AMS Osram - Beyond Q2
All,
Please find our updated model here.
AMS is doing a roadshow next week with both credit and equity investors and we will try to participate in these discussions/have a direct call with the Company in the coming days. However, it is reassuring that the new management has broadly kept the same guidance as previous management and has not taken the opportunity to re-adjust FY25 targets. We believe it is merely on the relief that management have not changed guidance that both the bonds and equity have rallied. We have updated our model for Q2 numbers, but these were never going to change our projections for future years.
Investment Rationale:
- We maintain our position in both the 2025 HY and 2025 Convertible bonds, which are marginally up (2-3pts) since we took a position in early June. Current yields of 12% and 16% respectively are sufficient to compensate for the uncertainties surrounding the Company and its new Malaysian factory.
- The thesis broadly remains the same, with an expectation of refinancing in FY24. There remains the possibility of an early refinancing and we fully expect that the Company are in talks with its banks to extend the maturities of its RCF and Term Loans, with any extension likely to be viewed overwhelmingly positive by the market. Note, there are negative pledges in several of the bonds to prevent the banks from taking security.
- On the downside, they’re initially maybe a couple of points as the relief rally experienced on Friday fades. Beyond that, the success or failure of the new plant is unlikely to be determined in FY23. The real downside risk will be if refinancing talks fail and the banks are taking a harder line.
Results:
- As stated above, Q2 numbers were never going to be the defining set of financials for AMS Osram. Excluding de-consolidation impact, group revenue increased marginally, and was at the top end of the Company guidance. In addition, the Adj EBIT was also at the top end of the 3-6% margin guidance. The Company has reduced both R&D and SG&A, with recent efficiency and synergy programs starting to have an impact.
- At the segment level, the Semiconductor business has improved as the Consumer and some parts of Industrial end markets start to stabilise.
- The Automotive segment is still impacted by inventory correction, but orders are showing signs of improvement.
- Lamp & Systems had a stronger-than-expected set of numbers despite Q2 naturally being a weak quarter. After the disposals, 80% of the L&S business is automotive, which has a strong seasonal bias (Q4 & Q1).
- Guidance for Q3 is a further reduction in the top line mainly due to the deconsolidation of sold assets. However, adj. EBIT margins are guided at a robust 5-8%, as the disposed businesses were low-margin.
Minority Shareholders:
- AMS Osram bought back 2m of Osram Licht shares during H1, reducing the potential liability. This was a cash outflow of €95m which justifies our view of putting the Osram put as a super senior obligation of the Company. This purchase surprises us as the dividend liability, (cost of capital for Osram Licht) is only 5.6%. However, the removal of the minority shareholders would bring clarity to the capital structure and ease the path to refinancing.
- Separately, on the call management referred to a recent court ruling in favour of the Company, which the minority shareholders have decided to appeal. We don’t have the full details of this appeal.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk