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OPAP | First thoughts: Instilling confidence, Q3 EBITDA +1.5% yoy

EBITDA +1.5% yoy, c3% better than our estimates on lower costs – OPAP reported Q3 EBITDA €105m, +1.5% yoy and a bit ahead of our estimate thanks to tight cost monitoring (non variable opex c-4% yoy), a relatively resilient top line (GGR -0.7% yoy) and a higher contribution from Stoiximan (c€5m incremental yoy). Net profit shaped at €52.8m, +8% yoy and c8% ahead of our estimate due to the higher operating profit and a lower tax rate. As expected, in the light of the November lockdown – likely to be extended for a few days we believe – there is no interim dividend proposal. Cashflow-wise, the quarter was quite solid with operating cash flow amounting to €87m (83% of EBITDA). This was absorbed by the payment related to the Stoiximan transaction (€92m) and the outlay related to the final FY19 dividend (€45m), thereby leading to a €38m increase in net debt qoq to €556m (1.7x LTM EBITDA), a bit better than our expectation (€572m).

State of play and estimate read-across – OPAP’s store network remains closed following the implementation of a full 3-week lockdown in November. Our understanding – given comments by state officials and taking into account the evolution of COVID-19 cases and hospitalizations – is that the re-opening date for retailers is likely to be pushed back by 1-2 weeks. We also remind that part of OPAP’s network (c20%) started to gradually get affected from mid-October via the implementation of local lockdowns. Having all these in mind, mgt expects a €45-50m impact on Q4 EBITDA (last year Q4 EBITDA was €108m) on the assumption that the lockdown lasts until the end of November, which, on our estimates would point to FY20 EBITDA near €265-270m (vs our €286m estimate). Assuming the shutdown were to be extended for another 1-2 weeks, FY20 EBITDA would shape between €245m and €255m on our numbers.

Gaming duty hidden value: final countdown – The new concession period started on 13th Oct. Since that day OPAP is liable for a lower gaming duty (5%) on the over-the-counter games (c€1bn of annual revenues in “normal” times). This means that, on a monthly basis, OPAP will be facing c€25m lower duty than under the previous regime. Of course this “benefit” will be minimal during the lockdown, due to the very low revenue base. Given the sizable shortfall that a low gaming duty would mean for state coffers, we expect negotiation for some sort of settlement between OPAP and the state to start soon. We believe this may potentially incorporate an extension of the current concession and/or a reduced duty rate over the next 10 years (relative to the 35% duty rate under the previous regime). As we have repeatedly flagged, the aforementioned prepayment is worth c€2/share.

Valuation – Our PT is predicated on a DCF-based SOTP of OPAP’s concessions (8.8% WACC), while also taking into account the aforementioned value related to the duty prepayment.