AMS Osram - Reading the Tea Leaves - Positioning

Dear All,

Please find our unchanged investment analysis here.

AMS Osram is scheduled to release its Q2 results next Thursday. However, following this morning’s announcement, we are reducing our exposure to the credit. While we remain fundamentally confident in the company's ability to improve profitability over the coming quarters, the timing of the recently announced private placements raises some concerns regarding the near-term likelihood of asset sales. As a result, we believe it is prudent to adjust our positioning.

Investment Rationale:

- We have been invested in AMS Osram since June 2023, with the current position established in May 2024. We currently hold a 5% long position in the 2029 EUR bonds at an average entry price of 104.7%, and a 2% long position in the 2027 convertible bonds at 75%.

- We are exiting our position in the convertible bonds at 95% and reducing our exposure in the 2029 bonds to a 4% long position, exiting at 105.5%. In our view, the timing of the private placement suggests a lower probability of an imminent asset sale.

- Although the company has allocated €150m for buybacks, current pricing appears to reflect expectations of a significant asset sale, something we now consider less likely in the short term. That said, with current liquidity and asset sale potential, we see limited downside from current levels.

- Regarding the 2029 bonds, we are scaling back our exposure based on the same rationale. Despite continued confidence in the company's improving leverage profile, and with the bonds yielding 8.5%, we see merit in reducing our exposure. 

- This leaves us with a 4% long position in AMS Osram’s 2029 Euro bonds. 

Transaction Update:

- AMS Osram has executed a private placement, issuing an additional €500m of its 2029 bonds, €200m in EUR at 104% and $350m in USD at 104.75%, representing approximately a 2-point discount to previous trading levels.

- The proceeds will be used to pre-fund the €350m equity put (yet to occur), with the remaining €150m earmarked for repurchases of the 2027 convertible bonds in the open market.

Preliminary Q2 Results:

- AMS Osram has provided preliminary results ahead of the full H1 release scheduled for July 31st. Revenue is slightly below our forecast, likely due to FX headwinds from dollar weakness. EBITDA was broadly in line at €146m (vs. our estimate of €148m).

- Free cash flow after interest was €140m below expectations. While details are not yet available, we had assumed €150m of inflow from working capital, which may account for the gap. Another possible factor could be option exercises during the quarter, though this would typically fall outside the company’s FCF definition.

- The company reaffirmed its FY25 guidance for improved profitability and free cash flow exceeding €100m.

We’re happy to discuss further and will share a detailed update following the Q2 results release next Thursday.

Tomás

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