OPAP | First thoughts: underlying Q1 numbers in line

Mixed games performance; cost savings underpin 16% adj. EBITDA growth – OPAP reported underlying Q1’19 results broadly in line with our estimates, with the top line momentum decelerating somewhat (GGR +5.0% vs. +7.6% in Q4’18), as improved sportsbetting and solid numerical games were partly offset by weak scratch and virtuals. IT cost savings coupled with the top line increase (also helped by VLTs’ rising contribution) drove a c16% increase in underlying EBITDA to €100.9m, in line with our estimate (incl. a €2m boost from IFRS 16). Reported EBITDA shaped at €111.6m, propelled by a provision reversal. Net profit shaped at €57.2m, +43% yoy or +13.7% on an underlying basis. On the cash flow front, FCF generation was quite strong with OPAP managing to reduce its net debt position to €410.5m from €459m in Q4’18.

Improved core sportsbetting, resilient Kino, weak Hellenic Lotteries – Sportsbetting revenues fell 5% yoy, but this was sequentially better than the c12% decline registered in H2’18. Of note is that the decline seems to have been driven by virtual games, with core sportsbetting (i.e. Stoihima) having returned to positive growth. Numerical games were up 1.6% yoy, with Kino slightly positive, quite a commendable performance against the background of the doubling of VLTs in operation compared with Q1’18. Hellenic Lotteries posted a disappointing performance though, falling 11% yoy, but we understand performance has improved in Q2. As for VLTs, these contributed €69m of GGR, +59% yoy but just 0.7% qoq. The blended GGR/day of machines operating since the start of Q1 is likely to have shaped near €41 on our numbers.

Issues in focus – The conference call has been scheduled for tomorrow at 14:00 UK time (UK 3; Greece 0; US ; Other 2). We expect focus to be on: 1) the performance of OPAP’s recently-launched digital platform which seems to have been lukewarm so far; 2) developments on the regulatory front, especially with respect to the recent State Council decision which opined that VLT regulation should be ratified through a Presidential decree before coming into effect; our view remains that the State Council’s intervention simply aims to restore the proper legal angle of the VLT regulatory process; 3) how the latter affects the VLT roll-out plan, with OPAP noting that the “roll-out of additional VLT machines is currently on hold”; 4) an update on the Stoiximan transaction; 5) granularity on the scrip dividend plan; 6) upcoming product enhancement actions.

Valuation – Our valuation is predicated on a DCF-based SOTP of OPAP’s concessions (at 8% WACC). Our €11.7 PT effectively places OPAP at c10.4x 2019e EV/EBITDA, underpinned by the solid earnings’ growth, the limited regulatory risk, the high cash conversion and the superior cash returns. We re-emphasize our view that the market overestimates the present value of tax payments that OPAP will make post 2021, taking into account the contractual terms embedded in the Extension agreement. On our estimates, this creates a tax-related hidden value potentially worth > €2 per share, an issue we expect will come to the forefront in 2019, in view of the transition to the new tax regime in end 2020.