AMSSY - AMS Osram: Strategic Realignment For Higher Future Growth

2023-11-19 08:09:27 ET

Summary

• The Optoelectronics & Sensors market is estimated at $65.7 billion in 2022 with a CAGR of 6.9%, while the lighting market is larger but has a slightly lower CAGR.
• The company's divestiture of the Lamps & Systems segment and the ongoing plan to divest non-core Semiconductor businesses in FY2024 indicate a focused effort on strengthening its core and improving.
• We believe this strategic realignment position ams-Osram for sustained, profitable growth, which could allow the company to outpace market growth and gain market share.

In our previous analysis of the previous ams-OSRAM AG ( OTCPK:AMSSY ) merger, we expected the combined company to achieve EUR350 mln in synergies by streamlining operations as well as the development of micro-LED and VCSEL in automotive LIDAR. While facing potential challenges from an iPhone redesign, we believed the company's reduced dependence on Apple and BOLED technology offers promising prospects and while competition in 3D sensing solutions is fierce, we were confident in the combined strengths of ams and Osram.

In this analysis, we determined whether the company could capitalize on the lighting market. Firstly, we examined the market breakdown of the company businesses in optoelectronic & sensor (Semiconductors) and Lighting (Electrical Components & Equipment). Moreover, we analyzed the company’s divestitures and future realignments to identify its focus. Finally, we examined its market positioning and determined whether it could increase its competitiveness with its increased focus.

Market Growth Outlook and Opportunity

ams Osram manufactures and sells Optoelectronics & Sensors including emitters (such as LEDs) and other optical and imaging sensor technologies. In addition, the company also sells “traditional lamps and lighting systems” including LED lamps.

The company’s revenue breakdown shows its Semiconductors businesses accounting for a larger share of revenue compared to its Lamps & Systems business.

Source: WSTS , TrendForce, Omdia, Yole Development , Fortune Business Insights , MMR , Khaveen Investments

According to WSTS, the Optoelectronics & Sensors market is estimated at $65.7 bln in 2022 and is projected to grow at a CAGR of 6.9%. In comparison, the lighting market is almost twice as large as Optoelectronics & Sensors and but has a slightly higher CAGR forecast of 4.4%.

Furthermore, we broke down the Optoelectronics & Sensors and Lighting markets based on various research reports. Based on the table, the largest submarket of Optoelectronics & Sensors is CMOS Image Sensors which accounted for 32.4% of the market but ams Osram does not have a strong presence as its share is below 1% and has a relatively low market CAGR of 6.7%. On the other hand, the LED chip market is smaller but has a higher market forecast CAGR, which the company has a 13% market share (2 ^nd place). Additionally, mini-LED has a higher CAGR (54.3%) but is much smaller. Some of the market growth drivers are:

• The rising need for economical and energy-conserving lighting solutions.
• The expanding utilization of LED technology within the automotive industry.
• The emergence of LED specialty lighting across various domains such as fishing, healthcare, marine, horticulture, and harbor illumination.

Furthermore, ams Osram also has a strong presence (2 ^nd place with 25% market share) and has a higher CAGR of 9.3% compared to the overall Optoelectronics & Sensors. Some of the light sensor market growth drivers are:

• The increasing integration of light sensor features in consumer electronics like smartphones and tablets.
• Progress in the automotive industry, smart home technology, and outdoor lighting.
• A rise in the need for sensors in the construction of smart cities and a surge in IoT advancements.

In the lighting market, General Lighting which consists of residential and commercial applications accounts for the majority of the market (80%) but has a lower forecast CAGR of 4.2% compared to the Automotive Lighting, Back Lighting & Others category which has a slightly higher CAGR of 5.3%. Some of the market growth drivers of the automotive lighting market are:

• Technological advancements in adaptive lighting systems.
• The increasing integration of LED technology in car lighting systems.
• The widespread acceptance of LED lights by automotive manufacturers.

