AMS Osram - Back to Basics - Positioning
All,
Please find our updated analysis here.
We have invested in AMS Osram successfully over the last year and we feel now is the time to re-enter the name. There are a couple of positive event risks in the coming months but primarily the investment in AMS Osram is a yield play. At current levels, AMS Osram is generating a 10% yield on the Euro bonds, which compensates for risks in the name. The market has come to terms with the loss of the Apple contract and the abandonment of the Kulim facility and confirms our view that the credit story was always built on the underlying businesses with the Kulim facility effectively concerning equity investors. With the exit from the microLED facility likely, AMS Osram refocuses on its existing segments and the growth story that is there.
Investment Rationale:
- We are taking a 3% long position in ASM Osram’s March 2029 bonds at 105.25% and 2% long position in the 2027 Convertible Bonds. We had hoped to have a better entry point on the back of weaker operational performance in Q1, but the market has become more forwarding looking willing to overlook the underperformance. We fundamentally agree and see a couple of near-term triggers which will improve leverage going forward.
- First, an exit of the Kulim factory is likely in the coming months. In our analysis, we anticipate €400m of proceeds to exit the Sale and Leaseback agreement, with no equity value. However, the removal of the €400m liability on the balance sheet will improve leverage stats immediately.
- Secondly, the planned disposals/wind downs of the non-core segments in the semiconductor space will provide an additional €100-200m of proceeds without impacting margins. AMS Osram are now reporting separately new segments including the non-core business which generates €233m of revenue in Q1 with only €5m EBITDA, a paltry 2.2% margin. This segment is 50% non-core and 50% core, and we are led to believe the non-core margin is negative.
- Ultimately, when the Kulim factory is sold, leverage will return to mid 3’s including the cost of the put, when we should see the bonds trade to 106-107% level, and c.8.5% yield.
- The downside is primarily any delay in exiting the Kulim facility. The factory is a drag on cash flow and not exiting the facility could leave AMS Osram with a white elephant.
Recent Results:
- The Company had guided to a weak set of numbers for Q1 with actual numbers in line with our expectations of below mid-guidance levels. EBIT margins were weaker due to a lack of capitalised R&D, now the microLED project is terminated. Revenue continues to show signs of growth on an organic level (5%) growth, but with divestments muddying comparisons, actual revenue has declined.
- Lamp & Systems has benefited from the normal seasonality, with EBIT margins further benefiting from a favourable product mix and lack of raw material one-offs which impacted Q4 numbers.
- The semiconductors segment, which the Company has now split into two, continues the same pattern as previous quarters, strong automotive segment, de-stocking continuing in the industrial and medical segments and consumer products weaker due to seasonality impact, but showing signs of improvement from recent Android wins.
Guidance:
- Management provided specific guidance for Q2, with Revenue €770-870m and EBITDA of 14-17% (Sarria €800m and €123m or 15%). More importantly, the Company has reiterated its guidance of FCF before interest, including divestments to be positive for FY24. This is a reasonable assumption given our estimate of €50m negative before divestments proceed. We have very little guidance on the level of proceeds from selling the non-core, negative EBITDA businesses. AMS Osram continues to believe they will divest/exit the non-core business during FY24.
- Operationally, management have reiterated the same guidance as previously, with weaker H124 numbers followed by an improving macro picture. In addition, recent project wins will boost revenue, during their ramp-up phase.
Kulim Facility:
- Technically the Sale and Leaseback is not debt as per new accounting terms, but AMS Osram (and the market) treats it as such. The Company sound more confident that an exit can be orchestrated in FY24, likely in the coming months, where a potential suitor will step into the Sale & Leaseback agreement. Management have not guided towards any equity value in exiting the facility, but all conversations appear to indicate at a minimum, they will exit with no additional cost.
- We have some outstanding questions over the cash flow of the Kulim restructuring, and how much cash has already been spent. However, the Company has indicated €120m of cash transformation costs was spent in Q1. We are struggling to identify this from the cash flow statements. The total guidance of €700m of transformation costs for FY24, of which a further €70m is due to be accounted for in the remainder of 2024.
Housekeeping:
- The Company held a second, credit investor call yesterday, which we also attended. We were surprised at the upbeat nature of the Company considering the cautious guidance for Q2. The Company appear to be more confident in H2 numbers, driven by the recent project wins.
- Next Reporting: Q2 results on July 26th.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk