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OPAP | First thoughts – Q1’22: Solid as expected, €140m FCF

Blowout cash flow – OPAP’s Q1’22 results were broadly in line with our expectation while reaffirming the superior cash flow generating capacity of the business model in the new era of low over-the-counter cash gaming duty (given the prepayment made by OPAP years ago). Revenues rose 162% yoy (at €457m) while settling -8% qoq due to the lower seasonality. EBITDA increased 175% yoy (-1% qoq) coming in at €168.8m, just a bit above our €162m estimate on tight underlying cost monitoring despite the natural uptick in costs due to the reopening. Net profit was in sync with our numbers at €88m. Most importantly, in the absence of significant capex, OPAP delivered FCF a bit above €140m in the quarter (c85% EBITDA conversion) thereby reducing net debt to just €39m (excl. leases) from €183m in end 2021.

Q1 in more detail: retail c10% below pre-COVID levels, online lower but healthy – With OPAP lapping last year’s lockdown, yoy comparisons are meaningless. Across the channels, retail operations settled c10% below normal (vs -13% in Q4) as restrictions only started to ease since mid-February. OPAP digital declined to €15m from €19m in Q1’21 as growth in casino was offset by channel migration for other games. Stoiximan was cycling a tough comp and saw its contribution fall from €103m in Q1’21 to €90m in Q1’22. As a result, group revenues settled at €457m (+162% yoy). On the opex front, net non-variable opex look just slightly higher yoy on an underlying basis (excl. last year’s one-off income and a €5.7m top-up of the Stoiximan estimated earnout this year). As a result, OPAP delivered EBITDA of €168.8m, +175% yoy. A conference call will follow tomorrow at 14:00 UK time where we expect mgt to reaffirm that the low end of the FY22 guidance (EBITDA €720m) is still feasible.

Cash avalanche in full swing – Given the inherent cash generating capacity of the business model (franchise-based, limited capex/WC needs), underlying FCF is set to exceed €500m in the coming years underpinned by the re-opening impulse, leading to hefty cash returns (9-12% yield). The continuation of the generous dividend policy is supported not only by fundamentals but also by the main shareholder’s interests. The latter has been opting for dividend reinvestment as a means to increase its shareholding. Given the latter is set to reach 50% in the coming months (assuming participation in the upcoming scrip dividend), we believe it is reasonable to expect Sazka to opt for returns in cash post 2023, but the bottom line is the same: continuation of a very generous dividend policy. As a reminder, OPAP shares are trading ex div (€0.50) on 18th July and ex-capital return (€0.90) on 29th July.

Valuation: renewal optionality – Q1’22 underpins our estimates for c30% EBITDA growth in FY22, predicated on retail revenues settling 7% below 2019 levels. Besides fundamentals, we recently initiated a debate on licence renewal optionality estimating that only c40% of the value related to renewals/terminal values of OPAP’s concessions is embedded in the current share price, now leaving c€3.5 as optionality, corresponding to c25% upside vs spot levels. Our PT (DCF-based SOTP of OPAP’s concessions at 7.3% WACC) effectively places the stock at 8.7x 2022e EV/EBITDA. We reiterate OPAP as one of our top picks in Greece.