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OPAP | Heads up – Q3’23: tough comps and weak sports margins to weigh on Q3 results, but FY23 guidance within reach

Q3’23 on 21st Nov; tough comps and one-offs to interrupt positive streak – With Q3 impacted internationally by adverse sporting results (driving down sportsbook margins) and domestically by one-off events (heat wave, floods) and the absence of Joker jackpot rollovers (c3% headwind on group GGR), Q3 looks set to see an interruption in the positive trends of previous quarters. As such, we expect GGR -3% yoy at €482m, with retail -6% only partly offset by online (+5%). Coupled with cost inflation as indicated by the reset of opex this year (total opex in Q2’23 c€13m higher yoy), we expect this to translate in €18m lower EBITDA yoy, at €170m (-14%). Although the quarterly results do not look set to be exciting, the negative trajectory in H2 was implicitly already embedded in mgt projections (FY23 EBITDA €740-760m) with the low end of the guidance still appearing within reach, in our view.

Q3 in more detail; confluence of headwinds – Foreign bookmakers have already warned about weak sports margins due to adverse results in Sep. In addition, Greek retail was rather tepid in July-August (-4%) weighed down by the weather, with softness likely to have continued in Sep, especially given the additional headwind from the floods in Central Greece (c3% of OPAP’s network in the region). Overall, we expect these to have driven a c2% underlying decline in the retail business in Q3, further exacerbated by the yoy swing in Joker (another c4% impact on retail), thus leading retail revenues -6% yoy. Online is likely to have stayed in positive trajectory, but the market momentum (c12% growth in July-Aug) ought to have been disrupted in Sep, leading to a c5% online growth in Q3 for OPAP. Below the operating line, we remind that OPAP is likely to book a provision for the recently announced €24.6m fine imposed by the Hellenic Competition Commission, something which will further weigh on reported numbers. We note that OPAP has already filed a petition against this decision.

Mild downward revisions to reflect lower top line; thesis intact – We have recalibrated our model filtering through the lower sports margins in Q3 coupled with somewhat lower footfall. Overall, we end up with a 4% downward revision to our FY23e EBITDA which we see shaping at €741m, at the low end of the guidance (and +1% yoy). We have made trivial changes in the outer years anticipating a boost to the top line (+6% in 2024) from upcoming product revamp (Joker, Lotto, Eurojackpot). This will filter through to similar growth in 2024e EBITDA, on our numbers.

Valuation – We have slightly lowered our PT, valuing OPAP via a SOTP of its concessions predicated on 7.6% WACC. Our PT implies a 2024 EV/EBITDA of c8.4x, modest premium vs OPAP’s historic avg but still discount vs best-in-class peers such as Flutter and Entain. Following the recent dividend cut-off, catalysts are starting to look scarce given the full cycling of COVID and the slowdown in operating momentum. As such, we remove the stock from our top picks, but we reiterate our Buy rating, as we continue to find the investment case compelling arguing that the stock resembles a high yield bond with investment-grade fundamentals offering coupon-like yield of c10% plus price appreciation potential from re-rating and crystallization of licence renewal optionality.