EUR 508.94 For Business Accounts Only

The force awakens

 

Follow the cash – Following a stellar operational performance in Q3 (GGR +12%, adj. EBITDA +14%), mgt’s decision to propose a €0.70 special dividend came as the cherry on top. The proposed dividend will be added to a total €1.39 paid out since June 2016 (c14% yield) and is testament to management’s willingness to optimize the capital structure and maximize shareholder returns. Given the double-digit earnings growth in the next few years on the back of macro recovery, new product roll-out, regulatory support (online licencing) and self-help actions, we reiterate our long-standing view that OPAP will continue to pursue a high cash return policy. We expect dividend distribution at c8-10% of the market cap annually but see scope for a total return c40% until 2019e, assuming net debt/EBITDA increases to 2x. We thus reiterate OPAP as one of our top picks in Greece.

 Sportsbetting: time to believe? – Q3 sportsbetting numbers came in well ahead of  expectations with GGR registering a noteworthy 21% yoy growth, marking the first quarter of a “convincing” growth rate since 2014. Although the core Stihima game remains on a downward trajectory (sequentially improved though), this is now more than offset by the contribution of Virtual Games. The latter seems to appeal to various generations of customers thanks to the compelling player experience, effectively enabling OPAP to capture a previously untapped category of punters. The strong start of virtuals underpins our long-standing view that content improvement and product innovation are equally important with macro recovery for the inflection of sportsbetting. We now expect Virtual Games to contribute €45-65m of GGR (11-14% of sportsbetting) and therefore envisage a recovery in sportsbetting revenues in the coming years, also aided by the revamp of OPAP’s online sportsbook by Q1’18.

Stepping up its VLT game… – VLTs have not registered an impressive performance so far, with GGR/machine still below €50 per day. In our view, several restrictions embedded in the regulatory framework dilute the positive impact from the novelty factor resulting in a longer ramp-up period than initially envisaged. On the positive  side, though, performance is accelerating and deployment is gathering speed with mgt reiterating a target of 10K machines by end 2017 and 20-22K by end 2018. We reiterate our view that the crackdown on the illegal slot machines’ market (worth €0.7-1bn) is a sine qua non for VLTs’ performance. Against this background, we expect the gradual migration of punters from illegal channels to gaming machines to propel VLTs’ performance (GGR €51 in 2018e rising to €65 in 2019e). On our estimates, each €10 variation in daily GGR per machine is worth c€20-25m on EBITDA.

Valuation – Following c1-3% upgrades to our EBITDA estimates, we have raised our cum div fair value but this is offset by the incorporation of increased dividend distributions over the next 12-months, leaving our ex-div PT unchanged. On a total return basis we calculate c18% upside, thereby sticking with our Buy rating. Our PT (based on DCF and multiples) values OPAP at c8.3x 2019e EV/EBITDA, quite reasonable in the context of double-digit earnings’ growth and cash return potential.