Caution following ‘encouraging’ recovery

OPAP 16 September 2020 Update
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OPAP

Caution following ‘encouraging’ recovery

H120 results

Travel & leisure

16 September 2020

Price

€8.55

Market cap

€2,862m

€0.92/GBP

Net debt (€m) at 30 June 2020 post IFRS 16 and excluding investments (net debt pre-IFRS 16 €517m)

569

Shares in issue

334.7m

Free float

58.3%

Code

OPAP

Primary exchange

ASE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.0

(1.5)

(13.1)

Rel (local)

3.3

(3.8)

12.2

52-week high/low

€12.32

€5.86

Business description

OPAP was founded in 1958 as the Greek national lottery and it is the exclusive licensed operator of all numerical lotteries (seven games), sports betting (four games) and horse racing. OPAP listed in 2001 and was fully privatised in 2013. Sazka Group has a 41.7% stake and significant board representation.

Next events

Q320 results

25 November 2020

Analysts

Russell Pointon

+44 (0)20 3077 5700

Sara Welford

+44 (0)20 3077 5700

OPAP is a research client of Edison Investment Research Limited

OPAP’s Q220 results were heavily affected by the COVID-19 closures, with a revenue (GGR) decline of 53.2%. As expected, costs were well managed so that EBITDA profitability was restored by the end of the period and free cash flow generation improved on a relative basis. Post lockdown, the overall recovery was described as ‘encouraging’, but management reiterates a cautious outlook for the rest of the year given the macroeconomic uncertainties and re-emergence of COVID-19 in parts of the country. We make small changes to our assumptions, which result in similar EBITDA for FY20 to before and a modest downgrade of 3% in FY21. Our DCF continues to suggest a value of at least €9.5/share.

Year end

GGR*
(€m)

EBITDA**
(€m)

EPS**
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

1,547.0

353.6

0.52

0.7

16.5

8.2

12/19

1,619.9

411.2

0.65

0.3

13.2

3.5

12/20e

1,351.1

302.2

0.31

1.5

27.7

17.6

12/21e

1,729.2

426.5

0.54

0.8

15.9

9.1

Note: *Gross gaming revenue; **EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Q220: Strong control of costs and cash

OPAP’s Q220 GGR fell by 53.2% y-o-y to €179.6m, with declines in all four of the disclosed revenue sources as most of the estate was closed for around two months in the lockdowns from 14 March. Despite the extent and speed of the revenue decline, management’s focus on operating cost savings and the continuing strong performance of Stoiximan ensured it was EBITDA positive as expected. Cash flow generation relative to revenue improved as management also exercised good control over working and fixed capital investment. Revenue recovery post lockdown was described as ‘encouraging’ overall, but the re-emergence of COVID-19 in Greece leads management to retain its cautious outlook for the remainder of the year but with confidence in managing the cost base accordingly.

Forecasts: FY21 EBITDA trimmed by 3%

Our EBITDA forecast for FY20 is maintained with an H220 decline for Instant & Passives (c 8% of group) now assumed, offset by a benefit from the company paying tax liabilities on time and therefore paying a reduced amount. Our forecasts assume revenue declines by c 5% in H220. Our EBITDA forecast for FY21 falls by 3%, reflecting the flow through of lower Instant & Passives revenue from FY20 and the absence of a benefit to other operating income in FY20 from the on-time payment of tax liabilities.

Valuation: DCF-based valuation of at least €9.5/share

The share price has recovered well through from the lows in March but have retraced modestly in the last few weeks. The EV/EBITDA multiple for FY21, which is the first year of full consolidation of Stoiximan, is 8.3x. Our DCF-based valuation continues to indicate a valuation of €9.5/share, with potential for an incremental €2.2/share for the prepaid tax asset of €1.8bn, which may be resolved in October.

Q220 results summary: Heavily affected by COVID-19

OPAP’s Q220 results were heavily affected by COVID-19 as Greek real estate was closed for a good proportion of the period. OPAP stores and Hellenic Lotteries street vendors were closed for 58 days from 14 March to 11 May 2020 and the video lottery terminal (VLTs) PLAY network was closed until 8 June. The Cypriot retail network was allowed to re-open on 23 May. Despite the shape and extent of the downturn, management controlled costs to achieved EBITDA profitability, which, coupled with control of working and fixed capital investment, led to improved free cash flow generation relative to revenue.

Q220 GGR declined by 53.2%, but good recovery post lockdown

Q220 GGR fell by 53.2% y-o-y to €179.6m as all revenue sources declined due to the retail estate closures. The most severely affected parts of the group were OPAP’s smallest revenue sources: VLTs (12% of GGR), which fell by 69.3% y-o-y, and Instant and Passives (8% of revenue), which reduced by 59%. The company’s most important revenue source, Lotteries (57% of the group revenue) fell by 45% and the second most important revenue source, Sports Betting (23% of revenue), declined by 55%, broadly similar to the group average. Following the revenue decline of c 17% in Q120, the total decline for the first six months of the year was almost 35%.

Management identified three key phases during Q2: lockdown (1 April to 10 May); partial re-opening (11 May to 7 June); and full re-opening (8 June onwards). It highlighted the revenue trends in each of the phases. During lockdown like-for-like revenue fell by 97% as the only revenue source was from the company’s online activities. In the second phase, partial re-opening, like-for-like revenue declined by 32%, which reflected seating restrictions in the OPAP stores, limited betting as sporting events were cancelled or postponed and the VLTs remaining closed. When all activities were fully re-opened and postponed sports events were resumed, like-for-like revenue was positive, which demonstrated an overall encouraging recovery in management’s view. Post lockdown: the recovery in Lotteries was described as ‘encouraging’; Sports Betting was ‘strong’ as delayed sports events helped the end of the period; VLTs grew by double-digits as the revenue per VLT per day resumed growth; but Instant & Passives was still ‘deeply negative’.

Extending past the period end, once the VLTs were fully re-opened total revenue grew by 3.1% from 8 June to the end of August, although August declined by 2.1% with trends negative across all revenue sources due to the summer holiday season and recent travel restrictions.

With respect to customer behaviour post lockdown, management observed that there has been a slight reduction in spend per customer and dwell times at locations, but the number of occasions on which customers visit locations has been stable. It is important to recognise that customers have provided positive feedback on the safety measures introduced by OPAP at its sites.

During the tough operating environment, management has continued to invest in stores and the supporting infrastructure. In Q220, 150 stores were upgraded on top of the 59 that were done in Q120, therefore more than 1,400 stores (over 40% of the estate) have been upgraded since 2018, when the Retail Excellence (REX) program started. Management targets a similar number of upgrades during the remainder of the year, so that more than 300 stores would have been built or upgraded by year end. The new satellite infrastructure, which enables more high-definition content, is active across the entire estate and more than 1,000 stores have smart digital infrastructure, which allows for centralised control of what is on individual screens, facilitating the creation of different gaming zones within stores.

EBITDA profit in Q220 due to good cost control

Despite the speed and the extent of the downturn in revenue during the period, OPAP generated EBITDA (before associates and one-off items) of €21.8m in Q220 to give a total for the first six months of €103.7m. The Q2 performance represented a decline of almost 75% on the prior year and a margin of 12.2% versus 22.7% in the comparative period. At the time of the Q120 results in June, management’s update on current trading indicated April 2020 had been EBITDA negative and June was expected to be EBITDA positive, therefore the outturn looks in line with prior commentary.

During Q220, the lost revenue was compensated for by the natural reduction in levies, commission and revenue sharing costs but there was a modest deterioration in gross profit to 38.3% from 39.7% in the prior period due to the changes in revenue mix as a result of the different re-opening times of the estate. More favourable net other operating income of €12.7m versus €9.1m in Q219 led to an improvement in the total gross margin from 42.1% in Q219 to 45.4% in Q220.

Savings in all operating costs helped sustain EBITDA profitability towards the end of the quarter. Marketing increased, relative to revenue, in order to drive OPAP’s online revenue growth during lockdown and other revenues ahead of the store re-openings towards the end of the quarter.

Kaizen Gaming’s (Stoiximan) strong operating performance is reflected in the year-on-year growth of associate income of 31% in Q220 and 129% in H120. During Q220, Kaizen’s active customer base increased by c 8% y-o-y and its revenue increased by 16%, with the performance of its casino business more than offsetting the declines from sports betting.

Further down the P&L, depreciation and amortisation (€38.6m) and one-off items (€7.5m) pushed the company into an operating loss for Q220.

Cash flow generation improved on a relative basis

OPAP’s operating cash flow declined from €77.5m in Q219 to €36.8m in Q220, although relative to revenue there was a modest improvement as working capital was controlled well. Lower investment in tangible and intangible assets led to free cash flow generation of €39.9m, a decline of c 42% y-o-y, which represents a strong performance given the extent and the speed of the revenue decline in the period.

The company’s cash position of €628m improved from €422m at the end of Q120 due to the free cash flow generation and new borrowings of €178m raised during the quarter. Versus the end of FY19, the cash position was broadly stable.

At the end of H120, the net debt position adjusted for IFRS 16 and investments was €568.9m versus €473.4m at the end of FY19.

Outlook and forecasts

Management remains cautious about the outlook given the forecasts for GDP declines in Greece in FY20 and FY21, especially given the re-emergence of COVID-19 on several Greek islands in recent weeks, which led to new travel restrictions and shortened the summer tourist season that is crucial for their local economies. The Greek islands in aggregate represent a mid-teens percentage of OPAP’s revenue; however, the impact of the travel restrictions could affect a greater proportion of the group’s revenue. The most obvious primary effect is lower current and expected incomes of the islands’ own residents. The secondary effect is the lower incomes of the many mainland residents that travel to work on the islands during the holiday season. During August 2020, the company’s revenue in the islands fell by 19% y-o-y.

If there is a further revenue downturn, the company is confident that it can manage the cost base to mitigate the impact on profitability, as achieved during the very challenging second quarter.

The changes to the sporting calendar, such as with football games postponed from Q2 to Q320 and the delayed starts to new football seasons in the third quarter, are likely to have some unquantified phasing effect on Q320’s results.

We make modest changes to our forecasts to FY20, which have a slight flow through to our forecasts for FY21. We reduce our forecasts for Instant & Passives in FY20 to reflect a decline in revenue in H220 of c 15%, to give a total decline of c 32% for the full year versus a full year decline of c 21% previously. We retain our gross revenue assumptions for the remaining three main revenue streams, which include declines during the remainder of the year for Lotteries of 10% and for Sports Betting of 17% and growth in VLTs of c 19% reflecting the ongoing maturing of the installed base. In total, our revenue forecast for FY20 of €1,351.1m, represents a y-o-y decline of 16.6%, with a decline in H220 of 6.8%. Our forecast for FY20 EBITDA is broadly maintained at €302.2m, a decline of 26.5% from FY19, through an increase in other operating income for the incentive for paying tax liabilities on time.

Our revenue forecast for FY21 falls by 1% to €1,729.2m and the EBITDA falls by 3% to €426.5m to reflect the flow through from FY20 of the decline in Instant & Passives revenues and the absence of the other operating income benefit reported in FY20.

Future gaming taxes: Coming into focus

As we detailed in our initiation note in February 2019, as part of its negotiations to extend the lottery licence from 2020 to 2030 in 2011, OPAP negotiated a contract in which it is only liable to pay for a small portion of future gaming taxes (5% tax on GGR rather than 35% for 10 years) in return for a consideration of €375m, of which €300m corresponded to the GGR tax prepayment. The €300m paid in 2011 has a future value (in 2030 terms when the settlement will take place) of €1.8bn. OPAP will implement the contract from October 2020 in the absence of an alternative being proposed by the Greek government. In our view, it is highly likely the government will seek to renegotiate, given the implications for the country’s finances.

Exhibit 1: Financial summary

€m

2016

2017

2018

2019

2020e

2021e

2022e

31-December

ISA

ISA

ISA

ISA

ISA

ISA

ISA

INCOME STATEMENT

Revenue

 

 

1,397.6

1,455.5

1,547.0

1,619.9

1,351.1

1,729.2

1,774.2

NGR

 

 

930.8

972.9

1,039.9

1,086.2

911.8

1,164.4

1,194.8

Cost of Sales

(827.5)

(862.9)

(904.3)

(946.9)

(773.6)

(963.0)

(987.0)

Gross Profit

570.1

592.6

642.7

673.0

577.5

766.2

787.2

EBITDA

 

 

307.5

306.5

353.6

411.2

302.2

426.5

444.1

Operating Profit (before amort. and except.)

 

252.4

218.7

258.4

296.6

170.7

293.1

308.9

Impairments

0.0

(2.7)

(17.5)

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

(7.1)

(7.5)

0.0

0.0

Share-based payments

(3.1)

(1.5)

(1.6)

(1.6)

(1.6)

(1.6)

(1.6)

Reported operating profit

249.3

214.4

239.3

287.8

161.6

291.5

307.2

Net Interest

(13.3)

(21.1)

(23.5)

(27.1)

(39.7)

(40.6)

(36.1)

Joint ventures & associates (post tax)

0.0

0.0

0.0

8.5

10.0

4.0

4.4

Other

1.0

(0.3)

0.1

0.0

0.0

0.0

1.0

Profit Before Tax (norm)

 

 

240.0

197.4

235.0

278.0

141.0

256.5

278.2

Profit Before Tax (reported)

 

 

236.9

193.1

215.9

269.2

131.9

254.9

276.6

Reported tax

(64.1)

(61.6)

(70.6)

(67.1)

(36.7)

(66.7)

(72.3)

Profit After Tax (norm)

170.4

140.1

166.9

208.7

104.3

189.8

205.9

Profit After Tax (reported)

172.9

131.5

145.3

202.1

95.2

188.2

204.2

Minority interests

(2.6)

(5.4)

(2.0)

0.3

(1.4)

(6.3)

(6.6)

Discontinued operations

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

167.8

134.7

164.9

209.0

103.0

183.5

199.3

Net income (reported)

170.2

126.2

143.3

202.4

93.9

181.9

197.6

Basic average number of shares outstanding (m)

319

318

318

322

334

342

352

EPS - normalised (c)

 

 

52.68

42.39

51.90

64.92

30.84

53.73

56.67

EPS - diluted normalised (€)

 

 

0.53

0.42

0.52

0.65

0.31

0.54

0.57

EPS - basic reported (€)

 

 

0.53

0.40

0.45

0.63

0.28

0.53

0.56

Dividend (€)

1.29

1.10

0.70

0.30

1.48

0.78

0.80

Revenue growth (%)

(-0.2)

4.1

6.3

4.7

(-16.6)

28.0

2.6

Gross Margin (%)

40.8

40.7

41.5

41.5

42.7

44.3

44.4

EBITDA Margin (%)

22.0

21.1

22.9

25.4

22.4

24.7

25.0

Normalised Operating Margin

18.1

15.0

16.7

18.3

12.6

17.0

17.4

BALANCE SHEET

Fixed Assets

 

 

1,330.3

1,356.5

1,384.2

1,370.1

1,415.3

1,330.3

1,243.5

Intangible Assets

1,231.0

1,218.5

1,157.2

1,096.0

1,094.2

1,026.4

956.7

Tangible Assets

67.6

109.3

111.5

162.3

209.4

192.3

175.1

Investments & other

31.7

28.7

115.5

111.7

111.7

111.7

111.7

Current Assets

 

 

437.4

440.4

385.5

869.6

768.8

822.9

849.3

Stocks

12.5

7.9

10.7

6.7

11.7

16.7

21.7

Debtors

80.6

127.8

138.3

161.2

171.2

166.2

161.2

Cash & cash equivalents

273.5

246.1

182.6

633.8

518.0

572.1

598.5

Other

70.8

58.5

54.0

67.9

67.9

67.9

67.9

Current Liabilities

 

 

(390.2)

(482.0)

(299.3)

(326.4)

(311.4)

(296.4)

(281.4)

Creditors

(149.3)

(173.9)

(176.7)

(184.1)

(169.1)

(154.1)

(139.1)

Tax and social security

(55.5)

(89.8)

(8.6)

(5.3)

(5.3)

(5.3)

(5.3)

Short term borrowings

(118.7)

(169.2)

(0.2)

(13.9)

(13.9)

(13.9)

(13.9)

Other

(66.7)

(49.2)

(113.8)

(123.1)

(123.1)

(123.1)

(123.1)

Long Term Liabilities

 

 

(305.3)

(556.7)

(710.8)

(1,141.5)

(1,266.5)

(1,166.5)

(1,066.5)

Long term borrowings

(263.0)

(513.1)

(650.3)

(1,103.2)

(1,228.2)

(1,128.2)

(1,028.2)

Other long term liabilities

(42.3)

(43.6)

(60.6)

(38.3)

(38.3)

(38.3)

(38.3)

Net Assets

 

 

1,072.2

758.2

759.5

771.7

606.2

690.3

744.9

Minority interests

(37.0)

(43.4)

(36.8)

(18.1)

(20.0)

(20.0)

(20.0)

Shareholders' equity

 

 

1,035.3

714.8

722.8

753.6

586.2

670.3

724.9

CASH FLOW

Op Cash Flow before WC and tax

310.7

308.0

355.2

412.9

303.8

428.1

445.7

Working capital

(71.9)

(9.2)

(25.0)

(16.5)

(25.0)

(10.0)

(10.0)

Exceptional & other

(12.4)

(0.4)

1.1

(13.9)

(7.5)

0.0

0.0

Tax

(116.9)

(31.4)

(51.7)

(78.9)

(36.7)

(56.7)

(62.3)

Net operating cash flow

 

 

109.4

266.9

279.6

303.6

234.7

361.4

373.4

Capex

(42.9)

(96.3)

(51.9)

(34.8)

(15.0)

(20.0)

(20.0)

Acquisitions/disposals

(0.0)

(31.5)

(47.9)

(21.9)

(163.4)

(30.0)

(30.0)

Net interest

(11.9)

(19.6)

(24.6)

(22.3)

(39.7)

(40.6)

(36.1)

Equity financing

(11.9)

(1.8)

(5.5)

(0.1)

0.0

0.0

0.0

Dividends

(292.8)

(446.1)

(154.0)

(164.0)

(264.0)

(116.5)

(159.0)

Other

(12.7)

0.3

(18.6)

(11.1)

(1.4)

(6.3)

(6.6)

Net Cash Flow

(262.8)

(328.0)

(22.8)

49.3

(248.7)

148.0

121.7

Opening net debt/(cash)

 

 

(154.6)

108.2

436.2

467.8

483.3

732.0

584.0

FX

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

(8.9)

(64.8)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

108.2

436.2

467.8

483.3

732.0

584.0

462.3

Source: Company data, Edison Investment Research

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Germany

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are ‘wholesale clients’ for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a ‘personalised service’ and, to the extent that it contains any financial advice, is intended only as a ‘class service’ provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the ‘publishers' exclusion’ from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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