AMS Osram - Uncertain Future.
All,
Please find our updated analysis here.
Although Q3 numbers and the Company’s guidance for Q4 and Q1 are similar to our projections, the release has left us with some doubt about the business trajectory. We were cautious on the semiconductor outlook but had expected lamps and systems to boost revenue and margins in Q4 and Q1, with new business wins in the semiconductor segment to come on board later in FY25. The specific guidance for Q4 is likely to point to further weakness in the semiconductor space, and although the Company are optimistic for FY25, we are struggling to match their confidence.
Investment Rationale:
- Although we are becoming more cautious about the name, we are maintaining our position for now. The Company are holding a credit investor call next Wednesday, where we hope to get better insight into the split of revenue between semiconductor and lamps & systems segments contained in Q4 guidance.
- 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 par, we are neutral on the trade with the coupon cancelling the 5.25pts loss. The Convertible bonds have traded up 4pts since purchase.
Any Reasons for Positivity:
- AMS Osram continue their momentum of design wins, with €3.5bn lifetime-value wins year to date. They have demonstrated a strong market position and the $250m prepayment received in the quarter reinforces this view. The ramp-up of these design wins will improve profitability.
- AMS are well positioned in non-traditional segments of the market. In the medical segment, AMS have a relationship with 8 out of the top 10 CT scan manufacturers. Similar in professional lighting, with 6 out of the top 8 using AMS technology.
- On cost savings measures, AMS Osram has achieved €85m run-rate savings versus a projection of €75m for FY24, with further saving and efficiency measures initiated, with an overall target of €225m by FY26. These are not included in our projections.
- Overall, AMS Osram expect to improve EBITDA margins to 20-24% from the current 15-18% due to the above measures.
Recent Results:
- Q3 numbers include a prepayment from ANS Osram customer of €224m (c.$250m) which has impacted cash flow but has no impact on P&L. This prepayment is for a customer order that is likely to be delivered in FY26.
- P&L numbers were in line with our expectations, with revenue of €881m and EBITDA (unadjusted) of €155m versus our model of €885m and €147m, respectively.
- Other notable items on the balance sheet include the build-up of Working Capital. Inventory is c. €160m higher than expected, with the Company explaining that this is planned versus future sales. Overall disposal proceeds were €50m lower than our expectations, with the Company now talking down the possibility of any future disposal proceeds.
Company & Model Projections:
- AMS Osram have continued to guide for weak revenue for Q4, extending the weakness into Q1. We had always modelled a weak start to 2025 but are now questioning the remainder of FY25. AMS Osram has guided to FY25 to show growth of 6-10% revenue, and while we acknowledge recent contract wins, it is hard to fully justify these growth targets.
- The Company has also guided for FCF, including net interest payments, to be positive for FY25. We have adjusted our growth targets for FY25 which results in a modest negative outflow for this metric.
- Our concern is that FY26 is likely to see an outflow of c. €200m as the business unwinds the prepayment received in this quarter. With the business needing to refinance €160m of debt in Q4, coupled with €450m of convertible debt in March 2025, the business will have to raise additional money before Summer 2026.
- AMS is not deleveraging with leverage without topline growth. Our projections, with modest 2-3% growth, project leverage does not materially change over the next 2 years, staying in the 4.8-5.0x range. (we include the Osram put, c. 1.0x, plus the prepayment as quasi-debt in our leverage stats).
Kulim Factory:
- We had wrongly assumed an exit from the Kulim factory was imminent post-Q1 results as Company management and some equity analysts highlighted the potential for proceeds to exceed that of the sale and leaseback liability. This would reduce leverage stats by c. 0.8x. We had highlighted the factory is a drag on cash flow and that not exiting the facility could leave AMS Osram with a white elephant.
The update from management on the Q3 call was more subdued. Management struck a more cautious note, stating that the process of finding a third party to take over the 8” factory/ Sales and Leaseback is continuing in a difficult environment.
- Management highlights that they remain price sensitive but eventually any exit, even at a loss, would be beneficial for creditors. We have removed any potential asset sale from our model but would expect an exit in the coming 12 months.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk