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OPAP | Q2 2020 preview: As good as it gets

High single-digit EBITDA; underpinning our FY20 estimates at this stage – OPAP will announce Q2 results on 9th Sep post market close. The quarter will be marked by the full impact from the coronavirus-induced lockdown, with OPAP’s outlets resuming activity on 11th May but VLT halls staying closed until early June. As such, we expect revenues to fall 58% yoy, given the significantly fewer days in operation and widespread sporting fixture postponements. That said, Q2 is poised to shape better than we had anticipated in our last GRECO note in May, underpinned by pent-up demand. Factoring in a c€6m curtailment in net non-variable expenses (marketing, utilities), we end up with Q2 EBITDA of c€7m, -92% yoy, albeit a satisfactory performance given the circumstances. Assuming our H1 estimates are close to the actual figures (EBITDA €94m), we believe our projection for FY20 EBITDA of €267m (implying H2 -22% yoy) may look on the conservative side. Having said that, FY20 EBITDA consensus of €300m implies c3% decline in H2, which would point to relatively normalized trading in the remainder of the year and a more benign macroeconomic scenario than our estimates envisage.

Minimal cash burn in the quarter; lottery games providing some support in Q2 – We expect limited cash burn in the quarter, given the positive EBITDA, working capital management and limited capex outlays. As such, we see net debt shaping near €560m, little-changed vs the end March levels. Similarly, OPAP’s available liquidity should not be materially lower than the €604m gross cash position reported as of 10th June. As far as the games are concerned, we expect a somewhat better relative performance for lotteries (c-50%) helped by the more resilient performance of Joker (also available online). Sportsbetting ought to have shed more than 50%, weighed down by the sporting event inactivity (as most leagues resumed in mid-June). VLTs operated just for 3 weeks, so we expect minimal contribution (> 80% yoy decline).

State of play – Anecdotal evidence seems to point to the normalization of trading activity lately, to c80-85% of pre-covid levels. That said, social distancing restrictions have recently tightened, with the govt enforcing the mandatory use of masks in betting outlets/VLT halls. On the other hand, the sporting events-heavy third quarter is likely to enjoy a boost from the timing shift of sporting fixtures, thereby driving further improvement of underlying trading. Besides operating performance, focus will gradually shift to the gaming duty issue, ahead of the expiration of the current gaming duty regime in October 2020. We note that upon expiration, OPAP will start paying a much lower duty rate (5%), which would result 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 prepayment by OPAP of c€1.8bn in gaming duty (over 2021-2030) 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.