Bottom Line: Chill over Iceland

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THERE was plenty in yesterday's statement from Iceland to vindicate those sceptics who have pushed its shares down by 25 per cent against the sector, and 50 per cent against the market, over the past year.

Growth in like-for-like sales declined from 7 per cent in the first half to 3 per cent in the second, and they are now falling by 2 per cent. Operating margins slipped from 6.2 per cent to 5.9 per cent. The French acquisition in 1991 is looking like an expensive mistake.

The bear case need not end there. The price war on the high street means that Iceland's low prices are no longer as special as they were. While its high-street bias may make it less vulnerable to the superstore giants, rivals such as Gateway and Kwik Save are flexing their pricing muscles. Its move into chilled food, which may have fuelled much of its sales growth in recent years, is now complete, so pushing sales ahead will become more difficult.

But Iceland is not alone in facing these pressures, nor in suffering sales declines. Unlike many of its rivals, however, it is still earning good returns from new store openings (although the dip in sales at its own outlets when an additional one opens nearby is unsettling) and should have little difficulty in maintaining its 50-plus opening programme for the next few years. Given its healthy cash flow, it should be able to fund that from its internal resources.

The most pessimistic analysts are expecting no growth in profits this year, putting the shares on a forward multiple of 10.8 times - a 10 per cent discount to the sector. Optimists expect sales growth to resume and say it could produce as much as pounds 73m, for a 17 per cent discount to the sector. The bear points will remain a worry, but the rating takes that into account.