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Matthew Sipos
Matthew Sipos
Articles (9) 

Value Idea Contest: Opus Global Plc

Opus is a strange and risky idea, but it can become a value pick in the future after the merger with Konzum

January 29, 2019 | About:

1. The company

Opus Global PLC (BUD:OPUS) is a Hungarian stock well known for being a more than a 100-times multibagger in the past. The stock was trading around 3 Hungarian forint as of December 2015. The current share price is around 480 forint 160 to 200 times more than historical lows.

Opus was recently renamed. It was previously known as Opimus Group. Opimus (the original name before Opimus was Phylaxia, a Hungarian pharma company), was also a holding company close to bankruptcy. In 2016, Status Capital, a Hungary-based investment fund, acquired a 8.38% stake in the company.

Then, in 2017, a well-known businessman, Lorinc Meszaros, also bought a 16.9% stake and a 14% stake via Konzum Management Ltd. He had a plan for buying almost empty, cheap companies (Opus and Konzum) as a sheet for his current and future portfolios. The stock was among the top winners last year, achieving a 1600% gain. Its sister company is Konzum, which was the best-performing investment asset worldwide in 2017 with a 6600% share price appreciation.

Neither company is firmly a conservative value pick currently. There is a high-volume speculation in both stocks. You can not use traditional models safely (such as DCF, Graham number, Peter Lynch valuation and so forth) to assess or value these assets at the current stage of development. The management (Meszaros and his team) is constantly filling up these publicly traded companies with assets. Their strategy is to control the strategically most important and profitable sectors of the Hungarian market by establishing a large conglomerate.

So, these are two companies in early growth phases, which are literally unanalyzable and have opaque corporate structures. Why should an investor get into such a dangerous business?

First, Opus is – I believe - oversold at the present time. High-volume speculation and surreal expectations caused the share price sink from around 700 to 750 forint to 480 forint. This is around net asset value.

Second, both companies own and manage some great businesses in hotels, food processing factories, real estate holdings, insurers, asset management, banks, IT and telecom and utilities.

Last, the management recently accepted a merger between Konzum and Opus to become a blue-chip stock (the fifth-largest in the Hungarian stock market with a possibly 1.2 billion euro market cap). It may becomes a target of funds and large investors due to its size.

Opus share price from the last five years (share price of Opus as of Jan. 29: 474 forint):

Source: BET (Budapest Stock Exchange)

Konzum share price (share price of Konzum as of Jan. 29: 234 forint):

Source: BET (Budapest Stock Exchange)

2. Business

After the merger (presumably in the second quarter), the company will be approximately a 1.2 billion euro market cap blue-chip security with a colorful variety of industries in its portfolio.

Due to the two companies' potential sizes and continuously developing synergies, they may be able to work cost-efficiently with good margins and return on equity.

According to rumors, there are also political tailwinds helping to increase the prosperity of Opus, such as winning a construction tender – this can secure a competitive edge for the company for the long term. I do not want to speculate about political tendencies, but this possibility is a belief of many. I will discuss it further in the risk chapter.

Moat: businesses Opus and Konzum own

Opus has 51% ownership of Meszaros & Meszaros Ltd. and R-Kord, and fully owns a company named Wamsler. Wamsler has manufactured household ovens, cookers and ovens for about 100 years – it has a well-estabilished brand and a popular product. Meszaros & Meszaros Ltd. and R-Kord are in the construction and railway construction businesses with a signed backlog of 1 billion euros.

They also have a 51% stake in the lignite-fired Matra Power Plant (with a 950 MW capacity), and they are working on green energy plants (mostly solar power plants). The plant provides 13% of the country’s electricity and ranks as the second-largest power plant in Hungary. Regarding the agricultural sector, the conglomerate owns 100% stake in Kall Ingredients (food ingredients, corn processing, isosugar manufacturer), a 51% stake in Viresol (wheat starch plant) and a 74% ownership of Csabataj Zrt. (poultry farm).

Opus Global also has a 24.67% ownership of Status Capital Zrt. and a 24.87% ownership of Takarekinfo Zrt. an informatic data management company that coordinates IT development within the banking sector.

Opus and Konzum own 50% of the shares of the Hungarian IT company 4iG.

