AMS Osram - Refocusing on the issues.
All,
Please find our unchanged analysis, after the Q4 numbers released in March, here.
With the bonds trading down 10-15 points in the downdraft of tariff concerns, we have revisited our analysis of AMS Osram. The Company’s guidance during the FY24 results for Q1 is relatively modest, with the growth expectation weighted towards H2 ’25. The bonds are currently offered at 93, 13% YTM, which is still attractive given the known risks in the name. However, we acknowledge we are becoming a little cautious on the interest coverage, with the potential refinancing of the 2027 convertibles and the RCF being drawn to fund the minority shareholder put.
Investment Rationale:
- We increased our long position in AMS Osram in March, resulting in us having. 5% long position in the AMS Osram € Mar-29 bonds at 104.7%. These bonds are currently at 92%, with a 13% YTM. We also have a 2% long position in the Nov 27 0% Convertibles purchased at 75%.
Despite the mark-to-market loss on the bonds, we are maintaining our position and expect the bonds to trade close to a 10 - 11% yield. This is driven by top-line growth. The Company has recently made some large contract wins, with over €1bn of contract wins in Q4. This, coupled with destocking in previous quarters, makes us broadly bullish on topline growth, especially for H2 2025 and beyond.
- We remain more cautious on EBITDA and cashflow assumptions than market consensus, due to lower cost savings assumptions in our model.
- There is a divergence between the equity and credit stories for AMS Osram. Management remains focused on its cost savings and driving top-line growth, but credit investors will be conscious that interest coverage will tighten in a steady state environment.
Automotive Exposure:
- The headline figure of 52% revenue exposure to automotive end markets is a constant topic of fear for AMS Osram investors. However, with €1bn of sales in the lamp and systems segment, (80% automotive exposed) where AMS Osram enjoys a number 1 position. The Automotive segment is predominately in the aftermarket segment, which is visible in the seasonality of this business.
- Ignoring Lamps & Systems, automotive is 64% of the Opto Semiconductors segment, and 6% of the CMOS Sensors segment. Combined, this equals an overall 40% exposure to the wider automotive segment. We remain optimistic for both of these segments due to recent contract wins, including strong automotive contract wins in China.
Ratings Downgrade:
- The bonds were downgraded by Moody’s in early April, after being placed on negative watch. Moody’s has revised the outlook to stable from negative. Moody’s cited upcoming maturities, namely the undrawn RCF due in September 2026 and its convertible bond in November 2027.
- Our expectation is the $800m RCF will be extended for 1yr. This facility is currently undrawn with its sole purpose to fund any potential put from minority shareholders in Osram Licht. The potential liability is for €585m with the potential put expected in H2 2025.
- Aside from the RCF, the next maturity is the €760m 2.125% Convertible, which will require refinancing, inevitably at higher rates. Having the RCF drawn at 5% coupon, plus a refinancing of the 2027 convertible, will increase the interest bill by c.€70m, net of the the minority dividend savings. This would reduce interest coverage on our projections close to 1.0x. The Company have a stronger FCF projection than our model demonstrates, driven by higher cost savings. The Company is expecting over €100m FCF after interest for FY25.
Importance of Malaysian Factory:
- The Company is seeking to deleverage its balance sheet, which would be aided by exiting the Malaysian facility. Exiting the sale and leaseback would lower leverage by 0.9x and improve cashflow by €40-45m due to the lower lease payments.
- We were a little surprised at the lack of updates regarding this facility during the Q4 call. This is in contrast to the Q3 call, and we would expect some questions around this topic on the Q1 call at the end of April.
- With the changing tariff policy of the US, the chances of selling this facility have been reduced. However, during the Q3 call it was apparent that the Company was in discussions and there was the potential for proceeds to exceed the sale & leaseback amount.
Next Steps:
- AMS Osram is due to report the Q1 numbers on 30th April at 7:15 CET, with a call held at 9:45 CET. The Q1 numbers in themselves will not be very interesting, with the focus mainly on the confirmation of guidance for FY25.
- AMS Osram has previously expected growth in H2, driven by the ramp-up of new designs, especially in mobile phone sensors and lasers in the industrial segment. It is unlikely there will be any boost from its automotive segment.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk