All,

Please find our overview of AMS Osram here.

Near term, risks are on the downside and we are exploring the possibility of taking a short position in the name, particularly the low/nil coupon convertibles. The yields are insufficient for the Company’s headwinds, especially the weakness in the consumer segment (mobile phones). We are not taking this short position currently, but we will be staying in front of the name for any further deterioration with the release of the Q4 numbers. Our cautiousness reflects the underlying growth opportunity within the business's segments plus the ample liquidity the Company has. Given the relatively short-term maturity of the bonds, we see limited risk of any new financings arranged that don’t take out existing debt.

Investment Considerations:

- At current yields, 7-9%, we are not encouraged to go long the bonds, while on the downside a move out to 10% would drop the 2027 convertibles by merely five points. Even if Q4 turns out to be disappointing, we hesitate to assume a move significantly wider than that as leverage is not particularly high and the Company has substantial liquidity with high cash balances and full availability under its revolver to deal with any minority put down the line.

- The bonds are pari-passu with all existing debt but they do not enjoy protection from their covenants to prevent significant layering with new debt ahead of them.

- Additionally, the Company has a 3x equity cushion, enabling AMS to raise convertible bonds at low coupon rates.

Minority Osram shareholders:

- We have treated the Osram put from minority shareholders onto AMS as “senior debt”. The minority shareholders are currently guaranteed a dividend, c.€49m p.a. equivalent to a 5.6% interest rate on the €862m put value. The shareholders have appealed these valuations and the whole court process could take 5 years (commenced in 2021).

- It should be noted that AMS has sufficient liquidity to honour the put if exercised in the short term.

- It is an added complication, but the domination agreement allows AMS to proceed with its cost savings and integration plans, subject to the payment of the guaranteed dividend.

Guidance:

- We haven’t been able to speak to the Company (currently in a closed period), but we are comfortable with our medium-term guidance with leverage marginally increasing. We have maintained relatively high levels of CAPEX for FY23 and FY24, meaning there is no meaningful deleveraging before the refinancing need in FY24.

- Recent results were weak with the Company reducing their FY24 guidance. However, we are cautious in shorting the outstanding debt given the positive underlying structural changes in the market, with significant growth in the Consumer and Automotive sectors.

Full-year results are due on the 7th of February. We will broaden our analysis post-release.

Happy to discuss,

Tomás

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

AMS Osram - Sensing a change