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OPAP | First thoughts: Q2 EBITDA a bit above (+3% yoy), guidance reiterated; quarter sweetened by €0.60 interim DPS

Q2 EBITDA +3% yoy, a bit above our expectations, on better than anticipated top line; guidance reiterated – OPAP Q2 shaped a bit better than our expectations, but without looking overly exciting, with revenues (GGR) growing +7% yoy (better than the +4.2% growth registered in Q1) and EBITDA returning to growth (€183m, +3% yoy) after the c3% decline in Q1. Across the channels, retail was soft at -1.3%, likely affected by seasonal factors, but online eclipsed our numbers with a whopping +33% increase yoy. On the cost side, opex stayed elevated (non-variable opex +13% yoy) due to persistently high marketing expenses (Eurojackpot and euro advertising), thus diluting somewhat the c9% growth in gross profit and leading to the +3% reported EBITDA growth. Below operating numbers, net financials have been boosted by accounting relating to the Cyprus licence, thus leading net profit to €118m, +11% yoy (-1% on a recurring basis). Mgt reiterates the FY24 outlook (EBITDA €750-770m, 1-3% growth yoy), which implies 2-7% growth in H2, which seems reasonable given the easy comps (especially in Q3).

Impressive cash generation, sweet dividend – OPAP converted 108% of EBITDA into operating cash flow during the quarter, given working capital release. Coupled with limited capex, this helped OPAP deliver a whopping c€175m FCF in Q2. Following the dividend payment of €222m and €46m buybacks, net debt (ex-leases) increased €92m qoq to €193m (€101m in Q1’24). Mgt has proposed a €0.60 interim DPS (ex-div on 4th November), broadly in sync with market estimates, re-affirming OPAP’s commitment to a generous shareholder remuneration policy.

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.

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.