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Redeye sees large upside in Opus

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Swedish research firm Redeye recommends to Buy shares of vehicle inspection specialist Opus and reiterates its target price of SEK 12 in a research note yesterday. Opus has been in the news lately as the company that detected Volkswagen’s diesel fraud in the USA already in 2014.

Redeye’s analyst writes that following a bigger share price drop, he believes that Opus is mispriced by the market and the potential worries are not as big as the investors believe them to be. There are risks of course, but the risk reward ratio looks favourable, according to Redeye.

From the Redeye report (translated from Swedish):

October 2nd, the American EPA (Environmental Protection Agency) introduced stricter limits for ozone levels at ground-level. According to a press release, the accepted level will drop from 75 ppb to 70 ppb. This will imply that several areas in the USA have to improve their quality of air. Many states and counties do not have any vehicle inspection programme at all which should be the first natural step to take, but not the only one. This will not lead to new business for Opus over night. However, over a 2-3 year horizon this should have positive effects. In particular since Opus is the biggest player in the market with the broadest product and service offering in the USA. 

In Sweden, we await the result of investigation by transport agency “Transportstyrelsen” which was initially due at the end of September but is now expected for late October. The agency is examining how many times cars should be inspected, which was a big topic in Swedish media. We do not believe that a shift from the current 3-2-1 interval to the EU minimum requirement of 4-2-2 is likely. There could be a suggestion to phase out the intervals somewhat, however. A potential change will probably be implemented around 2018. In 2018, a new EU-directive will be implemented which includes stricter controls of electronic safety systems. In modern cars, safety systems consist of several different systems and sensors who work together to give the desired effect. This means that the test have to be more advanced and demand a higher technical level of the inspection stations. We believe that this suits Opus well since it is a technology focused company with its own development. Their latest acquisition, Drew Technology, was executed just for the reason of this market trend.

Redeye concludes that compared with the current share price, they see a 89% upside to their target of SEK 12. Since the share price is even below their pessimistic scenario (bear) of SEK 7, the downside should be limited.

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