Contents. Foreword and Report s Main Findings Opportunities and Challenges...20 Seafood Player Comparison...21 ISB Basic Information...

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2 Contents Foreword and Report s Main Findings The Icelandic Economy The Icelandic Fish Industry Opportunities and Challenges...20 Seafood Player Comparison ISB Basic Information

3 Foreword Dear Reader, It is with great pleasure that we present this ISB Seafood Industry Report, this time focusing on Iceland. As before, the objective of our Seafood Industry Report is to give a comprehensive and analytical overview of the region or country in question, aimed towards those living outside that area. Iceland is one of the largest single fisheries countries in the world, the total fish catches in 2004 amounting to over 1.7 million tonnes. Fisheries play a great role in the Icelandic economy although other industries have gained importance during the last few years. Last year about 60% of the country s exported goods were marine products. Marine products accounted for 40% of the country s total export revenue. Icelandic marine products are noted for quality in foreign markets. Icelanders export almost all their marine products as the domestic market is small. On 7-10th of September The Icelandic Fisheries Exhibition 2005 will be held in Kópavogur, Iceland. ISB will have a booth at the exhibition where the bank will present its services for seafood companies. Enjoy the reading! ISB Seafood Team 3

4 Main findings Heavy industrial development projects in Iceland are strongly affecting the short-term prospects in the Icelandic economy. This will have an adverse effect on companies profitability and competitive position, and therefore on exports (such as the fishing and seafood industries), since the high exchange rate of the ISK will stifle the growth potential of export companies. Rising product prices in foreign markets have helped Icelandic fisheries companies now that the exchange rate of the ISK has stayed very strong. Consolidation in the fishing industry has increased in recent years. In 2005, the ten largest fisheries companies own 50% of the total fishing quotas in Icelandic waters. Fisheries companies continue to reduce in number in The Icelandic Stock Exchange. In recent months the largest owners and managers of Samherji and Thormodur Rammi have acquired the companies and then de-listed them. Unfavorable external conditions and slow trading in fisheries companies stocks mean that owners do not see a purpose in listing. Fishing quotas in Iceland s territorial waters have not increased in total in recent years. Despite expectations for increased total fishing quotas they have remained almost unchanged. The profitability in Icelandic fisheries, both catching and processing, has improved when looking back on the last 20 years. 4

5 The Icelandic Economy 5

6 Strong economic growth Strong ISK tough times for export industries The Icelandic Economy Heavy industrial development projects are strongly affecting the short-term prospects in the Icelandic economy. Economic growth in 2004 is estimated to have been 5.2%. Inflation was 3.2%, and unemployment 3.1%. The current-account deficit soared in 2004 and all the evidence indicates a deficit of 8.7% of GDP for the year, amounting to ISK 75 billion. Economic growth of % is forecast for 2005; this is well above the average forecast for OECD countries. Investment is also forecast to grow rapidly in 2005, as the extent of heavy industrial development projects increases. On the other hand, the crowding-out effect of these same projects will reduce investments in the short term by companies in the non-sheltered sector, such as the fishing and seafood industries. The export sector will also suffer because of the high exchange rate of the ISK. This will tend to further exacerbate the current-account deficit, predicted to amount to 11-12% of GDP for the current year. This is a greater deficit than is forecast for any other OECD country in ISB Research now predicts 3.5% inflation this year looks set to be a year of continuing strong growth, led by increases in private consumption. A sharp reduction in business investment, accompanied by a substantial depreciation of the krona is likely to hamper growth in 2007, although the current account will move towards an external balance as exports surge. 6

7 The Icelandic Economy Export revenue trends Total marine product revenues have declined in proportion to other exports. This trend will continue; in the year 2012 the total share of marine products is expected to be only about 27%, according to ISB Research s forecast. This development is regarded as positive for the Icelandic economy, as it will make it less dependent on performance in fisheries. This is also considered mainly as a positive trend for fisheries, as the ISK is expected to become more stable, making government intervention in the exchange rate less likely. 100% 80% 29% 38% 34% 34% 60% 10% 40% 13% 26% 33% 20% 55% 42% 32% 27% 0% est est. Marine products Aluminium Other industrial prod. Tourism, transp.and other serv. 7

8 The Icelandic Fish Industry 8

9 The Fish Industry Key factors for the performance of Icelandic fisheries Development of the Icelandic krona (ISK). Price of seafood products. Growth of major fish stocks. Oil prices. Development of salaries and other costs. Political involvement and possible changes to the fisheries management system. 9

