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First thoughts - OPAP | Q3’23 as expected, adj. EBITDA -13% weighed down by a confluence of factors

Q3 revenues -3.6% yoy, adj. EBITDA -13%, dragged down by weak sportsbook margins and several one-offs; FY23 EBITDA guidance lowered to €720-740m – As anticipated, OPAP has reported a rather tepid Q3 with revenues -3.6% yoy affected by adverse sporting results (driving down sportsbook margins), weather (heat wave, floods) and the absence of Joker jackpot rollovers (c3% headwind on group GGR). Coupled with cost inflation, this translated to €25m lower adj. EBITDA yoy, at €172m (-13%), broadly in sync with our projection. Reported results have also been affected by €27m non-recurring expenses, mainly the provision related to the recently announced fine imposed by the Hellenic Competition Commission (against which OPAP has filed a petition). As a result, reported net profit fell 30% yoy to €83m. On the positive side, cash flow generation was strong, with operating cash flow (€125m) further boosted by a €123m inflow related to the Betano earnout. As a result, OPAP is now back in net cash position (€148m). In the light of Q3, mgt has lowered the FY23 EBITDA guidance to €720-740m, paving the way for mild downward revisions (cons €758m).

Q3 in more detail; confluence of headwinds – In previous weeks, foreign bookmakers warned about weak sports margins due to adverse results in Sep. In addition, Greek retail was rather tepid in July-August (land-based gambling market -4%) weighed down by the weather, with trading in September affected by the floods in Central Greece (c3% of OPAP’s network in the region). These seem to have driven a c2% underlying decline in OPAP retail in Q3, further exacerbated by the yoy swing in Joker (another c4% impact on retail), thus leading retail revenues -6% yoy. Online stayed in positive trajectory (+2%), but only partly offsetting the headwind from retail. Besides numbers, of note is that the relevant court seems to have rejected OPAP’s request for arbitration related to the gaming duty being levied on Hellenic Lotteries during the COVID period, with OPAP paying the relevant disputed amount (€70m) in early October.

2024 outlook: mid-single-digit growth within reach – Since the new gaming duty regime came into effect (Oct 2020 until 2030) OPAP’s EBITDA generating capacity has been reset to c€740-780m on our numbers, with 2022 and 2023 landing at the low end of this range due to different reasons (COVID effect in 2022, low margins and inflation in 2023). Looking ahead to 2024, OPAP has several levers to pull to drive top line growth including ongoing product revamp (Joker, Lotto, Eurojackpot), online penetration and player activation. We thus envisage 6% revenue growth in 2024 filtering through to similar growth in EBITDA, which will exceed €780m on our estimates.

Valuation – We value OPAP via a SOTP of its concessions predicated on 7.6% WACC. Our PT implies a 2024 EV/EBITDA of c8.4x, modest premium vs OPAP’s historic avg but still discount vs best-in-class peers. Following the recent dividend cut-off, catalysts are starting to look scarce given the full cycling of COVID and the slowdown in operating momentum. That said, we continue to find the case compelling arguing the stock resembles a high yield bond with IG fundamentals offering coupon-like yield of 10% and price appreciation potential from re-rating and licence renewal optionality.