7/25/2019 Iceland Foods Recommendation

1/2

I recommend investors buy Iceland Foods (ICELTD) 6.5% seniorsecured bonds due uly !5" #$#! at &.5 'or a T o' . Iceland Foodsis a discount *rocer +,o 'ocuses on t,e nic,e 'ro-en 'ood maret. T,ecom/any ,as 0 #% o' t,e 12 maret and is t,e t,ird lar*est 'ro-en'ood retailer +it, !3.!% maret s,are. T,e 12 *rocery maret is

under*oin* si*ni4cant c,an*e as erman discounters ldi and Lidltae maret s,are" 'orcin* t,e 7i* 3 *rocers (Tesco" sda" 8ainsburyand orrisons) to cut /rices in order to be com/etitive. T,e old +ay o'buildin* lar*e ,y/ermarets on t,e outstirts o' to+n is *oin* out o''avor as t,e 4nancial crisis 'orced consumers to be smarter +it, t,eirmoney. s a result consumers are s,o//in* at discounters and des/itet,e 'act t,at t,e 12 economy is doin* better" t,is be,avior is still,oldin*. In addition" Iceland ,as e9/osure to t+o ot,er s,i'ts in 12consumer desires" convenience and online. Des/ite t,e /ressures t,e12 *rocery maret is currently under*oin*" I believe Iceland +ill be asurvivor and no+ is a *ood time to start to build e9/osure to t,e name.

Iceland bene4ts 'rom stron* li:uidity and a *ood 'ree cas, ;o+ /ro4le.

Icelands ca/ital structure is /retty sim/le. T,e Com/any ,as anundra+n su/er /riority 7< #5 million revolvin* credit 'acility and t,en= senior secured bonds. T,e t,ree bonds are a 7< =5$ million L >3#5 ;oatin* rate note due ?!5?#$#$" a 7< 3$$ million 6.#5% notedue ?!5?#$#! and a 7< #$$ million 6.5% note due ?!5?#$#3.Levera*e t,rou*, t,e notes is 5.39 (3.69 net) and on a lease ad@ustedbasis levera*e is 6.#9 *ross (5.69 net). T,e Com/any ,as 7< !33million in cas, versus A5! million in total debt. Icelands businessmodel *enerates a lot o' cas," *eneratin* 7< 5$$ million in 'ree cas,

;o+ over t,e /ast 'our years. T,e model /rovides ne*ative +orin*ca/ital and ca/e9 re:uirements are lo+ at less t,an #% o' sales.Ca/ital e9/enditures and interest total about 7< A$ million annually"leavin* /lenty o' room to still *enerate /ositive 'ree cas, ;o+ +it, LTE7ITD at 7< !6 million.

Iceland o/erates &33 stores in t,e 12" 6 in Ireland" = in t,e C-ec,Be/ublic" # stores in Iceland" and #= 'ranc,ise stores (!# in 8/ain" inC,annel Islands" = in Isle o' an" and one in

7/25/2019 Iceland Foods Recommendation

2/2

Iceland a//eals to its customers t,rou*, its sim/li4ed /roduct oerin*.T,e Com/any oers its customers a ran*e o' over #"5$$ 'ood 821sincludin* 'ro-en" c,illed" and *rocery /roducts. Fro-en /roducts maeu/ =5% o' sales" C,illed ==%" and rocery =#%. Icelands /roductsran*e 'rom everyday items suc, as mil" e**s and bread to an

e9tensive ran*e o' A$$ 'ro-en 'ood 821s coverin* a broad s/ectrum o'ready meals" /i--as and /arty 'ood to 'ro-en meat" /oultry" 4s, andve*etables. T,e Com/any 'ocuses on t,e value end o' t,e retail 'oodmaret and trades 'rom conveniently located stores t,rou*,out t,e 12.