AMS Osram - A different story - Positioning
All,
Please find our updated model here.
All good things must come to an end. AMS Osram has been a good position for us but with the refinancing behind us, it is time to exit. With sufficient cash on the balance sheet to deal with upcoming maturities, the Company executives are solely focused on operational issues coupled with the execution of the new Kulim 8-inch micro LED factory in Malaysia.
Investment Rationale:
- We are exiting our position in the 0% 2025 Convertible bonds at 94% (YTM 6%). With the refinancing complete, the Company have sufficient liquidity to deal with the near-term maturities, including these notes. We had maintained the position on the small chance the Company would call these bonds to tidy up their balance sheet, but this is now unlikely. At 6% YTM, there are better opportunities elsewhere.
- We maintain our view that AMS Osram will benefit from the macro shift in their end markets but see some execution risk in implementing their recapitalisation plan.
- The new bonds, which are now trading at c.8.5% yield, may offer an opportunity to short, given the cautious guidance for H1 2024. We will continue to monitor the name as a potential short. However, we are not shorting it at this moment, as the Company have sufficient liquidity and have delivered its guidance so far.
Recent Results and Guidance:
- Q4 results were in line with our expectations, but the Company had a cautious tone re FY24, especially H1. There is continuous weakness in the industrial and medical segments and only slightly better market conditions in their Consumer segment.
- The outlook for 2024 is a tale of two halves, with sustained weakness in H1 including some inventory corrections, whereas hope of stronger performance in H2 is driven by new business wins and market recovery.
- The business is expected to be Free cashflow neutral before interest for FY24. This is based on the sale of €300-400m of revenue business which the Company is still in negotiations for. If the sales do not proceed, the Company are likely to ramp down that business.
Reason to Short?
- Company guidance specifically for Q1 is a reduction in sales to €800-900m (Q1 23 was €817m adjusted for deconsolidation) and EBIT margin in the 4-7% range (5.4% in Q1 2023 reported). This is roughly flat, however, management highlights continued macro weakness, and restocking to occur in the medical and industrial segments.
- There will be an additional €200m outflow of working capital in FY24 for roll-over from Q4 2023 of CapEx and R&D.
- The business expects to be FCF positive for FY24 excluding interest payments. But this is based on the conclusion of the sale non-core semiconductor portfolio, which is c. €300-400m of revenue. We expect the sales proceeds to be €200-300m. Any delay or cancellation of this process would result in a larger cash outflow for the year.
- Additionally, the Company has highlighted inflation concerns with the new production facility. We don’t foresee any negative news about the facility itself at this stage as it continues to ramp up. However, cost overruns due to inflationary pressures are possible.
- However, we are not going to take a short at this moment mainly on the back of the significant liquidity the Company has. Ignoring the RCF (which is primarily to deal with the remote possibility that the Osram shareholders put their shares), the Company has €1,145m in cash plus €200m of undrawn bilateral loans in liquidity and only €311m of debt due in FY24 and #450m in the following year.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk