AMS Osram - Clearer road ahead.
All,
Please find our updated model here.
AMS Osram reported their Q2 results, marginally better than their guidance at the time of their results in Q1. We had expected AMS Osram to slightly miss their guidance in Q2, as in previous conversations with management had spoken about further destocking and a delay of orders into H2. Despite the slight weakness in Q2, AMS Osram managed to meet their targets and issue a cautious and slightly improving outlook for H2.
Investment Rationale:
- We are maintaining our 3% long position in the Euro March 2029 bonds and the 2% long position in the 2027 Convertible bonds.
- In early May, we re-invested in the AMS Osram structure on expectations that there are a couple of near-term triggers which will improve leverage going forward. We had expected some minor asset sales in Q2, but we are not duly worried as the CFO indicated some of these sales will be completed in Q3.
- The bigger positive impact will be the exit of the sale and leaseback agreement concerning the Kulim factory. Our base case centres on AMS Osram exiting the lease with no equity value, even as management continues to hint that there is some and that progress will be made by year-end. However, the removal of the €400m liability on the balance sheet will improve leverage stats immediately.
- Ultimately, when the Kulim factory is sold, leverage will return to mid-3s including the cost of the put, when we should see the bonds trade to 106-107% level and c.8.5% yield.
Q2 Results:
- The results were in line with Company guidance and slightly better than our expectations. Revenue from automotive and professional light segments continues to grow and higher factory utilisation has improved EBITDA levels. More importantly, the cost-saving efforts of the Company continue to yield progress with run-rate cost savings now at €60m versus a €75m FY target.
- The Consumer segment, within Semiconductors does continue to show weakness, with further destocking and ramp-downs of legacy products.
Outlook:
- H1 was always due to be the weaker half, and the Company have issued strong guidance for the remainder of the year. We have not updated our expectations as we continue to see some weakness in other related industries, especially automotive.
- The Company continues to have sufficient liquidity, and with EBITDA likely to improve we see limited downside operationally.
- However, we are conscious that the exit of the Kulim factory is widely expected, and any failure in exit will be a huge disappointment to the market.
Happy to discuss further.
Tomás