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OPAP | First thoughts: No surprises, EBITDA -3%, guidance reiterated

Q1 EBITDA -3% yoy on front-loaded marketing; FY24 guidance reiterated – OPAP Q1 was in sync with our expectations, with revenues (GGR) +4.2% yoy but EBITDA -3.1% at €190.3m (EEe €191m) due to elevated marketing expenses (launch of Eurojackpot, spending in support of recently revamped lottery games etc.). Overall, non-variable opex were up 12% yoy (some €13m swing yoy), thus diluting the positive effect from the c4% increase in gross profit from gaming operations (effectively revenues minus variable opex). This fed through to a c4% yoy decline in net profit to €113.3m (EEe €114m). Cash flow generation was quite healthy, with 58% of EBITDA being converted into operating cash flow leading to €101m FCF and a reduction in net debt to €101m from €170m in end 2023 (post €32m buybacks). With the decline in Q1 profit owed entirely to opex phasing, mgt has reiterated the FY24 outlook (EBITDA of €750-770m, 1-3% growth yoy), which ought to reassure investors. Our estimates lie at the top end. Across the channels, we note the 15% growth in online vs c9% for the overall egambling market in Q1, indicating market share gains for OPAP/Stoiximan.

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 (franchise-based, working capital dynamics, limited capex) and the low cash gaming duty relating to the over-the-counter (OTC) concession through to 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 a 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 this 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 OTC 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.

The outlook: a low to mid-single digit growth story, and that’s ok – Growth avenues look scarcer than in the past, with retail hinging on disposable income and online momentum depending on market share dynamics and marketing intensity. For 2024, OPAP does have several levers to pull to drive growth including ongoing product revamp (e.g. Eurojackpot) and as such we reiterate our forecasts for 5% revenue growth (2% land-based, 13% online) filtering through to adj. EBITDA growth of c4% (a tad above mgt guidance). We envisage c4% EBITDA growth in 2025 and 1% in 2026e.

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.