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OPAP | First thoughts: Impeccable results, guidance raised to the upper end of the range

Q3 adj. EBITDA +24% yoy, c12% above our estimates on strong revenues; FY24 EBITDA to settle to the upper end, as per mgt – OPAP has reported a very strong Q3, growing revenues +18% yoy, thanks to easy comps, Joker jackpot and strong online (+36%) coupled with the normalization of costs which were frontloaded to H1’24 (non variable opex -11% yoy in Q3). These led EBITDA to an impressive +24% increase yoy on an adjusted basis (€213m), or +47% on a reported basis (Q3’23 weighed down by provisions). The strong operating results were only partly offset by a €7m impairment related to the Hellenic Lottery licence, thus leading to net profit of €120m, +45% yoy and c9% above our numbers. Mgt echoes more confidence about the FY24 outlook, now suggesting that EBITDA is set to shape at the upper end of the €750-770m range (1-3% growth yoy). With our €772m number (just slightly above guidance) implying 7% decline in Q4’24, we argue that profitability is likely to exceed €785m in the full year, thus identifying c2% upside to current consensus (€772m).

Impressive cash generation, once again – OPAP converted c90% of EBITDA into FCF during the quarter (c€190m), given working capital release and limited capex. Following cash returns of €90m and €27m buybacks, net debt (ex-leases) declined €74m qoq to €119m. With mgt remaining committed to a generous shareholder remuneration policy, paying out all profits as dividends, we believe FY24 DPS is likely to shape near €1.4-1.5, which would leave another €0.8-0.9 as final dividend (following interim DPS of €0.6).

The next major catalyst and what matters the most, for now… – In the last few years investors have, quite rightly, focused on the high cash flow generating capacity of the business and the generous shareholder remuneration policy arising from it. Indeed, OPAP has distributed an average €1.6/share in the last 3 years (c12% avg yield) and looks poised to return another >30% of the market cap cumulatively over 2024-26e. This will be the result of the inherent cash flow generating characteristics of the model and the low cash gaming duty relating to the over-the-counter concession until 2030. The high cash returns are effectively what matters the most for now, but we caveat that investors should not treat the current FCF level as perpetual cash flow stream, due to: 1) the ultimate debasement of FCF post 2030 assuming the OTC cash game duty normalizes; 2) the time decay of the core OTC concession value as it approaches expiration (2030). We thus reckon that the next leg higher – over and above our PT – can be catalyzed once there is visibility regarding the extension of the core concession. In our view, the upcoming expiration of the HL licence in April’26 could be the catalyst for the initiation of early talks between OPAP and the state for both concessions. In the meantime, cash returns look likely to stay generous, translating to a 2-digit yield.

Valuation – We value OPAP via a SOTP of its concessions based on 7.3% WACC. Our PT implies a 2024 EV/EBITDA of c9x, modest premium vs OPAP’s historic average justified by the better cash generation profile. We continue to find the case compelling arguing the stock resembles a high yield bond with IG fundamentals offering 2-digit yield and price appreciation potential from re-rating and licence renewal optionality.