10 The Icelandic Krona (ISK) The Fish Industry EUR/ISK USD/ISK jan.01 apr.01 júl.01 okt.01 jan.02 apr.02 júl.02 okt.02 jan.03 apr.03 júl.03 okt.03 jan.04 apr.04 júl.04 okt.04 jan.05 apr.05 júl.05 The ISK is very strong at present and has strengthened by 14% against the official currency basket during the last two years. The stronger ISK has had an adverse influence on fisheries companies earnings, as the majority of their expenses is in ISK while revenues are primarily in foreign currencies. ISB Research expects the ISK to remain near its current level for the remainder of this year and next year. 10

11 Price index of marine products The Fish Industry ISK (left axis) SDR (right axis) jan.00 maí.00 sep.00 jan.01 maí.01 sep.01 jan.02 maí.02 sep.02 jan.03 maí.03 sep.03 jan.04 maí.04 sep.04 jan.05 maí.05 In foreign currencies (SDR), average product prices increased by 12.5% from May 2004 to January Since then the price has decreased but has gone up again in the last two months. In general, product prices in foreign currencies are very high, historically speaking. ISB Research expects demand and prices for marine products to remain stable. Product prices in ISK have not increased due to the krona s strong position. In fact, high product prices have helped Icelandic fisheries companies now that the exchange rate of the ISK has remained so strong. 11

12 The Fish Industry ISB Research forecast TACs in Icelandic waters (major species in thous. of tonnes) Species 2003/ / / / / /09 Cod Haddock Saithe Redfish Greenland hailbut Capelin Herring Iceland s most important fish stock, cod, has not grown as much as hoped for. The spawning stock and fish stock have not grown in recent years and therefore cod catches around Iceland are not expected to increase in coming years. The most positive change in TACs (total allowable catch) for the year 2005/2006 is the haddock and saithe increase. Looking into the future, capelin and herring quotas are expected to grow at a moderate pace. 12

13 The Fish Industry Ten largest holders of quotas in Icelandic waters 2005 (TAC: thous. of tonnes in cod equivalents) Company TAC % of total TAC 1 HB Grandi 48, % 2 Samherji 33, % 3 FISK Seafood 17, % 4 Brim 17, % 5 Þorbjörn Fiskanes 16, % 6 Síldarvinnslan 16, % 7 Þormóður rammi - Sæberg 16, % 8 Ísfélag Vestmannaeyja 16, % 9 Vinnslustöðin 13, % 10 Eskja 13, % A single company may not control more than 20% of the quota of individual species. (Except for redfish, 35%). A single company may not control more than 12% of total TACs in Icelandic waters. Consolidation has been increasing steadily in the industry and the trend is expected to continue. 13

14 The Fish Industry Consolidation in the industry 60% 50% Source: Directorate of Fisheries 45% 47% 50% 40% 32% 30% 24% 27% 20% 10% 0% The graph above shows the share of total quotas controlled by the ten largest fisheries companies. Why increased consolidation? Increased competition both domestically and from abroad Demand for economies of scale Need for new technology and expensive investment Increased focus on better return on equity 14

15 The Fish Industry Key figures of the largest Icelandic Seafood Companies Company Revenue (m. ISK) EBITDA (m. ISK) Profit (m. ISK) est est est. HB Grandi 4,829 9,356 10, ,585 1, Samherji 12,377 16,760 2,252 2,266 1,067 2,914 Icelandic Group 58,729 69,748 90,745 1,664 2,500 4, SIF (m. EUR) Vinnslustodin 3,378 4,005 4,578 1,006 1,025 1, HB Grandi and Vinnslustodin: A stronger ISK, lower product prices and higher oil prices all contribute to worsening performance of the sector. SIF and Icelandic: Revenue, EBITDA and profit is expected to be higher in 2005 than in 2004 (Note that figures are not completely comparable since both of the companies have acquired other firms). Samherji was delisted from ICEX (Iceland Stock Exchange) Main List in July ISB Research expects fisheries to react with a growing focus on rationalisation and synergies. 15

