AMS Osram - Consistent with our view
All,
Please find our model post Q4 numbers, here.
We have not made any major changes to our projections post Q4 and final FY24 results from AMS Osram. This is mainly a reflection that the credit continues to perform as expected, with our original thesis from last year that recovery in the end markets will be later than the Company previously guided. , The Company has no liquidity concerns and with a slowly improving macro picture, we continue to see value in AMS Osram bonds at current levels.
Although not immune to the weakness in the overall auto segment, these results demonstrate that AMS is not an auto supplier but a business with a diversified customer base. Recent new business wins have compensated for the exit from non-core and legacy products, supported by stronger-than-expected cost-saving measures.
Investment Rationale:
- Post Q3 numbers we had become more cautious but maintained our position on lack of liquidity concerns and our expectations of a turnaround in late FY25. The bonds have been volatile with the market punishing AMS for its auto exposure.
- We re-established a position in AMS in early May following Q1 numbers, taking a 3% long position in March 29 bonds at 105.25% and a 2% long 2027 Convertible Bonds at 75%. With the 2029 bonds now trading at 101%, we have taken 4.25pts capital loss, compensated by the coupon. The Convertible bonds have traded up 10pts since purchase.
- We see no need to adjust our model post-Q4 numbers, with overall Company projections matching our model from Q3. We had expressed some doubt about the trajectory and timing of the recovery, with our model showing stronger H2 versus H1. The Company has now adjusted its guidance to a similar shape (albeit stronger) and therefore we remain confident in our positioning.
- We note that our projections are for slightly higher revenue at lower margins versus the Company's guidance. This is partially explained by the faster-than-expected cost savings driving down the cost line, albeit the overall impact is muted due to lower volumes.
Q4 Numbers/Guidance:
- AMS Osram managed to generate positive FCF (after interest) in FY24, ahead of our expectations, but the reality is this is driven by cost savings rather than top-line revenue growth. Overall semiconductor revenue in Q4 was down 3%, driven by a slight decline in the automotive segment (inventory correction) and a 10% decline in the Industry and Medical segments (again inventory correction coupled with weak medical).
- The Consumer segment provided a strong increase (+20% versus Q4 23) due to the ramp-up of new products and solid overall handheld and wearable segments.
- In FY24, AMS Osram continued to win new contracts, with €1bn of LTV (estimated lifetime value) design wins in Q4 alone. This underpins management’s view that FY25 revenue will be a tale of two halves, H2 revenue will be stronger (low double-digit) than H1. The higher volumes should see improving profitability compared to FY24, as a result of the higher cost savings.
- CAPEX guidance is < 8% of sales (we have adjusted our projections down from 10% to 9% for FY25, and 8% thereafter).
- Our projections of €75m positive FCF after interest stacks up well against management’s view of an excess of €100m. Therefore, we feel comfortable with our overall projections.
Other issues:
- Included in our capital structure, is an advanced payment of €224m received in Q3 24 as a customer pre-payment for a project to be delivered in FY26. We have included this as debt in a similar fashion to factoring or other Working Capital financing. This is c.0.5x of leverage, and we project it as an outflow in FY26, via Working Capital.
- Liquidity is not an issue for the Company. The Company has a Convertible bond (€450m) that will be repaid from cash on the balance sheet (€1.1bn) in March this year. The only other debt before the maturity of the 2027 convertible bonds we are long, is €150m of promissory and bank debt. Therefore, even without any positive free cash flow, the business will have €500m cash balance at the end of 2026.
- The Osram Licht AG Put Option should be finalised this year. The cost of the put is c.€600m albeit we value it €680m on our capital structure due to the Osram Licht equity trading at a premium to the theoretical put option. The Company has an undrawn €800m RCF facility to be used for this purpose if required.
- We issue a word of caution on the lack of comment regarding the Kulim factory site. There was a general market expectation that progress would be made on disposing of this site in Q4 24, and although efforts continue, the Company provided no specific updates on the process. The associated debt is c. 0.75x of leverage and €25m of interest outflow, which is meaningful in the context of AMS Osram's balance sheet.
Happy to discuss this with you further.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk