AMS Osram - banking on the backlog - Positioning

All,

Please find our updated model here.  

We had updated our model in February post the release of FY24 numbers, but because the bonds popped, we did not increase our position. We viewed the uptick as broadly due to short covering. AMS Osram bonds were shorted in late 2024 due to its auto exposure. Now the bonds have settled, we have revisited the name, updating our model. We have extended our projections to FY27, making some modest changes for FY25 & FY26. We have upgraded our margins for FY25 & FY26, however, for context we are still 200-300bps lower than the equity consensus.

Investment Rationale:

- We are increasing our long position by 2% in the March 29 bonds at 103.5%. This takes our overall exposure across the AMS Osram structure to 7% long exposure. These bonds should trade inside 8%, giving 5pts of upside if a recovery is evident in H2. This potentially will be aided by a ratings upgrade, which should be forthcoming on the back of improved FCF and greater customer diversification. 

- We had expressed some doubt about the trajectory and timing of the recovery resulting in our model showing stronger H2 versus H1. The Company has now adjusted its guidance to a similar shape (albeit stronger) and therefore we remain confident in our positioning.  

- If the H2 recovery is further pushed out, we see a downside of 5pts+, but with recent contract wins and recent advanced payments, we remain optimistic about H2 outperformance. Also, leverage reducing below 4.0x is unlikely this year which may delay a ratings upgrade.  

- We re-established a position in AMS in last May following Q1 numbers, taking a 3% long position in March 29 bonds at 105.25% and a 2% long 2027 Convertible bonds at 75%. The 2029 bonds are now trading at 103.5%, we have taken c2pts capital loss, compensated by the coupon. The Convertible bonds have traded up 12pts since purchase.

Model Changes:

- We have made minor changes to FY25 & FY26, and extended the model to FY27.  

- We note that our projections are for slightly higher revenue at lower margins versus the Company's guidance and equity consensus. This is partially explained by the faster-than-expected cost savings driving down the cost line, albeit the overall impact is muted due to lower volumes.

- More importantly, we have added a DCF analysis to our work. Not surprisingly given our lower overall EBITDA assumptions, the DCF values the Company at 5.7x, below the 7.1x currently implied by the share price. 

- The recent strong performance in contract wins (backlog), over €1bn of contract wins in Q4, supports our topline assumptions. However, we remain a little cautious about the level of cost savings expected and wish to see a couple of more quarters before we adjust the margins accordingly. AMS Osram won over €5bn of LTV (estimated project Life Time Value) in FY24 across all segments of its business. The reported de-stocking must eventually end and will improve demand in FY25. 

Key Risks:

- Short-term guidance remains weak for H1 FY25 on both destocking in the Industrial and Medical segments and weaker overall demand. OEM manufacturing in the automotive segment is expected to weaken in China, putting pressure on its Lamp and Systems segment.  

- The lack of any update regarding the Malaysian factory on the Q4 call is a little worrying. The associated sale and leaseback are c. 0.85x turns in leverage and will have to be exited before refinancing the 2027 convertible bonds. The mood was more optimistic during the Q3 call which was noticeably different on the Q4 call. 

- The Osram put and associated court ruling is expected in Q3. The balance sheet liability is c. €585m, but we have included €650m in our calculations, based on the sporadic trading levels of the Osram shares. A ruling at current levels or worse would negatively impact sentiment towards the credit, albeit the Company has an €800m revolver to deal with any substantial cash requirement resulting from minority shareholders putting the equity. 

Happy to discuss.  

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk