AMS Osram - refinancing done, time to re-examine the underlying

All,

Post the refinancing, we have taken the opportunity to update our model here

With the refinancing behind us, and the rights issue fully underwritten by HSBC/Morgan Stanley/UBS the next trigger is the FY23 numbers, to be reported in early February. The bonds have traded up 3-4pts since issuance, but we strike a cautious note on the short to medium prospects for AMS given the uncertainty in their end markets.


Investment Rationale:

- We maintain our 3% long position in the 0% March 2025 Convertible bonds at 89.625%, which yields 8.5% to maturity. With the refinancing nearly completed, the 0% convertibles are the nearest falling maturity, in 16 months. Post the underwritten equity raise, leverage will fall to c. 4.2x with further modest deleveraging over FY24. 

- Although diminished, there is potential further upside if the Company decides to repay/tender for the outstanding converts which would make sense to both investors and the Company. We would expect the Company to do open market purchases during H2, supporting the price levels of the convertible. 

- Depending on market conditions, the Company intend to raise further financing in FY24 (probably H2) and this is likely to include a small convertible issuance. 

Model Update:

- We have reconfigured our projections for FY24 and FY25, adjusting the impact of the divestment program to ascertain the true run-rate of revenue. 

-We have raised CAPEX for FY23 to c. €1,200m, lowering subsequent years, in line with guidance. Our model assumes the mid of revenue guidance for Q4. EBIT Margins re maintained at 6%, at the lower end of guidance. The impact of the higher interest costs plus the capitalised interest costs under the Sale and Leaseback are also included in our model. 

- Our FY24 assumptions are based on expanding margins, partly due to the sale of the underperforming businesses. The main impact comes from higher utilisation from higher revenues. Our revenue assumptions are for €3.2bn FY24, which is c. €1.2bn below previous guidance, allowing for recent divestments. It is extremely difficult to justify AMS's previous guidance. 

- The main takeaway from our revised projections is the reduction in cash balances to c.€200m by mid-FY25 (post-repayment of the March 2025 convertibles). This is only achievable if CAPEX spending reduces to c. 10-12% of revenue (in line with guidance). 

- Therefore we remain cautious about the existing AMS Osram business and acknowledge that macro factors need to come to the Company’s assistance to grow top line. 


Next Steps:

- The Company are currently raising new equity via their 11 for 4 rights issue at CHF1.07 (66% discount to Friday’s closing). The prospectus was published on Monday, with the exercise period ending on the 8th of December. The rights issue is fully underwritten and therefore we expect no issues in raising the additional €800m of equity. 

- With the rights issue expected to close on 8th December, the (old) existing bonds will be taken out before Christmas, as previously advised. 

- Next reporting is not until early February when the Company are expected to report their FY23 results.

Happy to discuss. 

Tomás

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

Tomás MannionOSRAM