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OPAP | More aces to play

With our new OPAP note we strike again, this time initiating a debate on license renewals. Four years after we first revealed the hidden value relating to the gaming duty prepayment, we kick off a new debate on license renewal optionality arguing that only c37% of the value related to renewals/terminal values of OPAP’s concessions is embedded in the current share price, leaving c€4 as optionality, corresponding to c30% upside vs spot levels. On our estimates, a full renewal/terminal value framework points to a fair price above €17 per share. We expect renewal optionality to be a focal point for investors in the coming years.

For investors interested in sensitizing renewal/terminal value inclusion in OPAP’s valuation, we have an interactive model available upon request.

In our note we explain how VLTs are a key value swing factor, as most market participants value the particular licence just for the remainder of the concession period (i.e. 2034) while attributing no value thereafter. This effectively means two things, namely either that the licence gets renewed at a cost equal to the cash flows generated over the next licence period, or that the licence does not get renewed and the VLT market simply disappears without any migration to land-based games. Both scenarios seem overly pessimistic in our view, leaving €0.80 per share optionality stemming from assigning a terminal value to the particular licence.

Besides the renewal optionality, our note reiterates our thesis regarding OPAP’s super high cash generating capacity in the new era of low cash gaming duty for land based games. We estimate that underlying FCF will exceed €500m in the coming years underpinned by the re-opening impulse, leading to hefty cash returns corresponding to 10-13% yield. The continuation of the generous dividend policy is supported not only by fundamentals but also by the main shareholder’s interests.

On the short-term outlook, we expect retail revenues to settle c7% below pre covid levels in 2022, but this will still correspond to >30% yoy growth in land based revenues and similar growth at group level, leading to c30% yoy growth in group EBITDA. Given the unique combination of growth, cash returns, exposure to re-opening and optionality from licence renewals, we reiterate OPAP as one of our top picks in Greece.