AMS Osram - new broom brings new focus?
All,
Please find our updated model here.
The new CEO, Aldo Kamper, spoke for the first time to investors at the presentation of the Q1 results. However, the narrative remains the same. Operationally, the Company has completed its disposal and integration process, achieving higher sales proceeds and higher cost synergies than planned at the time of the Osram acquisition. This does not hide the depressed revenue line and in turn, due to operational leverage, the subdued EBIT margins that were guided for Q1. In fact, it is likely to be a somewhat similar story for Q2, with Company guidance remaining subdued.
Continuing on the theme of same story as previously, the Company’s fortune lies with the ramp-up of the new factory in FY24. The new technology should see a step change in margins and revenue but in the short term, operational leverage, high CAPEX and overall poor macro environment has led the Company to weaker guidance for Q2.
Investment Rationale:
- At current yields, we are becoming more constructive on AMS Osram. The yields, 10-14% range, are not yet sufficient for the current headwinds AMS are experiencing, especially with the weakness in the consumer segment (mobile phones). However, we are comfortable with the growth opportunities within the business, and with its wide diversified segments, we don't foresee any major difficulties for the business.
- We don’t see any urgency in taking a long position currently, given Q2 is highly likely to be weak also. In order to take a long position we are seeking further underlying industry data, specifically on the consumer segment.
- The documentation of the AMS debt structure could enable the Company to put in additional senior secured debt, but the relatively short-term nature of the bonds makes this unlikely. The Company may have to pursue a refinancing on a senior secured basis, but with a further 2x of market cap beneath the bonds, we would feel relatively comfortable.
- The new CEO has acknowledged that the capital structure needs to be dealt with, and has already started discussions on this topic. This is earlier than we had expected, given that Rainer Irle, the new CFO joins in early July. Mr Irle joins from Siltronic AG, a manufacturer of silicon wafers for the semiconductor industry, where he held the CFO position.
Hope over reality:
- We had intended to reexamine AMS’s bonds as a potential short in April but feel we have now missed the boat. We remain conscious of the equity story behind the new facility and strong underlying markets where AMS operates. There remains significant positive structural changes in the market, with significant growth expected in Consumer, Industrial & Medial and Auto in sensing, visualisation and illumination, all segments that AMS participate in.
- The opportunity of the 8” production facilities has resulted in a customer agreeing to pre-payment agreements related to future deliveries, underpinning existing agreements. Note, this pre-payment has not been received yet as is not present in their accounts.
- Ultimately, our resistance of taking a short at this current time is based on the cashflow expectations over FY23. We model a further €300m of outflow for the remainder of FY23, leaving leverage, including the Osram put above 5.0x. This is high for the current ratings, but highlight the Company will still have c. €500m of cash on balance sheet plus availability under its various banking facilities.
- Although the new CEO was unwilling to confirm previous FY24 revenue guidance, the Company remain cautiously optimistic that AMS will benefit from an improving demand environment in the second half of the year. This is supported by the expectation that inventory adjustments at the OEMs will have completed by Q2 which will support the automotive segment. Additionally, AMS are planning for a ramp-up in the smartphone (consumer) segment in H2.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk