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OPAP | More measured growth, but still betting on a safe ace

Firstly, how to value OPAP – Being a business operating limited-life concessions, OPAP is far more complicated to value than most investors realize. In fact, one can argue that as concession expiration approaches, the shares ought to incorporate a lower valuation reflecting the reduced time life of the respective concessions. On the other hand, we also note that some of the provisions embedded in certain concessions act as effective barriers to entry, attributing to these licences going-concern characteristics. With this in mind, we reckon that valuing OPAP requires a more meticulous approach than most market participants implement (simply inflating a “terminal” FCF in 2030 is overly simplistic in our view). To capture these intricacies, we estimate the cash-flow generating capacity of each concession separately, while taking into account renewal fees as these licences expire using as template international precedent renewal cases. In our baseline valuation, we embed a renewal value for all concessions except for Hellenic Lotteries (HL), reiterating our PT of €17.9.

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% 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 activities 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 top line growth including ongoing product revamp (e.g. launch of Eurojackpot) and as such we expect 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.