AMS Osram - Not all about business - Model Update
All,
Please find our updated model on AMS Osram following the Q3 results here.
With AMS Osram shares down c.20%, the bonds have moved lower in sympathy. In our view, the equity reaction is excessive, and bondholders should focus on asset sales, which will drive credit returns over the coming quarters, rather than short-term movements in the underlying business. We maintain that a full refinancing of the capital structure in 2027 remains the most likely outcome, subject to progress on Kulim and other asset sales. However, as outlined below, earlier this year, we exited our position in the Convertible bonds, where we see limited upside in the Convertibles from current levels.
Investment Rationale
- We are retaining our 4% long position in the AMS Osram € Mar-29 bonds. We increased our position to 5% in March, giving an average cost of 104.7%. However, over the summer, we exited our 2% long Convertible Bond position and reduced the € Mar-29 bonds to 4%. While we remained fundamentally confident in the company's ability to improve profitability over the coming quarters, the timing of the private placements in July raises some concerns regarding the near-term likelihood of asset sales. As a result, we viewed it as prudent to reduce our positioning.
- The bonds are currently offered at 104.5%, implying a yield of c.8.5% (YTC March 2028). As the bonds are call constrained, we see only 3–4pts of upside, primarily from progress on the Kulim exit and delivery of the €500m non-core asset disposal programme. Combined, these would take leverage below 2.0x.
- The Convertible bonds now trade at 96%, upside is limited. The Company may tender for €150m of the €760m outstanding using proceeds from the summer issuance, but the remainder are likely to stay outstanding until their November 2027 maturity. With a yield to maturity below 5%, we are not investing.
- The equity reaction post-Q3 (down 15–20%) reflects market concerns around the outlook. We have lowered our forecasts but remain comfortable with the Company’s cashflow prospects. Nevertheless, we are not increasing our weighting in the 2029 bonds following the exit from the Convertibles, preferring to remain cautious.
- For the Convertibles, potential upside is c.4pts in a scenario where the Company tenders for the full issuance. However, we do not expect this before completion of asset sales and/or a meaningful reduction in the Osram minority shareholders’ put. These are positive catalysts for the entire capital structure, not just the Convertibles. Downside remains limited given c.€1bn of cash and an €800m RCF; even without asset sales, the Convertibles should be money-good.
- Upside for the € Mar-29 bonds is centred on asset disposals. However, the bonds trade close to their call price, capping upside at 2–3pts. Delays in disposals or FCF below €100m in Q4 would likely see the bonds move below par.
Q3 Results
- Creditors received no material update on the two key credit drivers: the Osram Licht put options and the sale of the Kulim factory.
- Results were in line with guidance and market expectations. Core semiconductor revenue increased 9%, and cost controls supported an improvement in the EBITDA margin to 19.5%. EBITDA includes a €10m contribution from asset sales.
- Q4 guidance was slightly softer, although revenue and FCF expectations were maintained. Revenue is forecast at €790–890m, with management confident around the midpoint. Adj EBITDA margin guidance is 17.5%. FCF is still expected to exceed €100m, although this includes the expected inflow from the Austrian Chips Act grant. Excluding this, we estimate FCF at €52m, with the Company expecting the first instalment, a low double-digit million amount of the state grant from the Austrian government.
- As a reminder, the Chips Act refers to the €227m Austrian State aid package supporting the construction of a new wafer manufacturing facility in Premstätten, Austria.
Refinancing in 2027
- This remains our base case, contingent on the sale of the Kulim factory and successful execution of the non-core disposal programme.
- We assume €400m of proceeds from non-core disposals (c.€100m below management’s target) and a zero-equity-value exit from Kulim. We also assume full cash settlement of the remaining Osram Licht shareholders’ put.
- On this basis, leverage would be c.3.0x by Dec 2026 — above the 2.0x long-term target but still consistent with a full refinancing.
Risks
- A failure to exit the Kulim factory would leave c.0.75x of additional, non-earning leverage on the balance sheet. Earlier management commentary suggested the potential for some equity value; recent tone has been more cautious. Any exit that removes this leverage would be highly positive for creditors.
- AMS Osram has generated c.€200m of disposal proceeds so far, the majority in FY24. We expect a further €200m, consistent with the €500m programme. Management has not disclosed detailed timelines but reiterated at Q3 that progress remains on track. This €500m total excludes the sale of the Kulim factory.
- In July 2025, AMS Osram announced the agreement to divest its Entertainment & Industry Lamps business to Ushio for €114 million. The transaction is expected to close in the first quarter of 2026. The closure of this deal will bring the overall target closer.
- Investor caution around the underlying business remains, but the Company has secured c.€5bn of life-time-value orders in 2024 and €4bn YTD (Q3 2025), underpinned by state support for the Austrian wafer facility.
- Ultimately, the credit story will be driven by progress on disposals, including the Kulim factory.
Next Steps
- FY25 results will be published on 10 February 2026. The next likely announcement is confirmation of the first drawdown of the Austrian government grant, which is expected before year-end.
- There is also potential for asset sale updates, though management indicated that progress on the Kulim exit is unlikely before year-end.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk