OPAP — Fast Forward to growth and higher returns

OPAP is Europe’s only listed pure gaming operator with 100% exclusive licences; the earliest is due to expire in 2026 and the latest in 2036. The business model is predicated on the continuing cash flow from monopoly businesses, supplemented by product enhancements and the move online. The outlook for the latter has been boosted by the recent acquisition of Stoiximan, a leading online provider of casino and sports betting.

The business model is very cash generative given its franchise model requires limited fixed and working capital and all licence payments have been made. With a high level of variable costs (taxes and commissions are based on revenue) and a strong track record of managing other operating costs, management consistently delivered higher margins before COVID-19, despite the challenging macroeconomic backdrop, while continuing to invest in new products.

The aim of the new CEO’s strategy, Fast Forward, is to create a world-class gaming entertainment company with a focus on building its brands and customer interactions both online and offline, while maintaining OPAP’s leading position in corporate and social responsibility.

Our new forecasts for revenue growth of 40% (FY21) and 31% (FY22) reflect gradual underlying recovery post COVID-19, new product growth and the first full year consolidation of Stoiximan. Forecast adjusted EBITDA growth of 118% (FY21) and 34% (FY22) are helped by a continuation of good cost management, as well as the favourable licence extension (from October 2020).

Our DCF-based valuation uses a terminal growth rate of 1.5% and a terminal EBITDA margin of 25% in 2031 to reflect the end of the concession in October 2030, which increases the EBITDA margin to 37–38% during its term. We assume that OPAP pays €1bn between 2028 and 2029 to renew its concession beyond 2030. Using a WACC of 7.5% produces a value per share of €16.6.

OPAP’s dividend policy is to return the bulk of free cash flow to shareholders. The prospective dividend yield of 5.8% in FY21 and 9.1% in FY22 looks well underpinned given the strong balance sheet, even after a difficult FY20 and M&A activity.

OPAP was founded in 1958 as the Greek national lottery and is the exclusive operator of all numerical lotteries (seven games), sports betting (four games), horse racing and video lottery terminals (VLTs). Through its 83.5% holding in Hellenic Lotteries, OPAP also has an exclusive licence to operative passive lotteries and instant (scratch) games. The company operates a network of franchised shops and gaming halls (c 4,000 in Greece, and c 200 in Cyprus at FY20) and is expanding its online offering in lottery and sports betting.

OPAP listed on the Athens Stock Exchange in 2001, and after a series of further secondary offerings and international tenders, it was fully privatised in 2013. Sazka Group, the largest pan-European lottery operator, holds a 44.1% shareholding and is well represented at the board and executive level.

The exclusive licences ensure OPAP is well placed to protect the top line (in the context of sensitivity to the macroeconomic environment and retail spending) and it is seeking growth from online and new products. In general, many of its new products are targeted at younger and female demographics, such that management hopes to minimise the cannibalisation of existing products. Since 2013, OPAP has undergone significant changes to both modernise and streamline the business.

OPAP is the largest social contributor in Greece operating under the World Lotteries Association (WLA) and responsible gaming standards, while it transforms its business excellence into social contribution through an integrated corporate social responsibility programme.

OPAP’s games portfolio is split between fixed-odds betting games and mutual betting games (total amount is distributed to winners). The traditional ‘legacy’ games, Lotteries, Sports Betting and Instant and Passives are mature businesses, and growth is expected to be driven by online activities and VLTs. Following the additional investment in Kaizen Gaming in FY20, its main Greek and Cypriot activities (Stoiximan) are fully consolidated from December 2020. Exhibit 2 demonstrates how gross gaming revenue (GGR), that is revenues for the individual business and the group, have developed and how we expect them to recover through FY21 and FY22, following COVID-19.

Numerical lottery games comprise the largest portion of GGR and consist of six games that are currently active, and two new lottery games (Bingo and Super 4) that have yet to be launched. The exclusive licence to operate the games, along with sports betting (see below), was originally acquired for 20 years in October 2000, and extended for a further 10 years in 2011 up until October 2030. The fixed odds games are Kino, Super 3 and Extra 5, and the mutual games are Tzoker (Joker), Lotto and Proto. The two most significant games in terms of revenue contribution are Kino and Tzoker.

From FY14 (when the current divisional disclosure was introduced) to FY19, GGR declined from €817m to €779m, with modest y-o-y declines since FY16 due mainly to some cannibalisation from other games. There is a high correlation between growth in GGR and private consumption for lotteries. Relatively stable GGR taxes and lower agents’ commissions versus GGR led to a consistent increase in gross margin from 41.1% (FY16) to 43.3% (FY19), and a stable absolute gross profit. In FY20 GGR fell by c 33% due to COVID-19 lockdowns and operating restrictions.