Konzum is known mostly for its tourism portfolio, such as the fully owned Hunguest Hotels Group (rural tourism, health and wellness) or the Balatontourist (a net of campsites around lake Balaton, fully owned). At present, Hunguest Hotels Group has 26 hotels, 20 of which operate in the most well-known touristic destinations of the country. Konzum has a 33% stake in Appeninn, a real estate company focusing on the niche segments: leasing A and B category business centers, industrial, retail and logistic properties. They hold a 25% stake in the Hungarian insurer CIG Pannonia and a 47% stake in Konzum Management Ltd., a wealth management company.

With a deeper analysis, we can clearly see that the corporate structure is quite complex, and many funds or companies are controlled by cross-shareholding.

3. Financials

At the moment, there is not enough historical financial data on which to build a valuation model. Opus and Konzum are continuously developing. Neither can you value the assets of these companies due to the opaque corporate structure and the current developing phase of these assets. We must rely on the management forecast. However, investors should take it with a grain of salt.

Konzum-Opus Investor Presentation, November 2018

We can see a large number of continual capital increases. In 2016, Opus had revenue of 11.38 billion forint. It grew to 42.55 billion by 2017 and for the first half of 2018 it was 20.8 billion (increased by 19% from last year period’s results). Opus also has low-level net debt and has a price-book ratio of 1.

With the capital increases grew the number of shares outstanding, too. Originally, shares outstanding of Opus were 325.3 million (while Konzum consisted of 208.6 million). Now shares outstanding are 536.4 million (while Konzum consists of 330.5 million shares).

4. Management

Both securities lack transparency and predictability. You cannot find substantial, up-to-date information regarding corporate structure or insider trades. With the capital raising, management continually dilutes the shares, thereby diluting shareholder ownership. On the other hand, they also increase capital – creating more value than dilution for investors. Hopefully, they will not use this practice routinely and will continue creating instead of taking value.

In this early stage of development, the management has forecast a dividend by 2020. There is no information about share buyback plans. Maybe it is too early at this stage.

What increases the credibility of the management is the last capital increase in 2018. Instead of the promised 110 to 120 billion forint, they increased the capital of Opus by more than 200 billion forint.

The management predicts a 350 billion to 400 billion forint market cap after the merger. At the time of writing, Opus' estimated market cap was 155.8 billion forint and Konzum was worth 70 billion forint.

5. Valuation

As mentioned above, most of the valuation models do not apply for this security. Here price-book ratio as a useable model for valuation. Today, at a price of 475 forint per share, investors can buy the business around net asset value. They do not have to pay for expectations. If you believe that it may become a well-performing value pick in the future, then it is a good price for it. There is no publicly available analysis of Opus or Konzum because of the difficulty of the situation. Using the forecast of management (350 billion to 400 billion forint market capitalization in the future), there is 55-77% upside potential.

6. Risks

Lack of transparency: It is like buying a bank-owned home at an auction. You cannot research the investment idea thoroughly, but buying assets with a discount and high-reward potential is very attractive for many. People tend to underestimate the risks and overestimate future presumptions.

Political risks: Hungary has a higher level of corruption than more developed Western countries and markets (like the U.S., Germany, Switzerland and so forth). Meszaros is considered a controversial businessman. He is a good friend of the Hungarian prime minister and accumulates his wealth quickly by winning government tenders.

Market downturn: A potential market downturn could significantly influence the stock’s price. Rising inflation or foreign currency exchange rates may influence the profit.

7. Outlook

Opus is not for the conservative value investor. For the enterprising, high-risk tolerant investor, it may also be an idea worth considering. The estimated market price of this stock is around 700 to 750 forint. After the promised capital increases (and more), investors value it at around 480 forint. Clearly, at 750 forint it was overvalued. Now, with a substantially larger capital increase, the market values it at 480 forint.

I firmly believe that investors were too optimistic at the beginning, and now they are too pessimistic. The company has some good quality assets and is still widening its moat. Present prices indicate that currently, the market does not value future potential – only the current assets.

After weighing up the pros and cons, I am bullish on the stock. But, I would not hold more than 5% of my portfolio in Opus (or Konzum).

Disclosure: I do own shares in Opus.

Exchange rates: EUR/USD – 1.1435 USD/HUF – 277.51 EUR/HUF – 317.17

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