Short name: OPUS
ISIN code: SE000169668
Sweden listed Opus Group is one of the great success stories on the Swedish stock market over recent years. Almost exactly two years ago, the Opus share was trading at SEK 0.68, today we are at SEK 11.75. The reason for this impressive journey is a combination of organic and structural growth. The most recent example is the acquisition of US company Envirotest, which was announced last week.
Opus’ business is to develop, produce and sell products and services within the vehicle emission and safety testing sector for the global market. Following the acquisition of Envirotest, Opus has around 44% of the US vehicle inspection market. The combined annualised revenue of Opus and Envirotest amounts to around SEK 1.5bn but according to Opus CEO Magnus Greko, there is way that this is the end of the road for Opus. In an interview from last week he stated that double that size would be desirable (i.e. SEK 3bn) since size matters when it comes to securing long-term contracts with governments and states. Says Greko: “In order to get the contracts and to build up and actually execute a vehicle inspection programme in a country for 10-20 years, you have to have a certain size. You have to be able to show that you have the technologies and test many million cars in different segments.”
Internationally, Opus competes with some 10 companies of which many have sales of SEK 3- 10bn within vehicle inspection.
Greko continues: “We are still somewhat small. The Envirotest acquisition is a step into the right direction but if we want to become really global, we have to become bigger. You have to come up to sales of around SEK 3bn to be a global player. We will continue to grow organically and we will look at acquisitions once we have consolidated Envirotest. Our target is to have net debt of below 3x EBITDA, but we have strong cash flow which we will use to pay down the debt. Net debt / EBITDA is a bit below 3 after the Envirotest acquisition.”
Another interesting aspect of the Envirotest acquisition is its profitability. Envirotest’s EBIT margin is close to 25%, which compares to Opus’ 15% (due to Opus equipment business which has lower margins than vehicle inspection). Margins within the Swedish vehicle inspection business are around 16%, something that CEO Greko is certain to improve in the future.
“Once we introduce our new IT-system we’ll get cost savings. Also, the importance of the lower margin equipment business (5-10%) will become less and less (ca. 10% following the Envirotest deal).”
We believe the recent acquisition increased the likelihood of Opus winning further contracts in the US, where the upcoming call for tenders in California is one of the highlights. California has 10 million inspections p.a. Furthermore, Opus should have good chances to grow in South America (e.g. Chile), but also Asia (e.g. India). In Sweden, Opus is likely to sooner rather than later to increase the outdated prices for its vehicle inspection services which could give an upside of 10-20% versus current levels. All in all, it should not be impossible for Opus to reach 2014 sales of SEK 1.8bn which in combination with an assumed EBIT margin of 16.8%, a financial net of SEK -36m, a tax rate of 27% and an applied number of shares of 245.7m (guesstimate), would give us a 2014 EPS of SEK 0.80. At current share price levels, this implies a PE-ratio of <15x expected 2014 earnings. We believe this is far too little for a fast growing company like Opus with a strong track record and clear growth ambitions.
In order to highlight the potential of the Opus share, we crunch some numbers and try to assess what the company could earn under the SEK 3bn revenue scenario that CEO Greko is targeting:
We believe that growth will primarily come from the vehicle inspection business, which has margins above current group average. Not the least the Envirotest example shows that margins of >20% are not impossible in that business. However, for the sake of being conservative we apply an EBIT margin of 17% on the SEK 3bn revenue scenario, leaving us with an EBIT of SEK 510m. Obviously, we have to make many assumptions as to how the growth to SEK 3bn sales is financed etc. We decided to apply an increase in net debt to SEK 1bn under the scenario. Envirotest was acquired at EV/Sales around 1x, but we do not believe that Opus will have to acquire the whole SEK 1.5bn in order to come to the SEK 3bn, but it will also continue to grow organically and its cash flow will counteract the debt increase somewhat. Using an interest rate of 5.5%, a tax rate of 27% we derive at an EPS of SEK 1.35. Applying a PE-ratio of 15 on this EPS number, we get a fair share price of SEK 20.25.
We think the Opus success story is far from over.