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OPAP | Q1 2022 preview: cash avalanche

Piling up cash – Q1 2022 results (31st May post market close) are set to reaffirm OPAP’s superior cash flow generating capacity in the new era of low over-the-counter cash gaming duty (given the prepayment made by OPAP years ago). We anticipate revenues of €465m, +167% yoy driven by: 1) the reopening impulse; 2) return of retail activities to levels c10% below pre-COVID and 3) quite robust online channel, despite the tough comp. This will filter through to cash EBITDA of €162m, +163% yoy and -5% qoq, quite a solid performance given the lower seasonality and inflation challenges. Most importantly, in the absence of significant capex, we estimate OPAP delivered FCF of almost €140m in the quarter (c86% EBITDA conversion) thereby reducing net debt to just €43m from €183m in end 2021.

Q1 in more detail: retail c10% below pre-COVID levels, online sequentially lower but healthy – With OPAP lapping last year’s lockdown, yoy comparisons are meaningless. Retail operations ought to have retraced closer to normality (c10% below pre-COVID vs -13% in Q4) as restrictions eased since mid-February. OPAP digital seems to have been performing well, mainly driven by casino, but group online (incl. Stoiximan) is in general lapping a tough comparative given last year’s migration to digital gambling. As a result, we model Stoiximan revenues c9% lower yoy thereby ending up with group GGR of €465m (-6.7% qoq). On the opex front, we model a yoy increase in non-variable costs given that Q1’21 had been boosted by one-offs (€9-10m) and an increase in marketing, but these will only partly offset the positive leverage thereby driving a >160% growth in EBITDA to €162m (-5% qoq). We expect net profit to settle at c€90m vs just €10m in Q1’21.

Cash avalanche in full swing – Given the inherent cash generating capacity of the business model (franchise-based, limited capex/WC needs), underlying FCF is set to exceed €500m in the coming years underpinned by the re-opening impulse, leading to hefty cash returns (10-13% yield). The continuation of the generous dividend policy is supported not only by fundamentals but also by the main shareholder’s interests. The latter has been opting for dividend reinvestment as a means to increase its shareholding. Given the latter is set to reach 50% in the coming months (assuming participation in the upcoming scrip dividend), we believe it is reasonable to expect Sazka to opt for returns in cash post 2023, but the bottom line is the same: continuation of a very generous dividend policy. As a reminder, OPAP shares are trading ex div (€0.50) on 18th July and ex-capital return (€0.90) on 29th July.

Valuation: renewal optionality – Q1’22 will underpin our estimates for c30% yoy growth in FY22e EBITDA, predicated on retail revenues settling c7% below 2019 levels. Besides fundamentals, we recently initiated a debate on licence renewal optionality estimating that only c30% of the value related to renewals/terminal values of OPAP’s concessions is embedded in the current share price, leaving >€4 as optionality, corresponding to >30% upside vs spot levels. Our PT (DCF-based SOTP of OPAP’s concessions at 7.3% WACC) effectively places the stock at 8.7x 2022e EV/EBITDA. We reiterate OPAP as one of our top picks in Greece.