16 The Fish Industry Key indicators of some listed seafood companies Company Ticker Price Mark.cap ISK m. P/E 04 P/E 05 est. EV/EBITDA 05 est. HB Grandi GRND , Vinnslustöðin VNST 4.2 6, SIF SIFI , Icelandic SH , The outlook for HB Grandi and Vinnslustodin in the year 2005 is rather gloomy, to judge by P/E ratios, as the strong ISK is expected to hurt revenues and profit margins of fisheries companies. The outlook for Icelandic Group is good. The company s policy is to integrate operations with Sjovik as the companies merged this summer. SIF has changed dramatically after buying Labevrie. The company has published one financial statement and operations are going according to schedule. The company is very dependent on sales results during the fourth quarter as festive food are the company s most important goods. 16

17 Some Icelandic primary seafood companies in 2004 The Fish Industry Million ISK Samherji HB Grandi Vinnslustöðin Síldarvinnslan Þormóður r. Eskja Revenues 16,760 9,356 4,005 7,978 4,809 3,015 EBITDA 2,266 1,585 1,025 1, Net profit 2, EBITDA % harvesting 28.9% 20.7% 30.2% 20.9% 29.0% 24.2% EBITDA % processing 5.3% 17.2% 22.2% 20.5% 9.9% 15.1% EBITDA % trading 3.9% - 1.5% Vinnslustodin returned the best EBITDA margin in fishing and processing in 2004 of the companies that are listed at The Icelandic Stock Exchange or have bond issues listed there. In 2004, Samherji made a considerable profit from investment activities. Only two of those companies are now listed at The Icelandic Stock Exchange, HB Grandi and Vinnslustodin. The biggest sharers of the other companies have bought the smaller shareholders out and then delisted the companies. Four seafood companies are now listed on the ICEX Main List while seventeen were listed in

18 Profitability Icelandic Fish Industry (EBITDA as a % of revenues) The Fish Industry % Harvesting as a % of revenues Processing, % of revenue ITQ system in 1984 Transferable qotas in 1990 Source: Statistics Iceland Profitability in Icelandic fisheries has improved when looking back at the last 20 years. EBITDA margin in fish processing and fishing has increased although there are of course fluctuations between years. 18

19 Changing Industry in 2005 The Fish Industry Samherji was delisted from ICEX (Iceland Stock Exchange) in July in accordance with the company's request. Fjarfestingarfelagid Fylkir ehf. (the management of Samherji) and financially related parties reached an agreement on the management and operations of Samherji hf. and acquired 91.64% of its shares at the end of July. The Boards of Icelandic and Blue Ice Group approved the conclusions of the expert report on the merger of the two companies. According to the merger schedule, shareholders in Blue Ice Group received 715 million shares in Icelandic in return for their shares in Blue Ice Group. The Boards of HB Grandi hf., Tangi hf., Bjarnarey ehf (not listed) and Svans RE-45 (not listed) decided to merge the companies with HB Grandi hf. Thormodur rammi Saeberg was delisted from ICEX in June in accordance with the company s request. Nyberg and parties reached an agreement on the management and operations of Thormodur rammi - Saeberg and acquired 92.5% of its shares in June. SIF has sold its subsidiaries, Saltkaup, Iceland Seafood International (55% of its shares) and Tros. All these sales agreements are in accordance with SIF s policy of clarifying the emphasis in its operations by shedding operations and assets that do not constitute part of its future core operations. 19

20 The Icelandic Seafood Industry: Opportunities and challenges Challenges & Opportunities Opportunities Further consolidation and acquisitions, both domestically and abroad. Increased quotas of haddock and saithe in 2005/2006 will contribute to higher revenues and earnings. Increased focus on seafood investments abroad. Increased competition will be met by newer and more efficient technologies. Challenges ISB Research expects the ISK to remain fairly strong in 2005 and 2006 due to a strong currency inflow, primarily from industrial projects in Eastern Iceland. Oil prices will likely remain high. Product prices are high but are expected to remain stable throughout Rapid growth in global aquaculture. Growing supply of frozen products from Asia, e.g. China. 20

21 Seafood Player Comparison Some international seafood companies Company Country Currency Market Cap. Enterprise Value Revenue EBITDA EV/EBITDA Pescanova S.A. Spain $ m , Icelandic Group PLC Iceland $ m , SIF Group Iceland $ m Neg. Fishery Products (FPI) Ltd. Canada $ m Royal Greenland Group Greenland $ m American Seafoods Holdings LLC US $ m Aker Seafoods Norway $ m Samherji hf. Iceland $ m Domstein Norway $ m Fjord Seafood Group (Aquaculture) Norway $ m Pan Fish (Aquaculture) Norway $ m NB: Royal Greenland, Samherji and American Seafoods are unlisted companies. Source: Company reports for 2004, market information and ISB research forecast, currency information August 25,

