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Another share issue is coming up on the Hungarian stock exchange, at our next Investors Club, interested parties can learn about the history of DM-KER and the details of the issue.
Opus Global is a Hungarian holding company with four main segments: industry, tourism, agriculture and food, and asset management. Previously, the company also operated in the energy sector, where it currently has no operations, but may return to the industry through acquisitions in the future. The current company was created by the merger of Opus and Konzum and became the fifth largest listed company in Hungary. There were two milestones in the life of the company that we know about today, one was when there was a significant change in ownership and management structure (along with operations) in 2017, and the second was when Consensus was merged.
To determine the value of Opus, Equilor used a fundamental “sum of parts” analysis as well as the DCF model. Therefore, the object of the shares was 354 HUF.
The history of investment
Opus is one of the largest Hungarian companies and, thanks to its participation structure, investors can embark on the growth of many segments of the Hungarian economy. The company’s income comes from multiple sources, making it more resistant to external shocks.
- The performance of the Agriculture and Food division is separate from the general macroeconomic environment and provides the company with stable cash flow.
- There will be great growth opportunities in the tourism sector after the coronavirus crisis.
- The industrial division can benefit from government infrastructure programs as it is involved in major projects such as the construction of the Budapest-Belgrade railway line.
According to an analyst from Equilor, Opus Global is one of the best opportunities now, thanks to its diversified scope of activities, if someone wants to benefit from the Hungarian economic growth.
Industrial production
The industrial production segment, which includes heavy industry and construction companies, is the largest member of the holding company’s portfolio, accounting for 32 percent of the group’s total balance sheet and 65 percent of your income. The division includes, for example, Mészáros és Mészáros Kft., Which deals with the construction of bridges, roads and hydraulic works, among other things, and has recently won several large projects worth billions. The industrial division also includes Wamsler, the largest stove manufacturing company in Central and Eastern Europe, with a market share of around 7-8 percent in Europe.
In 2019, 92 percent of the Industrial Production division’s revenue came from construction jobs and 8 percent from heavy industry. The proportion was 81 percent and 19 percent, respectively.
An Equilor analyst said significant business growth is expected in the coming years due to the contracts won, which could be followed by increased capacity and optimized production. The risk is uncertainty about the outlook for the Hungarian economy, but the analyst predicts that Opus may outperform the sector and the government may increase investment in infrastructure to stimulate the economy.
The company is expected to see analyst revenue growth and better earnings rates due to its recent investments.
tourism
The second most important business of Opus Global is tourism despite the challenges this year. With the merger of Konzum, the tourism sector joined the group, the company became the owner of Hunguest Hotels, which is the largest hotel chain in Hungary. There are 20 hotels in Hungary and 6 hotels abroad.
Tourism was the hardest hit by the coronavirus crisis, and the number of foreign tourists lagged behind. Sector revenues fell 55 percent in July, and the second half of the year is also not encouraging for the sector due to border closures. Some hotels, especially in Budapest, will not be cheap to operate, so some may be closed.
The sector received help from the government this year and was one of the biggest winners of the Hungarian Kurzarbeit. Equilor expects next year to be a bit better for the industry, but by 2022, pre-crisis levels will not return in terms of guest nights. Unless the coronavirus vaccine is ready within a few months and a large portion of the population is vaccinated, restrictive measures may persist even into the next year.
The biggest challenge for Opus’ tourism business to date could be the uncertainty caused by the coronavirus. The baseline scenario is that there will be a recovery in tourism in the form of a “Nike sign”. Occupancy can return to pre-crisis levels in 2022 and only then will room prices start to rise. Management has decided to use this period for renovations to maximize future value.
Equilor expects segment operating expenses to decrease significantly compared to 2019, partly due to renovations and partly due to government support. But even so, the division could generate negative cash flow for the next two years as a result of capital investments. This may mean some financing needs, but the analyst hopes it will not affect the group’s credit rating.
Agriculture and food industry
The division includes, for example, Csabatai, which owns 74 percent, Viresol, in which it owns 51 percent, and Kall Ingredients, in which the holding company owns 83 percent. The division is mainly engaged in food raw materials, animal feed, starch, alcohol production, egg products and cereals.
The performance of domestic agriculture has shown an improving trend in recent years, with Hungarian agricultural production leading the way in the EU since 2010.
The agricultural division has high growth potential due to capacity building measures and production optimization, with strong revenue growth over the next 2-3 years, according to Equilor analysts. Operating costs may rise slightly, and analysts expect long-term single-digit operating profit levels.
The biggest risk to the company is that agriculture is extremely sensitive to climate change and extreme weather conditions (such as floods, long and dry summers) can increase the cost of agricultural production. Agricultural price volatility is also unfavorable for business and changes in EU regulations can cause difficulties.
Wealth Management
Opus Global has a direct and indirect minority interest in various companies managed by Opus Asset Management. The strategy of the holding company is to provide financing to its companies in exchange for the profit growth potential expected in the medium and long term. The company classifies the shares of the asset management division as liquid assets.
The evaluation
To determine Opus Global’s value, the Equilor analyst used a “sum of parts” method, applying a 15 percent conglomerate discount due to loss of growth potential due to complex operations and costs. The analyst added the goodwill (EV) of the four main divisions, reduced by the conglomerate discount, then added cash and cash equivalents, and then deducted current and non-current liabilities from the amount. (Scenario analysis and individual weighted average cost of capital were used to value each business line and discount future cash flows.)
When can the dividend arrive?
Equilor expects the company to be able to profit at the level of operating profit in the coming years and, although free cash flow may decrease from 2020 to 2021, it can grow exponentially from that year on.
According to the analyst, stable cash production is expected in the company from 2023 and, starting this year, the management will have the opportunity to decide even the payment of dividends.
Even with a conservative dividend payment policy (50 percent dividend payment rate), a dividend of HUF 12 per share would result.
Exchange rate reaction
Opus’ share price responded to the analysis with a significant surge in trading this morning, with values jumping 8 percent in the minutes after opening and the third-busiest newspaper on the EEB this morning. Thus, the price of Opus has fallen 29 percent since the beginning of the year, which is approximately the behavior of the BUX index.
Top image: Opus Global’s new Wamsler SE plant in Salgótarján, MTI / Péter Komka, which manufactures stoves and fireplaces
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