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OPAP | First thoughts: Performing like a champ!

Q2: as good as it gets, underpinning FY20 EBITDA >€280m – OPAP announced quite solid Q2 results, delivering EBITDA some €9m above our estimates by virtue of a better top line performance (revenues -53% vs EEe -58%) mainly stemming from VLTs. As a result, EBITDA not only remained in positive territory but exceeded €16m, also underpinned by cost curtailment (non-variable opex >€7m lower yoy) and a higher-than-envisaged contribution from non-gaming activities (other income spread over other costs >€10m positive vs our expectation for a neutral contribution). At bottom line level the quarter was naturally loss-making (net loss €15.1m), also weighed down by a c€9m impairment. Overall, this was quite a resilient performance, given the circumstances (outlets resuming activity on 11th May but VLT halls staying closed until early June). Although the strong post-lockdown trading ought to tail off in the next 4 months, we believe FY20e EBITDA in excess of €280m is feasible, as this would imply a – by no means aggressive – 15% decline in H2.

 Positive FCF in the most challenging quarter ever – OPAP managed to deliver €36m of OCF in Q2 underpinned by working capital management. With capex being minimal in Q2 (c€5m), net debt shaped at €517m vs €556m in the end of March. Of note is that OPAP’s available liquidity amounted to €539m as of 7th Sep (vs €604m gross cash reported as of 10th June), despite the payment of €93m in relation to the Stoiximan acquisition.

 Lottery games more resilient; sportsbetting weighed down by lack of events – As we had anticipated, lotteries posted a more resilient performance (c-45%) helped by Joker (also available online). Sportsbetting plunged 55%, weighed down by the sporting event inactivity (as most leagues resumed in mid-June). VLTs operated just for 3 weeks, but contribution was markedly higher than expected (€22m, -69% yoy).

 Gaming duty hidden value: final countdown – As we have been flagging since early 2018, the current gaming duty regime is set to expire in October 2020. From November onwards, the Extension period comes into effect and along with it a new tax regime which effectively envisages a lower gaming duty rate for OPAP (5%) in the next 10 years, as the latter has effectively prepaid €1.8bn of duty for the Extension period (Nov 2020-Oct 2030). Although the issue is not straightforward (as the contractual terms envisage a settlement between OPAP and the state at the end of the 10-year period, depending on the prepaid amount and the actual revenue stream), it will soon come to the fore: assuming no action, OPAP’s contribution in the state coffers will decrease substantially starting from November, thereby resulting in a sizeable shortfall for the state budget. We expect negotiation for some sort of settlement (potentially an extension of the current concession) to start soon. 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 (8.9% WACC), while also taking into account the value related to the duty prepayment.