The exclusive licence to operate the sports and other betting games is part of the licence above, extending until 2030. Sports betting games includes fixed-odds games Pame Stoixima (the most important game), Pame Stoixima Virtual Sports and the mutual betting games Propo, Propogoals, and Horse Racing Stoixima.

OPAP has continued to develop its offer: Pame Stoixima Virtual Sports were launched in April 2017 to target a younger demographic and have clearly boosted the betting segment. Self-service betting terminals (SSBTs) were launched in August 2017 and virtual games were introduced to the terminals in November 2017. The Pame Stoixima sportsbook was enhanced in 2019. In April 2019, OPAP launched its online casino games through the pamesoixima.gr platform. In addition to enhancing its own sport offering, in 2020 OPAP acquired a controlling stake in Stoiximan, the leading online operator in Greece and Cyprus with market share of close to 50%.

GGR has reduced from €456m in FY14 to €396m in FY19 (under the old reporting structure) due to the general move online, where there is more competition. As for lotteries, relatively consistent GGR tax and duties and lower agents’ and other commissions have led to a higher gross margin of 38% in FY19 versus FY16’s 37%. In FY20 GGR declined by c 31% y-o-y. From FY20, OPAP’s online sports betting activities are reported in a new division, Online betting (see below).

OPAP holds an 83.5% stake in Hellenic Lotteries, which has operated the instant and passive lotteries since 2014; the licence expires in 2026. The three Passive games are Laiko (weekly jackpot), Ethniko (a subscription game in which each player has a unique number) and State Lottery (the traditional New Year’s Eve draw). Instant lotteries include scratch cards. All are available from OPAP’s agencies and street vendors, and the scratch games can be found in convenience stores etc.

This is a mature business with limited potential to grow given the increasing number and sophistication of competing products. GGR has declined modestly in recent years, from €159m in FY16 to €147m in FY19.

The licence stipulates that GGR tax in any year is a minimum of €50m or 30% of GGR. In FY19 and FY20 (due to COVID-19), GGR was lower than €150m, therefore the minimum €50m was expensed instead of the variable 30%. Hellenic Lotteries has filed for arbitration that the minimum levy for FY20 should not be payable due to the government’s COVID-19 related operating restrictions, and the liability should be the variable 30% of GGR (ie €12.3m, which has been paid), instead of the expensed €50m.

Agents’ commissions have increased relative to GGR; the rates are based on wagers rather than GGR as for other games and vary by product. The combination of lower GGR, with higher relative GGR taxes and agents’ commissions, have led to lower gross margins, 34.4% (FY16) to 30.3% (FY19). It was marginally loss-making at the gross profit level in FY20 due to lower GGR.

A VLT is a standalone machine with a random-number generator. The machines are certified by the Hellenic Gaming Commission and OPAP’s licence to operate the VLTs runs for 18 years, expiring in 2035. VLTs were officially launched in January 2017 and OPAP successfully completed the roll-out of the permitted 25,000 VLTs into ‘Play’ gaming halls and selected agencies by the end of 2019. The investment in VLTs and new concept shops was one of the largest and fastest gaming store roll-outs in Europe. The majority of the new Play stores contain c 30–40 machines, although OPAP has opened some larger flagship stores alongside smaller ones (with lower capex requirements), which are more suitable for less dense locations.

VLTs have a €2 limit, which is in line with the fixed odds betting terminal stake limits in the UK. Importantly, unlike the traditional over-the-counter (OTC) games, players are required to register and there were 528k registered players at December 2020 with c 128k monthly active users. Apart from the general reliance on the macro environment, a key driver for the VLT business will be to shift consumers away from the illegal machines towards OPAP venues. OPAP is hopeful that its VLT jackpots will provide a suitable inventive for players to shift allegiance.

From the launch in FY17, GGR reached c €298m in FY19, 18% of group GGR, before reducing to €201m in FY20 due to COVID-19.

VLTs are liable to GGR tax of 30% and agents’ commission varies depending on whether the machines are located in gaming halls or traditional OPAP stores.

In FY20, VLTs generated GGR of c €201m, averaging €39 GGR/VLT per day and EBITDA of €25m. Since launch, GGR/VLT per day has modestly declined as, naturally, the highest spending markets were targeted initially and the density of machines was lower. As the estate matures GGR/VLT per day is expected to gradually increase; we forecast a rate of €40 per day in FY22.

OPAP’s online presence and revenue is building quickly following the introduction and subsequent growth of many of its own games as well as the acquisition of a majority stake in Stoiximan (see below).

OPAP’s total online exposure has grown from c 1% of GGR in FY19, to c 6% of GGR in FY20, and c 24% in Q420, albeit the FY20 is skewed by the COVID-19 related closures of the physical estate. In FY20, OPAP’s online revenue was €42m and Stoiximan’s pro forma revenue was c €262m.

With the announcement of the FY20 results, OPAP enhanced its divisional disclosure to report separately the financials for Online Betting (ie sports, c 62% of Q420 pro forma) and Other Online Games (casino c 34% of Q420 pro forma and lottery c 4%). The two divisions include the results of OPAP’s own online activities as well as the consolidated elements of Kaizen Gaming (ie its Greek and Cypriot operations).

The underlying growth of the online market and the maturing/introduction of games has led to a substantial increase in the user base and revenue for both OPAP and Stoiximan. By the end of Q420, OPAP’s registered base of online players had increased by 77% y-o-y to c 418k and during the quarter monthly average users increased by c 80% y-o-y to c 139k. The growth in users drove a more meaningful 248% y-o-y increase in online GGR to €41.4m in FY20, implying a good increase in GGR per user. While there has been a boost to the growth of online from COVID-19 related closures, we observe that OPAP’s growth has exceeded its estimates for total online growth of +35% online growth and its share of the online market more than doubled. There was further sequential growth in Q121 when OPAP’s average monthly users grew to 163k and revenue was €19m.

In September 2018, OPAP announced the acquisition of an initial 36.75% stake in TCB Holdings (now named Kaizen Gaming), the parent company of Stoiximan, a leading online gaming company for €50m. In April 2020, OPAP announced a further combined investment of €163.4m for a direct (51%) and indirect (15.48%) stake in the Greek and Cypriot operations, which was completed in December 2020. As a result, OPAP has a controlling stake (84.49%) in the Greek and Cypriot operations (Stoiximan brand) and a 36.75% in its other markets: Germany, Portugal, Romania and Brazil that operate under the Betano brand. The deal enhances OPAP’s presence in the Greek and Cypriot online sports betting and casino markets, but it is run independently from its own online businesses. Prior to the December 2020 transaction the whole of Kaizen was accounted for as an associate. Following the conclusion of the transaction and taking control of Stoiximan it is fully consolidated and the other countries continue as an associate. In FY20, OPAP’s associate income was €18.2m versus FY19’s €8.5m, including the income from Stoiximan prior to the full consolidation from December 2020, as well as a full year of the international operations.

The strong growth in Kaizen’s customer base during FY20 (monthly average active players increased by c 51% y-o-y to reach 292k in Q420), led to 46% growth in its GGR for the year to c €355m. For the year, Kaizen’s total profit contribution to OPAP of €28.1m (consolidated and associate income) compares with the associate income of €8.5m in FY19.

Within OPAP’s cost structure, the two major variable components are the GGR tax (34.7% of FY20 GGR) and agents’ commissions (34.7% of net gaming revenue (NGR)). Relative to revenue, both have reduced between FY16–19, but increased in FY20 due to the mix effects of COVID. These reductions, when combined with underlying control of other operating costs led to a consistent increase in adjusted EBITDA margin from 22.0% (FY16) to 25.4% (FY19) before the COVID-19 related decline to 23.3% (FY20).

Coinciding with the full privatisation of the company in 2013, a 30% GGR tax was introduced by the Greek regulator. In essence, this tax replaced the dividend payments to the government. Three years later the GGR was further increased to 35% for just the Lotteries and Sports Betting licence, which was at the very top end of gaming taxes across Europe; however, it has subsequently reduced to 30% from October 2020. As a reference, other European gaming markets are levelling out at around 20–25% tax. Following the reduction in October 2020, GGR tax is 30% across the portfolio except for Instant and Passives (as described above) and for the online activities, taxed at 35%.

OPAP operates via a network of franchise shops throughout Greece and Cyprus paying commissions to agents and committing only limited resources to the kit out of shops. The company has renegotiated commission structures (now mostly variable with NGR) and the dynamics of the estate have altered. OPAP has been gradually churning and rejuvenating its estate, notably since renegotiating commissions. Over the long term the number of OPAP stores has reduced and the average size of the stores has increased: in Greece, the number of stores has reduced from c 4,700 in FY13 to over 3,600 in FY20; in Cyprus the number has marginally increased to 202. At the same time, the company has expanded the number of alternate points of sale for Hellenic Lotteries products. OPAP has also developed a new network of gaming Play stores for its VLTs.