22 ISB Some Basic Facts 22

23 ISB International Operations Iceland United Kingdom Luxembourg Headquarters Business Management Global seafood Sustainable energy International core customers International Corporate Credit Leveraged Finance Project Finance Capital Markets London Branch Corporate Finance UK/European food industry Global seafood Leveraged Finance ISB Luxembourg S.A. Loan participation Nordic area Private Banking Treasury Services Nordic small/medium banks Norway Denmark BNbank Corporate and retail mortgage financing KredittBanken Full service bank for traditional industries Off-shore supply vessels Subsidiary of KredittBanken FactoNor Factoring Services Representative office Leveraged Finance Relationship building with Nordic businesses and financial institutions Corporate Finance 23

24 ISB - Sector Services Corporate Finance Financing Food Sector Seafood Industry (Global) Food Ingredients (Northern & Western Europe) Packaged Foods (Northern & Western Europe) Icelandic & Norwegian Clients Any Sector Type of Services Acquisitions Disposals Minority Investments MBOs / LBOs / MBIs Private Placements Strategic Reviews Equity Participation Type of Credit Facilities Term loan Working capital Syndicated loans Vessel financing Other Services Fx dealing Risk management advisory Small to Medium Size $40m to $1.5bn size transactions ISB is perfectly positioned to compete with, and provide a better service than, bulge bracket investment banks within our sector and size focus 24

25 Seafood Industry Team Business Management Helgi Anton Eiríksson Director Business Management Direct line: Mobile: Ragnar Gudjónsson Director Corporate Banking, Iceland Direct line: Mobile: Jón Gardar Gudmundsson Director Business Management Direct line: Mobile: Hjálmur Nordal Director Business Management Direct line: Mobile: Kjartan Ólafsson Director KredittBanken Direct line: Mobile: Magnús Bjarnason Executive Director Business Management Direct line: Mobile: Covering: UK and USA Covering: Iceland Covering: Continental Europe, South-America and Africa Covering: Canada and Iceland Covering: Nordic Countries Covering: Asia and Oceania 25

26 Seafood Industry Team Other members Pétur Einarsson Executive Director Head of ISB, London Direct line: +44(0) Mobile: +44(0) Steinunn Thórdardóttir Executive Director International Corporate Credit Direct line: Mobile: Ólafur M. Magnússon Managing Director Corporate Banking, Iceland Direct line: Mobile: Tim Owen Executive Director Head of Corporate Finance, UK Direct line: +44(0) Mobile: +44(0) Timothy H. Spanos Director International Corporate Credit Direct line: Mobile: Gudmundur Ragnarsson Senior Manager Corporate Banking, Iceland Direct line: Mobile: Örn Gunnarsson Executive Director Corporate Advisory, Iceland Direct line: Mobile: Gunnar Engilbertsson Senior Manager International Corporate Credit Direct line: Mobile: Rúnar Jónsson FX Brokerage Capital Markets Direct line: Mobile: Eiríkur R. Eiríksson Senior Manager Corporate Risk Advisory Direct line: Mobile: Helgi H. Ófeigsson Senior Manager International Corporate Credit Direct line: Mobile: Stefán Eiríks Stefánsson FX Brokerage Capital Markets Direct line: Mobile: Gísli Sigurgeirsson Senior Manager International Corporate Credit Direct line: Mobile: Valdimar Halldórsson Analyst ISB Research Direct line: Mobile: Ingi Rafnar Júlíusson Executive Director Capital Markets Direct line: Mobile:

27 Legal disclaimer All opinions and analyses represent the views of Íslandsbanki at the time of writing and are subject to change without notice. Íslandsbanki and its employees cannot be held responsible for any trading conducted on the basis of the information and views presented here. Íslandsbanki may at any time have vested interests in individual companies, for example as an investor, creditor or service provider, but its opinions and analyses are produced independently by the Íslandsbanki Research division, based on publicly available information on the company in question. This Seafood Industry Report was written by Valdimar Halldórsson - Íslandsbanki - Research division: valdimar.halldorsson@isb.is 27