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OPAP | First thoughts – Cash avalanche in full swing, €1.0 interim DPS, buyback program activated; Buy

Healthy operating trends, overwhelming cash returns – OPAP Q2 results were broadly in sync with our expectations, but the key take-away is the overwhelming cash return, with €1.0 interim DPS announced (vs our €0.35 expectation). Although c50% of the interim DPS can be considered non-recurring (stemming from the booking of the capital gain related to the sale of Betano at parent company level), this validates our thesis for a cash avalanche post the COVID normalization with OPAP on track to distribute another €0.70 per share out of FY23 results, we estimate, if our 2023 net profit projections materialize. This will add up to a total dividend of c€1.7 per share in FY23, a whopping 11% yield. Mgt also announced the activation of a (up to) €150m buyback program through to 2024, which will further bolster shareholder remuneration.

Q3 in more detail: 13% revenue growth, 7% EBITDA growth, strong FCF – Revenues were up 13% yoy (at €498m) while EBITDA increased 7% at €178m, in line with our expectation. Top line was propelled by online growth (+25% yoy) and resilient retail (-1% vs Q2’19). The strong revenue momentum was somewhat diluted by opex inflation (non-variable opex +€9m yoy, namely +9%), but with the growth in EBITDA still a respectable 7%, fully underpinning the top end of mgt’s FY23 EBITDA guidance (€760m) and our own projection (€770m). With financing costs substantially lower yoy and in the absence of one-offs, OPAP enjoyed a c30% yoy increase in EPS (net profit +35% to €106.5m). FCF generation was also very strong (>€140m) partly absorbing the cash returns to shareholders (final DPS of 2022 and capital return) thus leading to a net debt position of €91m (from €77m net cash in Q1’23).

Outlook underpinned; eyeing 8% revenue growth and 5% EBITDA growth in 2023 – Our 2023-24 forecasts envisage 8%/5% growth in 2023-24e GGR based on 2-digit growth in online and 6%/3% growth in retail. This will filter through to 5%/3% growth in EBITDA over 2023-24e, which will support shareholder returns in the €1.6-1.7/share range in the coming years, namely quite a compelling c10-11% yield. Shareholder returns are also to be bolstered by potential earnouts related to the Betano stake sale (c€130m assumed in our numbers through to 2025e).

Valuation: renewal optionality, cash returns; top pick – Our PT is based on a SOTP of OPAP’s concessions at 7.6% WACC and implies a 2023e EV/EBITDA of c8.8x, modest premium vs OPAP’s historic average but still discount vs best-in-class peers such as Flutter and Entain. Despite the 21% total return ytd, we still find the investment case compelling arguing that the stock resembles a high yield bond with investment-grade fundamentals offering coupon-like yield of >10% plus price appreciation potential from re-rating and crystallization of licence renewal optionality.