Sectors > Top Reports > Iceland Memo 200320

Iceland Memo 200320

Buy £ 6.75% 2024 SSNs At 67.72 (Yield c. 18%). Manageable Liquidity, Coronavirus Boost & Price Limits Downside Risk
PUBLISHED: 20 March 2020
SUBMARKET: Iceland, Top Reports, Top Reports,


Why Read?

  • Understand the potential coronavirus impact on Iceland’s Q4 20 and FY 21 LFL sales growth and broader financial performance
  • Understand the extent to which The Food Warehouse and re-fitted Core Iceland stores have mitigated against sharp structural decline in Iceland’s un-refitted Core Iceland stores and the challenge Iceland faces in continuing to offset this decline
  • Understand why Iceland’s Senior Secured Notes (SSNs) likely have limited downside price risk from current levels in the 60 cents range and why we are moving our recommendation from Avoid to Buy after the 2024s have fallen c. 27 points and the 2025s c. 22 points since our Avoid recommendation in just 2 months
  • Understand Iceland’s EV, leverage, FCF and liquidity sensitivities to gross margin and LFL sales growth
  • Understand how much in-built gross margin compression lies ahead from the scheduled national living wage increase and from contractual upward rent adjustments on certain store leases
  • Understand how successful Iceland has been thus far in offsetting built-in cost inflation from national living wage and rent increases

What’s New?

  • Comparison of economics of un-refitted Core Iceland stores vs mini-refit and full refit Core Iceland stores vs The Food Warehouse stores – Adj EBITDA and Adj EBITDA margin split by store format
  • Coronavirus impact analysis – updated detailed liquidity, cash flow and other financial projections with valuation sensitivities to key variables including LFL sales growth and gross margin with bottom-up modelling of the impact of the scheduled national living wage increase and contractual upward rent adjustments on certain store leases

Questions Answered

  • What is the potential coronavirus impact on Iceland and is it transformational or just a temporary positive against ongoing EBITDA decline in the Core Iceland store estate?
  • How adequate and resilient is Iceland’s liquidity?
  • What shocks to LFL sales growth and gross margin would need to occur for Iceland’s SSNs to be impaired at current prices in the 60 cents range?
  • Will Iceland’s EBITDA shrink significantly if it slows the pace of new The Food Warehouse store openings?

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