Source: ams, Osram
Based in Austria, ams AG (OTCPK:AMSSY) manufactures sensor solutions and command a firm market leadership over the 3D imaging and sensing market with an estimated market share of 42% against notable competitors Lumentum (LITE), Finisar (II-VI) (IIVI) and Himax (HIMX). The company’s optical product portfolio includes ambient light, IR proximity, RGB and associated sensors and has extensive technological expertise in Active Stereo Vision ('ASV'), Time-of-Flight ('TOF') and Structured Light ('SL') architectures. As the imaging world transitions to 3D based technologies, the company is poised to benefit from its diversified end market exposure across mobile, industrial, medical and automotive markets.
Source: Yole, Development, ams, Lumentum, Himax, Finisar
One of the main long-term drivers presented to the company is the acquisition of Osram (OTCPK:OSAGF) which catapults the company into the top 20 largest semiconductor companies by revenues from 31st place previously. The deal combines ams expertise in sensors with Osram’s lighting and Opto semiconductors for complementary product ranges. Among factors contributing to our positive outlook of the integration includes Osram’s incredibly broad IP of advanced lighting technologies that the company can leverage to develop total packages for the emerging automotive LiDAR and microLED markets which are projected to grow to over $15 bln in the next 5 years from a nascent stage. Additionally, the combination allows the companies to streamline their design and manufacturing processes across Europe and Asia which leads to cost synergies.
Source: Statista
In terms of product development, the combination boosts the company’s patent portfolio as the widest breadth among competitors. This solidifies its R&D focus on advanced high-performance solutions especially in VCSEL which has significant advantages compared to traditional solutions. Its extensive technologies made the company a key supplier of facial recognition systems in leading smartphone makers including Apple (AAPL) and Samsung (OTC:SSNLF). However, rising competitive threats from existing companies and large analog suppliers could pose challenges to maintain its business with Apple.
Leveraging Osram’s Wide IP to Create Unique Product Integration
The acquisition of Osram is one of the key long-term drivers of the company. The company has completed its acquisition of Osram for around EUR 2.7 bln ($ 3.2 bln) and holds a 71% share ownership with a Domination and Profit and Loss Transfer Agreement (‘DPLTA’) in force enabling ams to exercise full control over the company. Osram’s strong leadership position in the global light emitter market creates a combined company into a global leader in sensor and photonics.
Among the major advantages provided to ams is to leverage the strong technology, IP and scale of Osram to capitalize on the AV, digital automotive lighting and next-gen imaging. As seen in the chart, the acquisition significantly expands ams’ patent portfolio. The overlapping of Osram’s patent portfolio of 5,700 patent families especially on LEDs, optoelectronics, light and radiation emitting technologies highlights technology synergies and potential breakthroughs in optical solution innovation. Given the acquisition cost, we believe this has provided ams with a major advantage in terms of the breadth of its patent portfolio obtained.
Source: Cipher
As Osram is a global leader with a market share of 24% in the automotive lighting segment, the area in which we expect the company to derive the most benefits is the automotive segment. This is highly beneficial to ams because it was heavily focused on the consumer segment accounting for around 80% of revenues. Thus, we see this as a major opportunity for ams to expand into the automotive sensor market valued at $24.5 bln with a CAGR of 10.5% to 2025 by leveraging Osram’s strong existing network to compete against existing players such as Bosch, Denso Corporation (OTCPK:DNZOF), Infineon Technologies (OTCQX:IFNNY), Sensata Technologies (ST), etc.
Source: Osram, Nichia, Lumileds, Stanley, Seoul Semiconductor, D&O Green Technologies
This fast growth is underpinned by emerging technologies in ADAS. One obvious integration application as highlighted by ams CEO is to offer a package solution with ams sensors in Osram automotive headlights. But there are even more opportunities that transcend beyond just headlights, the combined company has a range of innovative solutions for next generation displays, miniature light projectors for digital automotive lighting and in-cabin illumination and sensing. For example, the integration of microLED displays from Osram which boasts high brightness and wide colour gamut with full sensor-display integration from ams for in-car display and infotainment systems. The microLED market is still in the early development phase and is projected to grow at a CAGR of 153.1% to 2026.
Another key area of innovation is AV technology which the combined company can develop a Light Detection and Ranging (LiDAR) solution with ams and Osram’s expertise in VCSEL and EEL-based illumination for autonomous driving. Automotive LiDAR is still a nascent market but could grow at a CAGR of 40% to 2024 due to the advancement of AV technologies. As European carmakers are moving towards AV, Osram and ams stand to benefit from this emerging trend.
Source: ams
Another point about the integration relates to the consolidation of the company’s supply chain in Europe and Asia. The proximity of ams and Osram’s R&D bases in Europe allows for enhanced and smooth collaboration between employees. In the Q4 earnings briefing, the company has mentioned that there are already teams from both companies having started collaboration in R&D. In Asia, the combined company strengthen its manufacturing footprint across China, Philippines, Singapore and Malaysia and builds scale for more cost-effective backend processes.
Source: ams
Upon the completion of the Osram acquisition, the company plans to accelerate its roadmaps in new optical solution areas. The company’s management has guided revenue synergies of EUR60 mln ($70 mln) to be attained in the next 3 years. Though, we believe that this synergy guidance is conservative given the massive addressable market expansion through product integrations. The company also expects to streamline its manufacturing footprint and corporate expenses which provides COGS and Opex synergies of EUR120 mln ($142 mln).
Source: ams
According to Market Research Future, the global sensor market is projected to grow at a CAGR of 6.2% to 2026. Whereas Modor Intelligence forecasts the LED packaging market to grow 6%. In total, we expect the combined company to have revenues of $6,234 mln in 2021 which is a 49.6% growth compared to 2020. We also factored in revenue synergies provided by management guidance of $70 mln in the third year and forecasted synergies in 2021 and 2022 by dividing the synergies across 3 years.
ams-Osram Revenues ($ mln) | 2019 | 2020 | 2021F | 2022F | 2023F |
ams Core Business | 2,243 | 2,291 | 2,434 | 2,585 | 2,746 |
Osram | 1,877 | 3,777 | 4,004 | 4,244 | |
Revenue Synergies | 23 | 47 | 70 | ||
Total | 2,243 | 4,168 | 6,234 | 6,636 | 7,060 |
Total Revenues Growth With Osram | 85.8% | 49.6% | 6.4% | 6.4% | |
Total Revenues Growth Without Osram | 2.1% | 6.2% | 6.2% | 6.2% | |
COGS Synergies | 47 | 95 | 142 | ||
Opex Synergies | 47 | 95 | 142 |
Source: ams, Osram, Yole Development, Modor Intelligence, Market Research Future
Strongest R&D Capabilities and Expanding Portfolio of Emerging VCSEL Technology
The company’s market leadership is buoyed by strong R&D efforts to develop a technologically leading portfolio of 3D sensing solutions. Its strategic approach to maintaining its market leadership is through further broadening its portfolio across all three 3D sensing architectures including Active Stereo Vision ('ASV'), Time-of-Flight ('TOF') and Structured Light ('SL'). Each architecture has its unique benefits and limitations but is generally used across a range of application enabling the company to reach a wide range of markets such as mobile electronics, automotive, industrial and medical.
Source: ams
Compared to its competitors, the company’s commitment to R&D is highlighted through its high R&D spending. Moreover, the company’s percentage of R&D spending is the highest at 17.6% for the 5-year average R&D expenses as a percentage of revenues. In terms of the patent portfolio, the company solidifies its lead with Osram attaining the widest portfolio breadth at 14,023.
Company | R&D Expense 2020 ($ mln) | Revenue 2020 ($ mln) | % of Revenue on R&D | 5-Year Average % of Revenue on R&D | Number of Patents |
ams | 517 | 4281 | 12.1% | 17.6% | 14,203 |
Lumentum | 199 | 1679 | 11.8% | 13.3% | 406 |
Himax | 123 | 889 | 13.8% | 15.6% | 560 |
II-VI (Finisar) | 339 | 2380 | 14.2% | 10.4% | 2,170* |
*Finisar patents
Source: ams, Lumentum, Himax, II-VI, Howmanypatents
With a deep focus on innovation, the company’s patent portfolio would likely continue to increase with strong momentum already adding 9 approved patents so far in 2021. In particular, the company is strongly committed to expanding into the emerging ToF based VCSEL market where it lagged compared to both Lumentum and Finisar leading the market with a combined market share of 63%. Though, ams has been significantly growing in the VCSEL market from just 4% market share in 2017 to 11% in 2019 due to its growing VCSEL capabilities and $200 mln investment in its Singapore plant specialising in this technology.
We believe the company’s strong momentum in this area can continue due to continued product development and integration with Osram. Generally, VCSEL provides significant advantages such as fast scanning, long-distance, high efficiency and excellent resistance to ambient light. ams ToF sensors have extremely narrow pulse width enabling host systems to measure distances accurately and at very high speed. Furthermore, Osram also has VCSEL technologies under its BIDOS light source with infrared light which paves integration opportunities between each company’s technologies. ams is capable of supplying this technology for better LIDAR systems and in-cabin sensing. This would strengthen its capabilities in 3D LiDAR, a core technology enabling AV in its partnership with leading LIDAR integrator IBEO.
Besides automotive, the company has recently launched its latest VCSEL IR emitter family ideal for emerging use cases such as in
dustrial robots, facial recognition enabling the company to benefit from trends in industrial automation and industrial imaging. In the medical segment, the company provides these technologies for quick diagnostics diseases such as COVID-19 and influenza as well as Computer Tomography (CT) and X-ray. Overall, the company’s product portfolio breadth enables it to gain exposure to the widest range of VCSEL end markets which are all high growth.Source: Semiconductor Today
Strong Anticipated Smartphone Growth Opportunity as Key Sensor Supplier
ams has benefited over the years as a dominant supplier to leading smartphone makers Apple and Samsung. The company previously supplied IR proximity sensors in older generation iPhones and is also the sole supplier of VCSEL dot projector as a key component of Apple’s TrueDepth Camera System which enables 3D facial recognition (Face ID) since the iPhone X. Regards to Samsung, the company is the main supplier of RGB or proximity sensors in the brand’s flagship phones. Prior to the Osram acquisition, Apple and Samsung accounted for 65% of total revenues according to HIS Markit with Apple representing up to 45% of revenues. Though, Apple has dropped to around 20%of revenues after the Osram deal reducing the company’s concentration risk.
Face ID continues to be a key feature for iPhone in the latest model incorporating sensors from ams. This design win from Apple is highly beneficial for the company especially in 2021 as the growth of phone shipments is projected to recover this year along with the anticipated recovery in consumer spending buoyed by stimulus checks. With the launch of both Apple and Samsung’s flagship phones boasting the latest specifications and 5G support, the company’s shipments are forecasted to grow by 24% and 11.1% outpacing the total industry growth forecast of 5.5% in 2021 but is weighed down by Huawei which is facing supply chain issues caused by sanctions on the company. The company’s management has also touted its strategy to expand adoption across other Android devices such as Xiaomi (OTCPK:XIACF) which also uses IR sensors from ams.
Source: Neowin
Though in the longer term, the smartphone market growth is expected to taper off from 2022 with a CAGR of 3.6% to 2025 due to the longer replacement cycles which has increased to 33.6 months in 2020 compared to 24 months in 2014 as new models lack a strong enough appeal to entice consumers to upgrade their existing phones.
All in all, the consumer segment’s revenue contribution has decreased from around 80% to 37% post Osram acquisition but remains a contributor to revenues. To maintain its technological edge, the company is focusing on the development of a 3D dToF solution for high performance which integrates VCSEL illumination, optics, high resolution SPAD sensing, algorithms and software. Moreover, it is also focused on the development of BOLED 3D technology which is a new front-facing 3D technology that is behind the display making it invisible. We believe this technology is highly promising and has the potential to make the company remain competitive as bezel-less phone designs are rising due to demand for wider screens and smaller camera and sensor notches.
Emerging Competition and Potential Apple Redesign Risk
Within the 3D sensing market, the pace of innovation is rapid with emerging technologies across high performance sensors. Although Apple’s revenue contribution has reduced post Osram acquisition, Apple remains a key customer of the group with an incredibly high-power distance between both companies due to the difference in the company’s sizes. Its reliance on Apple as the company’s largest customer (around 20% of revenues) could pose a risk in the increasingly competitive market as companies develop their advanced 3D capabilities. Despite the long-standing relationship between ams and Apple, there lacks a firm established partnership between both companies and we believe a future partnership is less likely due to the power distance between both companies and the competitive landscape of the industry. Furthermore, Apple in 2017 invested in the company’s rival Finisar for $390 mln to renovate a 700,000 sq ft plant in Sherman, Texas to boost the production of VCSEL chips for the iPhone and the company claimed it represents anticipated future business between the companies.
Additionally, other large general MEM suppliers such as Sony (SONY) and STMicro (STM) could potentially expand into the 3D sensing market by developing their solutions which pose a risk to ams. Overall, the company is highly subjected to yearly redesigns of iPhones and should ams lose out design wins to its competitors, this would affect its revenue growth momentum as it represents a significant portion of the business.
Valuation
In terms of the financial analysis, the company’s core business has an average revenue growth rate of 31.6% on average in the past 5 years excluding Osram and Heptagon. Its average gross and net margins were 37.2% and 9.83% respectively.
Source: ams, Khaveen Investments
The acquisition of Osram will likely have a negative impact on the company’s margins. Osram’s gross margins, net margins and FCF margins are lower than ams but this is also a result of the slowdown of the automotive market.
Company | ams | Osram |
5-Year Average Gross Margins | 38.9% | 30.0% |
5-Year Average Net Margins | 10.4% | -0.6% |
5-Year Average FCF Margins | 0.9% | 1.4% |
Source: ams, Osram
That said, we believe that the automotive market recovery and Osram’s leading market position coupled with its strong product and patent portfolio should translate to improved margins going forward.
Source: Osram, Khaveen Investments
Overall, we expect still expect the gross, net and FCF margins to decrease but improve over time as the company realizes synergies and achieve scale. The combined company’s forecasted margins are shown in the table below which includes the effect of revenue and costs synergies discussed earlier.
ams-Osram Combined | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021F | 2022F | 2023F |
Revenues ($ mln) | 677 | 579 | 1,276 | 1,634 | 2,115 | 4,168 | 6,234 | 6,636 | 7,060 |
Gross Profit ($ mln) | 368 | 303 | 492 | 444 | 811 | 1,264 | 2,071 | 2,273 | 2,485 |
Net Profit ($ mln) | 162 | 108 | 107 | 107 | 336 | -106 | 454 | 556 | 659 |
FCF ($ mln) | 84 | 56 | -691 | -117 | 601 | 633 | 933 | 954 | 1,032 |
Gross Margins | 54.4% | 52.4% | 38.5% | 27.2% | 38.3% | 38.0% | 33.2% | 34.3% | 35.2% |
Net Margins | 23.9% | 18.7% | 8.3% | 6.5% | 15.9% | 2.4% | 7.3% | 8.4% | 9.3% |
FCF Margins | 12.5% | 9.7% | -54.2% | -7.2% | 28.4% | 27.6% | 15.0% | 14.4% | 14.6% |
Source: Osram, ams, Khaveen Investments
Excluding the acquisition of Osram and Heptagon for EUR 845 mln ($1 bln), the company has an average FCF of only 2.76%. This is in part due to the high capex incurred for the expansion of its Singapore facility for $200 mln in 2017. We expect the acquisition to provide a significant boost to its operating cash flows in 2021 by 50% reflecting Osram’s cash flows. Our capex assumptions also factored in Osram’s contribution of $250 mln in 2021 and beyond.
Source: ams, Khaveen Investments
As the company is expected to attain a steady stream of cash flows, we applied a DCF analysis to value the combined company. Our terminal value is based on a weighted average EV/EBITDA on the company’s revenue breakdown of the LED industry average representing Osram’s closest direct competitors and 3D sensor industry averages representing ams competitors.
LED Company | EV/EBITDA | Sensor Company | EV/EBITDA |
Osram | 11.69 | ams | 9.45 |
Signify (OTCPK:PHPPY) | 7.77 | Lumentum | 11.93 |
Hella (OTCPK:HLKHF) | 14.41 | II-VII | 14.29 |
Fagerhult | 8.01 | 3D Sensor Average | 11.89 |
LED Average | 10.47 | ||
Weighted average EV/EBITDA | 10.97 |
Source: Seeking Alpha
Furthermore, we applied a discount rate of 7.21% based on the average of the company’s WACC of 11.1% with a weightage of 100% and Osram’s WACC of 4.7% with a weightage of 71% reflecting the percentage of ownership in the company.
ams-Osram WACC | WACC | Weightage |
ams | 11.1% | 100% |
Osram | 4.7% | 71% |
Combined WACC | 7.21% |
Source: ams, Osram, Infrontanalytics
Based on a discount rate of 7.21%, our model shows an upside of 28.64%.
Source: Khaveen Investments
Verdict
To conclude, we view the acquisition of Osram being a positive deal for ams to leverage its tremendous IP and complementary product offering with the company’s leading high performance sensor solutions. Through unique product integration between automotive lighting and sensing, the combined company could create a complete LiDAR and microLED package for markets that are still nascent but show rapid growth potential driven by rising ADAS and emerging AV technologies with the support of Osram’s robust network in the automotive markets. Besides that, the acquisition significantly reduces its customer concentration risk and serves more diversified end markets across consumer electronics, automotive, industrial and medical fields. Given the company’s strong commitment to product development especially in VCSEL capabilities, we expect this will provide a firm competitive edge over competitors. Though, we also note the increasing competition from existing 3D sensor companies and the entry of large analog and MEMs which could challenge its business with Apple. That said, the industry has tremendous long-term opportunities with an addressable market of over $15 bln by 2025 driven by new and exciting technology development which the company is seeking to capitalize on with Osram. Overall, we rate the company as a Buy with a price target of $13.39 (US ADR) or CHF28.39 (Swiss Stock).