Outlook

Overall, we believe the higher market growth outlook of the Optoelectronics & Sensors market with a higher forecast CAGR of 6.9% driven by high growth submarkets such as LED and light sensors which the company has a significant presence in 2 ^nd place in each respective submarket, compared to 4.4% for Lighting market bodes well for the company which has a higher exposure with its Semiconductor segment accounting for the majority of its revenues (65.7%).

Strategic Realignment

Source: Company Data, Khaveen Investments

Following the company’s merger with Osram in July 2020, its revenue growth surged during that period due to the inclusion of Osram’s revenues but had been in decline in 2022 and TTM. In 2022, the company’s revenue in USD terms declined by 10%. One factor is due to the depreciation of the Euro against the US Dollar which declined by 10.9% based on the average exchange rate in 2021 and 2022.

Besides that, the company highlighted the reason for the decline was due to disposals of businesses (EUR307 mln) from its annual report. From its earnings briefing, management highlighted that “by comparing the equivalent portfolio 2022 to 2021 for a like-for-like comparison”, its revenues increased by 2% during the period.

The company commonly highlighted the reason for the divestitures as part of its “strategic realignment”. Based on its annual report, Fluence Bioengineering, Automotive Lighting Systems and Traxon businesses were under its Lamps & Systems segment previously. The company intended to “focus on core technology areas in illumination, visualization, and sensing and to divest businesses that are not core to the company’s strategy” such as its semiconductor business and its automotive & specialty lamps business.

Moreover, in 2023, the company continued to divest non-core businesses such as Clay Paky and Digital Systems Eurasia which were both under its Lamps & Systems segment selling products such as general-purpose LED lamps and horticulture lighting. These businesses contributed an annualized revenue of EUR316 mln in Q1 (8.5% of total revenue).

Outlook

Overall, the company’s business realignment was focused on the divestiture of its Lamps & Systems segment which was completed according to the company in 2023. However, following these divestitures, the company announced in July 2023 that it will continue to divest non-core businesses of its Semiconductor businesses with revenues of between EUR300 mln to EUR400 mln in its FY2024.

As seen in the chart , the company’s focus is on its core semiconductors segment with a higher growth rate target compared to its Lamps & Systems segment.

The growth of the Semi segment is well aligned with the expected growth in selected focus segments, and we want to grow faster than the market in these segments. – Aldo Kamper, CEO

Source: Company Data, Khaveen Investments

One of the reasons for the company’s realignment is due to profitability as highlighted by management in its previous Q2 earnings briefing .

We have completed a deep analysis of the company and all its business lines. We have taken key decisions and set the direction for focus on profitability, structural growth, and monetizing innovation. Our portfolio in semiconductors will be sharpened towards intelligent sensors and the middle components and more profitable. We will strengthen the focus on structural growth and automotive, industrial and medical markets as we continue to pursue selective high-volume consumer device opportunities where we can sustain a competitive advantage through cutting at innovation. – Aldo Kamper, CEO

As seen above, following its divestitures in its Lamps & Systems segment, its EBIT margin has increased from 2021 to Q3 2023. Furthermore, as part of the company’s Reestablish-the-Base Program which was announced in July 2023 about “focusing on its profitable core as a new base for sustainable, profitable growth”, management guided “EUR 75 million run-rate improvements to adjusted EBIT at the end of FY2024”. Therefore, we expect this to be positive for its EBIT margin growth in 2024.

Source: Company Data. Khaveen Investments

Therefore, going forward following the divestitures of its low-growth business segments, we expect the company’s revenue growth to accelerate. We forecasted the company’s growth above by its Lamps & Systems and Semiconductors segments. For 2023, we based this on its prorated Q1 to Q3 2023 segment revenues. In 2024 and beyond, we assumed a conservative growth rate of 2% which is the top range of management guidance but below the market growth forecast of 4.4% whereas for its Semiconductors segment, we assumed it to grow by the weight market forecast CAGR of LED, mini-LED and light sensors at 11.2%. Overall, we expect its total growth to accelerate to 8.4% by 2026 but remain negative in 2024 due to its planned divestitures of non-core Semiconductor businesses.

