AMS Osram - a change in tack
All,
Please find our updated analysis post Q1 2025 results here.
We had previously pointed out that AMS Osram was more of an equity story than and credit, but with company management accepting asset sales are required, credit investors will sit more comfortably. No firm details were provided on the call, but the sheer fact that AMS Osram are now pursuing asset sales has caused the bonds to rally 3- 4pts. We haven’t made any significant changes to our model, with us still forecasting FCF after interest close to zero versus the Company’s reiterated guidance of €100m positive FCF.
Investment Rationale:
- We increased our long position in AMS Osram in March, resulting in us having. 5% long position in the AMS Osram € Mar-29 bonds at 104.7%. These bonds are currently at 101%, with a 10% YTM. We also have a 2% long position in the Nov 27 0% Convertibles purchased at 75%, which are currently trading at 86.5%, 8% YTM.
- We had expected the bonds to trade back towards 10-11% YTM, but we are now changing our target to an 8% YTM, implying a 7pts of upside. This is an aggressive line, but with the Company aiming for disposals of € 500 m+ plus the disposal of the Kulim factory, leverage would reduce to 2.0x. The Book-to-bill ratio has increased across all segments of the business, which gives further confidence that the Company guidance of H2 revenue will be low double-digit above H1 numbers.
- However, the improved order book has not led to any increase in guidance. This is a reflection of the uncertainty in the market on the impact of tariffs on underlying demand.
- The downside for the credit is if the disposal plan is not executed. Management has provided no details on what business units are for sale and the timing of any potential proceeds. Previously, we had expected progress on the sale of the Kulim factory in 2025, but with tariffs, the timeframe has drifted.
Downside Scenarios:
- Not our base case, but in this section, we assume no asset sales and the Kulim factory is not sold. We are modelling zero FCF for FY25/26, leaving Net Debt in Dec 26 broadly the same. The Company assumes 90% of the outstanding shares will be put after a court ruling, we assume 100% for prudent purposes.
- Following these assumptions, including the zero FCF after interest, the Net Debt increases due to the PIK element on the Sale & Leaseback to €2,534m. IN addition, €134m of prepayment (as this will amortise over 10 quarters starting in 2026) and €570m of Osram Licht puts and €78m related to dividends and interest guaranteed related to the Osram Licht shares, leaving Net Debt at €3,316m. We forecast EBITDA to grow to €640m, but using flat LTM EBITDA (Sarria) of €530m, leverage would be 6.25x.
- With this level of leverage, what are the options available to the Company?
- The Company have stated repeatedly that the option of secured financing is not currently being considered. However, in late 2026, faced with this leverage and no asset sales, management will not have this luxury.
- A Senior Secured financing would still result in a higher coupon than the current 2.125% paid on the Convertible bonds. The RCF would be c. €650m drawn, so fully refinancing the RCF and the Convertibles on a senior secured basis would require a €1.4bn senior tranche, or 2.6x leveraged LTM March 2025 EBITDA. We do not see this as viable, especially given the overall leverage.
- The overall auto exposure is an area of concern. Ignoring Lamps & Systems, automotive is 64% of the Opto Semiconductors segment, and 6% of the CMOS Sensors segment. Combined, this equals an overall 40% exposure to the wider automotive segment. The overall outlook for the auto industry is very uncertain, and a delay in production will inevitably lead to a drop in orders. The growth in H2 may not materialise until 2026, which could result in no EBITDA growth in FY25.
Mitigation:
- Firstly, we would argue that it is unrealistic that EBITDA will not grow over the next two years. Assuming no improvement in margin from the new orders over the roll off of existing contracts, the cost saving program should deliver a further €100m of savings from current levels. Even boosting EBITDA by half of this to €580m would reduce overall leverage to 5.7x and senior secured leverage at 2,4x.
- This would still be too high for a refinancing, and we would expect the Kulim factory will be sold, even at distressed prices. Note this is a cost burden, and exiting the site would improve EBITDA going forward. We would expect some equity value in the site, but assuming the asset is sold at distressed levels of €300m (70% of the current debt level, and we don’t expect the sale and leaseback to be done at 100% LTV), it would still be deleveraging to the wider group. A reduction in net debt by €300m would reduce leverage by 0.5-0.6x, depending on which EBITDA figure is used.
