Short name: OPUS
ISIN code: SE000169668

Published January 15th, 2015:

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.


Initial article on Opus, published November 12th, 2013

Sweden listed Opus Group is one of the great success stories on the Swedish stock market over recent years. Almost exactly two years ago, the Opus share was trading at SEK 0.68, today we are at SEK 11.75. The reason for this impressive journey is a combination of organic and structural growth. The most recent example is the acquisition of US company Envirotest, which was announced last week.

Opus’ business is to develop, produce and sell products and services within the vehicle emission and safety testing sector for the global market. Following the acquisition of Envirotest, Opus has around 44% of the US vehicle inspection market. The combined annualised revenue of Opus and Envirotest amounts to around SEK 1.5bn but according to Opus CEO Magnus Greko, there is way that this is the end of the road for Opus. In an interview from last week he stated that double that size would be desirable (i.e. SEK 3bn) since size matters when it comes to securing long-term contracts with governments and states. Says Greko: “In order to get the contracts and to build up and actually execute a vehicle inspection programme in a country for 10-20 years, you have to have a certain size. You have to be able to show that you have the technologies and test many million cars in different segments.”

Internationally, Opus competes with some 10 companies of which many have sales of SEK 3- 10bn within vehicle inspection.

Greko continues: “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).

We believe the recent acquisition increased the likelihood of Opus winning further contracts in the US, where the upcoming call for tenders in California is one of the highlights. California has 10 million inspections p.a. Furthermore, Opus should have good chances to grow in South America (e.g. Chile), but also Asia (e.g. India). 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 15 on this EPS number, we get a fair share price of SEK 20.25.

We think the Opus success story is far from over.

Nordic Investor

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