Should ams OSRAM Dive Deep to Soar High?
ams OSRAM is a leading player in intelligent sensors and emitters market. It ranks 2nd in the global LED market, 2nd in light sensors and 1st in traditional automotive lamps/bulbs market. Despite its strong market presence, the company's stock value has been in decline since mid-2019. Owing to significant refinancing requirements in 2025, we anticipate enduring weakness, even with the company's effective efforts to streamline operations. Will ams OSRAM’s projected marked improvements in operational performance kick in or face hurdles?
ams OSRAM share price performance vs sector
Transformation 2.0 was quick to follow
When ams decided to acquire OSRAM to diversify its portfolio, the move turned out to be worth a king’s ransom. Consequently, after closing the deal, the company successfully carried out a portfolio re-alignment, divesting OSRAM's less sustainable and less profitable ventures, which accounted for €900 million in annual revenues.
Without wasting any time, the new management at ams OSRAM brought with it a new wave of optimism by announcing, during the Q2 23 results, plans to initiate another phase of restructuring involving exiting €300-400m of non-core Semiconductors revenues. There is also a plan to achieve €150m in annual savings by the end of 2025 (with half of the savings realized by 2024).
Profitability is on the upswing…
These planned disposals will help the company improve its margin significantly, although not to the historical levels since under-utilization will be an issue until there is a strong market recovery. The Q2 -23 performance was already above expectation because of the same. However, it will only partially improve the company’s financial health. FCF (Free Cash Flow) is expected to be negative in FY23 and only slightly positive in FY24 due to:
* Weakness in end-markets (especially Consumer)
* Lower revenues and EBITDA due to scope effects
* Capex at an extraordinarily high level of 25% and 13% of sales in FY23 and FY24 respectively due to the construction of the 8” microLED fabrication in Malaysia
* €50m of additional costs associated with the execution of the new restructuring plan
… but the market eyes refinancing
Low FCF generation over the next two years is concerning since ~60% (€1.7bn) of the company’s debt will mature by mid 2025 (vs. FY25e gross cash of €966m modelled in). This includes a convertible bond with an outstanding amount of €450m. Currently trading at 11-13% YTM, the refinancing of these bonds could add at least another €100m in financial costs, leading to earnings downgrades. The alternate route would be to raise equity coupled with private debt placements and customer pre-payments.
Do we see a positive Catalyst in the future?
The management could navigate the situation better by providing the market with some clarity on refinancing now, even if it is not the right time to execute anything. The broader semiconductor market is already in the downcycle so it is a good time for ams OSRAM to dive deep, so that the share price is free of refinancing overhang, and that it can benefit from a rosier backdrop and microLED shipments from 2025 onwards.
Wait for the clean-up to invest
We do not expect any significant improvement in the company’s stretched balance sheet. However, risk-taking debt investors can surely go long on ams OSRAM as double-digit returns are now matched by a cleaner and more promising company. For equity investors, going long the stock only makes sense on the expectation of Apple down payments or clarification on equity raising.
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