no (significant) upcoming maturities, we expect focus on Iceland to reduce over the coming quarters. Note our optimism is based on a lower EBITDA than the Company is currently guiding. 

Investment Rationale:

- We maintain our 6% long position in Iceland 2028 bonds. In July, we rotated our long position from the Iceland 2025s into the 2028s at a 16-point differential (exiting 25s at 97%, buying the 28s at 81%) on the expectation a refinancing would be possible. We were surprised however that Iceland didn't (weren't able) to extend the maturities, leaving the 2028 bonds as the longest-dated bond in the structure. 

- We remain positive on the name and although we can't model the FRS 102 EBITDA to above £176m as per guidance, we are confident the Company will deleverage over time. 

The company are due to report Q3 in early February, where we expect a strong Christmas trading. 

- With energy prices stabilising and no upcoming maturity wall we don't see any issues for Iceland in the coming quarters. The name is trading on a relative value basis and although we maintain our position, we can foresee exiting for other opportunities. 

Best EBITDA for 10yrs:

- The Company have guided to the best EBITDA (FRS 102) for the last 10 years, implying EBITDA. £176m for the year ending March 2024. Our model undershoots this level, modestly, as we have expected an increase in price competition. We had expected to see some of this pressure in the Q1 and Q2 numbers, following competitors' comments stating the market was moving from inflation to deflation, and specifically Tesco stating their intention to lead the market on price cuts. 

- Although this is not evident in Q1 and Q2 we have modelled for a modest miss to guidance on lower margins. However, the Company’s confidence in meeting its guidance may be supported by the larger store closures this year, the majority of which were underperforming stores. 

Market Share:

- There is some concern over Iceland’s market share towards the end of 2023, however, we note it has subsequently ticked back up to 2.3%. For our purposes, we have never been huge fans of Kantar’s data, and rely more on top-line growth and overall market growth. Iceland had outperformed in Autumn/Winter 2022 so the comparable numbers in 2023 are against a higher comparable.  

- Our view is supported by the higher growth in the frozen market segment, where Iceland are the number 2 player, behind Tesco.  

Housekeeping:

- Iceland has commenced reporting in line with IFRS 16 accounting, which has the impact of inflating reported EBITDA. We continue to model on a historic basis as we await a full year of IFRS16 accounting. 

- With the Christmas period behind us, we suspect the Company will reduce its Gross leverage by using some of its cash on the balance sheet. The business has historically held 2 years of cash interest (c. £130m) which should enable the Company to repay its 2025 bonds before year-end. 

Happy to discuss. 

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk