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#Opus: Fantastic entry point

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A fantastic entry point was created today in vehicle inspection specialist Opus. Following a newspaper article of questionable substance, the Opus share declined by almost 11% in today’s trading session.

Swedish newspaper Dagens Industri, not necessarily known for its high quality research capability, recommends to sell the Opus share following the strong recent run. “It’s difficult to see how a vehicle inspection company could be able to live up to the valuation that overly optimistic investors have put on the share” the article goes. The newspaper expects Opus to achieve 2014 revenues of SEK 1.6 – 1.7bn and a profit after tax of around SEK 150m, without giving any details as to how they come to these estimates. This would imply a PE-ratio of 20x on their 2014 estimates. The article continues: “This is too high given the fact that the market for vehicle inspection does not grow, that competition increases on the Swedish market and considering the uncertainty around the American vehicle inspection market.”

It remains the secret of the author why Opus should have so shitty margins that it will only earn SEK 150m next year. Furthermore, it is a mystery to everybody who has followed the company over the last years how anyone can claim that “the market for vehicle inspection doest not grow”. The reason for Opus’ impressive journey is a combination of organic and structural growth. Not the least due to the recent acquisition of Envirotest, Opus’ chances to gain further market shares in the USA have increased dramatically. Many states in the USA and many countries in Latin America and Asia are still far behind the safety and environmental regulations that we are used to in Europe – something that is set to change in the future. Opus will also continue to be active on the M&A front, something that CEO Magnus Greko only recently emphasized: “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).

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 15x on this EPS number, we get a fair share price of SEK 20.25.

We think the Opus success story is far from over and expect today’s share price reaction to be corrected within short.

Nordic Investor

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