As we reported yesterday, Swedish vehicle inspection specialist Opus published an encouraging operational update. Nevertheless, its share is stuck in bearish territory, which is hard to understand from a fundamental perspective.
Swedish news agency Direkt interviewed Opus CEO Magnus Greko in an article following yesterday’s announcement:
“The state of Colorado decided that the first inspection for a newly sold car should take place after seven years, compared with previously five years. This leads to a revenue reduction of around SEK 40m for Opus. Says CEO Greko: “Colorado’s decision means a reduction by roughly 212,000 annually, which can be compared to the roughly 1.2m inspections we execute. The total revenue reduction is around SEK 40m.” At the same time he highlights that less inspections also mean lower costs for the company. Opus reported revenues of SEK 1.1bn for the first 9-months of 2014.
Colorado’s decision increases the pressure on Opus to reduce its costs. This process has already started e.g. by performing simpler inspections on certain kinds of vehicles, without affecting Opus’ sales. Further measures are on their way.
Says CEO Greko: “Obviously we want to dampen the negative effect as much as possible. That is something we are constantly working on. How big the net effect on the result will be is hard to say today. The Colorado contract is very profitable, it is one of our most profitable programmes.”
During 2014, Opus’ result was also burdened by the introduction of a new IT-system in its Swedish operations. The major part of this work is now done. Says CEO Greko: “Most of the work has been done in September and October last year, which meant that we could not inspect as many cars as before and consequently lost market shares. Now the system is up and running, but we still have some fine-tuning left. As 2015 proceeds, we will be able to fully utilize the capabilities of the new system.”
Opus market share in Sweden was basically unchanged at 27.5% in November compared with October, according to statistics from the Swedish traffic ministry. This means that Opus’ market share remained at its lowest level since November 2012. The average for 2013 was 30,5%.
In California on the other hand, Opus is now controlling more than 50% of the rental market for control equipment. This result exceeds the company’s expectations by far, according to CEO Greko. “There 7.500 – 8.000 inspection stations in California and we have so far more than 4.100 contracts. We would have been happy with maybe 2/3 of that number.” Those stations that want to be part of the inspection programme have until March 9th to buy or rent equipment, so additional contracts are not unlikely. “It is hard to say where we will end up exactly, but I am hoping for even more.”
The rental contracts are without any specific end date. The participating stations cannot cancel the contract in order to change to a competitor, but only the state could stop its exhaust controls all together or a station could leave the inspection business.
Says CEO Greko: “It is easy for certified stations. Once they have signed the contract we supply the machinery, installation and support. Furthermore, we are helping with the financing.” The disadvantage with this model is that it locks-up a lot of capital. In the beginning, the company also has to pay provisions to the sales staff, before revenues start to materialize. “This means that we get a neative EBIDTA the first quarters. Once provisions are paid, this quickly changes however. This business has very nice margins.”
The bonus payments to sales usually are paid once the customers has paid three months of rental fees. CEO Greko expects the majority of the provisions to be paid out during Q2 2015.
The next phase in California is initiated in March with roughly 3,000 Star-stations that also inspect older cars expected to buy and rent equipment. “Many of these stations have equipment that is 15 years old and older and we are the only ones that are launching brand new equipment right now. We hope that as many as possible will chose our rental contracts for their upgrades.”
So all-in-all, news flow in the coming months should turn more and more positive. Increased IT costs in 2014 will be behind us, as will the initial provision payments in California that burdened margins. Changes seems also quite good that Opus will secure more business and new contracts in the months ahead. Nordic Investor has decided to use currently depressed share price levels to build a position in Opus. We also note that Opus’ CEO and the CEO of Opus Bilprovning both bought 100,000 shares each in December at around SEK 9, which is around 30% above today’s share price level.