On January 12th, we had the chance to sit down with Magnus Greko, CEO of Swedish vehicle inspection specialist Opus Group. The company has been in the media during fall because it had detected increased emission levels from Volkswagen cars in the US already in 2014. Opus’ Remote Sensing technology measures emission levels under real-life conditions on the road, rather than in the laboratory.
Here are the main takeaways from our meeting:
- Mr Greko emphasized the company’s target to grow by at least 10% p.a. In each of the coming three years, of which at least 5 percentage points are expected to be organic growth. These 5% organic growth per year are expected to come from new business within the international vehicle inspection business, both in North America but also with increasingly positive contribution from Opus’ concessions in Pakistan and Chile.
- The 5% per annum organic growth guidance does not include any contribution from potential new contracts for Opus’ Remote Sensing technology. Right now there is a huge interest for this technology in the aftermath of the Volkswagen scandal both in North America but also in Europe and not the least in Germany. Opus has started a cooperation with German giant Dekra in order to promote this technology and during Q1 2016, a test installation will be set up. The companies are also active in lobbying for the usage of remote sensing on a EU level in Brussels. In North America, Opus just recently started its second remote sensing program in the state of Virginia. We believe it seems highly likely that more states will follow suit, given the huge public attention of the Volkswagen scandal.
- During 2016, there are two large state contracts to be tendered, one in New Jersey and one in Massachusetts. Management believes that the contract in New Jersey is by itself worth around USD 20m per year. There are also three states (Nashville, Missouri and Rhode Island) to be renegotiated where Opus is the incumbent. They are, however, of smaller size and worth around USD 3m per annum each. It appears to us, that Opus’ Remote Sensing technology is a very interesting extra feature that currently no competitor can offer and it should enhance Opus’ chances to win the most important contracts.
- If the remote sensing concept was to be adopted in Europe, a huge market would open up for Opus. In Germany alone, there are around 60 million inspections. It remains to be seen what the final business model will look like. In North America, Opus does so-called “clean screening” with its Remote Sensing technology. Vehicles that are tested on the road and fulfill the emission requirements get a letter from Opus and can buy a certificate allowing them to skip their next emission test.
- Regarding Opus’ Swedish business, which accounts for roughly 33% of revenues today, management believes that there is room for add-on services in the future, aside from the actual inspection. For example, Mr Greko mentioned the possibility of a membership program with a monthly fee which allows the car owner to get an objective view on the car’s condition, rather than to blindly have to trust what a repair shop is telling you. Another example are “end of lease” tests, where the leasing companies want an objective assessment of the condition of the vehicle in question at the end of a leasing contract. Today, this is usually done by the car dealership which obviously has other interests than the leasing company.
- Commenting on the proposal of Swedish transport agency “Transportstyrelsen” to lengthen the inspection interval to 4-2-2 years, Mr Greko reiterated his point of view that this goes against traffic safety and environmental aspects. Furthermore, if accepted the proposal would not only lead to some 600 jobs to be destroyed directly within the area of vehicle inspection but it would also destroy several thousand additional jobs within car repair shops. A dialogue with the Swedish government is ongoing and a decision is expected to be announced during the fall of 2016. In any case, the impact on Opus’ bottom line from 2018 and onwards is deemed to be minimal even under a worst case scenario.
We left the meeting confirmed our opinion that the Opus case is rock solid and the company has many interesting potential triggers in the coming months. We believe the market has treated the Opus share unfairly during 2015, not the least following the initiative by the Swedish transport agency. Looking at the current share price of SEK 5.50 and consensus estimates, Opus is trading at an EV/Sales ratio of 1.37x for 2016 and 1.34x for 2017 respectively. For a company with an EBITDA margin above 20% this is extremely low. Given the many acquisitions in recent history, depreciation levels are currently high which distorts bottom-line earnings and makes the usage of PE-ratios problematic. Applying an EV/Sales multiple of 2x (in-line with companies with comparable EBITDA-margins) implies a fair share price of SEK 9.40 to SEK 10. What’s more, Opus’ share has come down so much that its dividend yield has started to become attractive as well. According to company policy of distributing 10-20% of profit at the EBITDA level, the dividend for 2015 should be around SEK 0.15. This corresponds to a dividend yield of 2.7%, which we find very attractive for a growth-oriented company such as Opus.
Disclaimer: Nordic Investor owns shares in Opus. The information provided in this article is our own interpretation and analysis. No guarantee for the correctness can be given. The article should not be seen as investment advise. Always consult a professional before making investment decisions.