- The megatrends in the wider automotive sector are a drive for further electrification, autonomous and Advanced Driving Assistance Systems and increased convenience. The semiconductor sector will broadly benefit from this, which is driving higher content per vehicle. Even in flat or lower auto production, semiconductor suppliers will see an increase in demand from the higher content levels. The recent order wins by AMS Osram reflect this trend and should mitigate the wider volume concerns.
Debt Carrying Capacity:
- Assuming €550m EBITDA, €60m taxes, neutral WC and €210m CAPEX, which would leave €280m for interest payments. Gross debt is c. €3.5bn, and at 10%, refinancing would equal €350m interest bill. We are assuming the Osram Licht shares are put, leaving the associated debt to be refinanced. But under this scenario, the business would not need €570m of cash and could probably run with €200m less. Additionally, we expect a distressed sale would result in at least €300m of proceeds for the Kulin facility. Combined, this would reduce the Gross Debt by €500m to €3bn, and the interest bill to €300m.
- This leaves a €20m shortfall, which would be achieved by an asset sale over 6.0x.
- This is a downside scenario, but highlights why the Company are pursuing asset sales. The level, €500m +, is higher than we have discussed previously but would deleverage the business significantly (assuming at exit multiples > 6.0x).
Q1 Results:
- The main takeaway from the results is the confirmation that the Company is achieving margin improvement. This was well flagged as the Company has divested some low-margin businesses, revealing the higher margin of the remaining business. Coupled with this is the cost savings program, which continues to deliver ahead of projections.
- The second takeaway is the improving order book, which is now > 1 across the Group. This is reflected in detail in the Consumer segment. This segment had 21% growth over Q1 2024. This is more impressive given this segment has seen some legacy business, which was a heavy contributor last Q1, and was mostly phased out in December.
- Both of these issues result in the EBITDA margin improving to 16.4% in Q1, 180 bps higher than the previous Q1. The cash flow was a little weaker due to higher working capital, mainly higher inventory levels. The higher inventory levels are in anticipation of higher sales in the coming quarters.
- The 31st of March fell on a bank holiday in Asia, resulting in some receivables being paid in early April. This resulted in a higher factoring level, but the exact amount is not disclosed. This should reverse in the coming quarters, and the Company reiterated its FY25 guidance of €100m positive FCF after interest.
What is the correct leverage?
- We have fielded a couple of questions on our leverage stats versus those presented by the Company. It is worth highlighting the differences between our numbers and those of the Company.
- Net Debt reported by the Company is €1,914m, but this includes carrying/book value. We use the total amount, which is €72m higher. Added to this, we add €224m of prepayments received in Q3 2024 for a project to be delivered in FY26, plus €570m + €78m for the Osram Licht minority shareholders. In addition, we include supply chain financing, which was €112m as of December 2024 (the number was not confirmed for March 25). In total, this leaves Net Debt at €2,970m, c. €1bn higher than the Company’s reported number.
- On the numerator side, our LTM EBITDA is €530m, versus the Company’s €586m, a difference of €56m. These relate mainly to transformation costs, which we may have to adjust.
- All of these combined leave our leverage at 5.6x versus the Company’s 4.2x (adjusted for the Osram Licht).
Next Steps:
- The Company are currently working on an extension of the RCF by 1 year. This is different to the current market view, that the November 2027 Convertibles need to be refinanced before the RCF can be extended beyond the September 2026 current maturity. This is not our view, and despite the negative pledge language in the convertibles, we expect the RCF will be extended by 1 year. We expect an announcement on this imminently.
- Given the lack of details on the asset sales, we are unable to provide a timeline for any announcements. However, this process is already in progress, and we would expect some further details to be provided at the Q2 call.
- The Q2 call is scheduled for the end of July, where the Company will have to confirm its expectation for H2 growth.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk