Investing.com -- Shares of ams OSRAM (SIX:AMS) surged on Tuesday after UBS upgraded its rating of the company to "buy."
At 5:35 am (0935 GMT), ams OSRAM was trading 13.9% higher at CHF 1.06.
The brokerage’s revised outlook flagged a more positive trajectory for the semiconductor manufacturer, driven by improving financial health and a promising industry outlook.
UBS’s analysis pointed to critical improvements in the company’s balance sheet and the potential for substantial growth in the near future.
Since its acquisition of OSRAM in 2020, ams OSRAM has undergone restructuring amidst a challenging industry cycle. However, UBS believes the worst may now be behind the company.
UBS noted that immediate liquidity and leverage concerns have diminished, due to initiatives aimed at deleveraging the balance sheet.
“We forecast net debt/EBITDA declining from 3.4x in Q2'24 to 2.8x by Q2'25,” the analysts said. The potential sale of its microLED facility in Kulim, Malaysia, through a sale-and-leaseback agreement could further drive down leverage ratios to as low as 2.2x, a move that UBS believes the market is not yet factoring in.
UBS expects the company’s financial recovery to accelerate, forecasting a return to revenue growth in 2025 after 11 consecutive quarters of declines.
Following a period of operational restructuring and asset disposals, UBS projects that ams OSRAM’s revenue will rise by 5% year-on-year in 2025, signaling a reversal in the company’s recent downward trend.
Alongside this revenue growth, the brokerage foresees further improvements in profitability, with the adjusted EBIT margin expected to increase from 7% in the second quarter of 2024 to 11% by mid-2025.
The revised forecast has led UBS to raise its price target for ams OSRAM from CHF 1.20 to CHF 1.60, implying a 70% upside from the stock’s closing price of CHF 0.93 on September 23, 2024.
UBS analysts mentioned that, in an optimistic scenario, where the company fully realizes its strategic objectives, the share price could potentially triple.
This optimistic outlook stems from UBS’s belief that the current market sentiment is overly pessimistic, particularly regarding ams OSRAM’s ability to deleverage and generate growth.
The recovery of key sectors, such as automotive LED and consumer electronics, is expected to further boost the company’s performance.
As liquidity concerns recede, and with tangible progress in revenue and margin recovery, the company appears poised for a substantial turnaround.