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OPAP | COVID-19 scenarios

Stress-testing estimates for various COVID-19 scenarios – With betting outlets having suspended their operation since mid-March, sporting fixtures having been cancelled and with the duration of the lockdown remaining uncertain, we have decided to undertake scenario analysis to help investors understand the extent of operating leverage and potential impact on OPAP’s earnings and liquidity. The scenarios we examine model a 22-66% drop in OPAP’s 2020e EBITDA relative to our current estimates (which assume full lockdown until April, with significant bounce-back in H2). We find that OPAP has sufficient liquidity to handle a store closure period of more than 6 months, but this would be further extended were OPAP to negotiate new credit lines or push back the M&A-related outlay (which we assume in Q3’20).

The scenarios – We are modelling the following scenarios: 1) A full suspension of the shops throughout Q2, with bounce-back in Q3 and Q4. We assume that the latter is relatively limited though, as social distancing dynamics weigh on footfall. 2) A full suspension throughout Q3, with snapback in Q4 and full normalization in 2021. 3) Similar to Scenario 2, but with the additional assumption that the prolonged period of shutdown and the resulting severe disruption in economic activity triggers a recession, which weighs on disposable income, and thus, on gambling spending in 2021. This results in a c14% organic revenue decline in 2021e relative to 2019e levels. Note that under all scenarios we anticipate OPAP to be in cash preservation mode, and expect no dividend to be announced at the upcoming results on 1st April.

Mitigating actions – We offer some granularity on the cost base, and the extent of operating leverage. Non-variable costs that are likely to be tackled under a scenario of prolonged store closure amount to c€220m, and relate mostly to marketing (€65- 70m), third party expenses (€c80m) and, to a lesser extent, payroll (€80m). In our note we stress that “other operating costs” are mostly variable in nature, as they mostly relate to cost of sales of the non-gaming subsidiaries, and in that regard, the worst case scenario is a zero contribution margin from these activities (difference between other income and other operating costs). In short, we model some cost action which intensifies under the stress scenarios (2 and 3). As a rule of thumb, we estimate that each month of shop closure shaves c€40-50m off EBITDA, namely 10- 12% of the group’s annual profits depending on cost containment.

Valuation – Given the uncertainty around the duration of the lockdown, the valuation is a rather precarious equation to solve. That being said, assuming no change to risk appetite (i.e. using WACC of 8.7%), on our estimate OPAP’s intrinsic value is higher than the current price under all aforementioned scenarios (€8.8 under bear case). Our PT is predicated on a DCF-based SOTP of OPAP’s concessions, while taking into account the >€2 per share tax-related value related to the gaming duty prepayment.