In November 2013, Opus announced the acqisition of US company Envirotest. The Acquisition is subject to: Envirotest winning a contract for the new vehicle inspection program in Colorado scheduled to start 2015; and Opus Group’s receipt of sufficient financing to fund the purchase price including approval at the Opus Group Extraordinary General Meeting to conduct the Rights Issue. The financing is in place by now and it seems as if the Colorado contract has already been awarded to Envirotest and should officially be announced soon.
According to the homepage of the State Purchasing Office Colorade Bids for Goods and Services (https://www.bidscolorado.com/co/portal.nsf/xpSolicitationView.xsp?action=openDocument&documentId=424E869742DF048E87257BA400621B0C), Envirotest has been awarded the contract for “Motor Vehicle Emissions Testing, Inspection, and Maintenance Program” until 2020.
Envirotest is the incumbent contractor of Colorado’s vehicle inspection program. Envirotest owns all of the existing inspection stations and currently employs trained, experienced staff. Envirotest also offers proven remote sensing technology, which is a requirement for the current and upcoming contract in Colorado. Colorado is Envirotest’s largest vehicle inspection contract.
So everything seems in place for the acquistion of Envirotest to be completed. This should increase Opus’ chances to gain further market share in the USA. 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 emphasized in connection with the original announcement of the Envirotest deal: “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 17x expected 2014 earnings, which does not seem too ambitious for a company of Opus’ nature; growing fast 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.