Potential to Increase Competitiveness

According to the company based on Trendforce and Osram, it is ranked in 2 ^nd place in both LED and Light Sensors submarkets within the Optoelectronics & Sensors market. In LED, it trails behind Nichia which only has a slim 2% lead over ams Osram whereas, in Light Sensors, the company’s share is only 5% lower than market leader STMicro ( STM ). In both market segments, only ams Osram is among the top 5, which could highlight an advantage and opportunity for it to leverage its strong position in both markets. For example, the company highlighted product development integration between its lighting solution with its sensing technologies.

Now the power and the potential of the unique combination of sensors emitted and ICs under one roof comes into play, combining our own ICs within the middle or sensor in a differentiated package and writing our own firmware to deliver unique intelligent mid- or intelligent sensors that provide a much higher customer value. An example is our recently announced cutting-edge 25,000 pixel automotive forward lighting, EVIYOS solution where we use our own highly sophisticated driver IC and ASIC in our own packet technology. This is currently receiving tremendous traction such that we already have more than €150 million design wins in our books. – Aldo Kamper , CEO

Furthermore, it claimed to be the leader within the automotive lamp market in the chart above, which is under its Lamps & Systems segment. Within the automotive end markets for LEDs and Light Sensors, the company is the leading company by a high margin as seen by its market share below. Similarly, it is also the only company to be in the top positions in both submarkets. We believe this could highlight synergies between its Lamps & Systems and Semiconductor segments.

Outlook

Overall, we believe the company’s advantage over its competitors is both its main segments, Lamps & Systems and Semiconductors is highlighted by its leading positions in both markets, especially in automotive which it is the leader in LED and light sensors and could benefit its growth Lamps & Systems growth outlook as automotive accounted for 72% of its Lamps & Systems segment revenue in Q3 YTD 2023. Moreover, we believe its leading positions in both LED and light sensor markets could allow it to capitalize on product integration synergies as highlighted by its recent EVIYOS solution product development and could allow the company to outpace the Optoelectronics & Sensors market and gain share.

Risk: Market Headwinds

We believe one of the risks the company could face in its future outlook in FY2024 is continued market headwinds. In 2023, our prorated results of the company’s Q1 to Q3 show a decline in not only its Lamps & Systems segment (-35.5%) but also in Semiconductors (-25.2%). Furthermore, management highlighted a challenging outlook for H1 2024 with a recovery anticipated in the second half of the year.

We expect some inventory corrections especially in the industrial applications in the first-half of '24. The second-half end of '24 should come in stronger than the first-half driven by design wins going into production and the end of the inventory corrections. - Rainer Irle, Chief Financial Officer

Verdict

In conclusion, we believe ams Osram is strategically positioned for growth, particularly in the Optoelectronics & Sensors market. The higher forecast CAGR of 6.9%, driven by submarkets like LED and light sensors where the company holds significant second-place positions, contrasts favorably with the slower growth of the Lighting market at 4.4%. The company's divestiture of the Lamps & Systems segment and the ongoing plan to divest non-core Semiconductor businesses in FY2024 indicate a focused effort on strengthening its core and improving profitability. The positive impact of these measures is evident in the increased EBIT margin since 2021 and the expected EUR 75 million run-rate improvements to adjusted EBIT by the end of FY2024.

Additionally, the company's leading positions in automotive-related LED and light sensors, comprising 72% of Lamps & Systems revenue in Q3 YTD 2023, provide a competitive advantage. We believe these factors position ams Osram for sustained, profitable growth, with potential benefits from product integration synergies, exemplified by the recent EVIYOS solution development, which could allow the company to outpace market growth and gain market share. However, based on our DCF valuation with a discount rate of 6.5% and a 5-year company average EV/EBITDA of 7.51x, we rate the company as a Hold with a price target of $1.98 as its current EV/EBITDA of 7.28x is fairly close (-3%) to its 5-year average of 7.51x.

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