As a direct result of OPAP’s ongoing cost controls, total operating costs (ie personnel, marketing and other) have declined on an absolute basis since FY16, despite the commencement of several material projects (Hellenic Lotteries, Horse Racing, VLTs and Virtual Games).

Key to OPAP’s strategy is that it holds exclusive concessions in all land-based games in Greece apart from casinos where OPAP has no presence. The core games exclusive licence has been extended until 2030, the scratch tickets and passive licence expires in 2026, and the horse racing licence expires in 2036. The exclusive licence to operate 25,000 VLTs in Greece expires in 2035.

On 13 October 2020, the 10-year extension of OPAP’s exclusive right to run specific numeric and sports betting games became effective, as discussed in our initiation note.

OPAP is among the larger social contributors (tax contributions, employment and charitable donations) in Greece operating under the WLA’s and responsible gaming standards, while it transforms its business excellence into a social contribution through an integrated corporate social responsibility (CSR) strategy. A summary of OPAP’s credentials is shown below.

Following his appointment as CEO effective from 1 January 2021, Jan Karas, who had been Acting CEO since June 2020, introduced his Fast Forward strategy in April 2021.

The strategy outlines six key areas, highlighted below, to be used as a general framework for continuing OPAP’s journey to providing world-class gaming entertainment to its customers in retail and online. The strategy continues the work of the previous CEO’s strategy, Vision 2020, which was introduced in 2016 and successfully executed. Enveloping the whole strategy is the company’s strong focus on corporate responsibility and responsible gaming, ensuring that OPAP remains the CSR leader in Greece.

OPAP’s board comprises 10 non-executive directors (including four independent directors) and three executive directors (chairman, CEO and CFO). Many of the board members are associated with OPAP’s major shareholder, Sazka Group, Europe’s largest lottery business.

The Greek gaming market is regulated by the Hellenic Gaming Commission (HGC) and a three-member supervisory committee is responsible for the supervision and exercise of preventive control over OPAP to protect the public interest. In 2014, the Greek State Council ruled that OPAP’s monopoly in Greek gaming was irrevocable and no appeal can be raised before a national or EU court.

The HGC estimates that the total Greek gaming market’s GGR amounted to €1.6bn in 2020, having dropped by 27.1% y-o-y due to the COVID-19 outbreak and its effect on retail business, of which OPAP’s land-based games (ie the numerical lotteries, sports betting and VLTs) comprised €904m (c 56% of the total). Legal online gaming comprised €588m (36% of total); land-based casinos (ie from 10 casino companies) €85m (5%); land-based state lottery games (ie operated by Hellenic Lotteries, majority owned by OPAP) €41m (3%); and land-based horse racing betting €6m (less than 1%). In total, management estimates OPAP’s total market share at 61% of GRR, without the online market share of Stoiximan. Online gaming is dominated by betting (61% of the total), with casino comprising 36% and poker comprising 3% of GGR.

OPAP estimates that in 2020 GGR per adult in Greece was €172, broadly in line with the European average of €173, while that of Cyprus is a little higher at €240. Given the longstanding cultural tendency to gamble in Greece, we note that Greece’s GGR as a percentage of GDP was 0.99%, the highest of the 27 EU countries; the average for all 27 countries was 0.53%.

HGC estimates that the Greek online gaming market grew 34.5% in 2020 to €588m GGR, although this is still far lower than other European countries (c 24.8% in 2019 according to Statista). Online gaming is dominated by betting (61% of the total), with casino comprising 36% and poker comprising 3% of GGR. Betting and poker have declined in importance (market share) in recent years at the expense of growth in casino.

Within the legal sports betting market, the market leader is Stoiximan with c 50% market share, and the main competitors are bet365 and Entain.

Following the HGC’s invitation to apply for online gaming licences in February 2020, OPAP submitted applications for each of the two available types of licence, Online Betting and Other Online Games in March 2020. The 24 operators that were granted temporary licences in 2011 were allowed to continue operating until 31 March 2020 before having to re-apply for the licences. Supplemental data was submitted in September 2020, and the HGC has not yet completed its assessment of suitability of the shareholders and persons that perform key operations of all of the applicants. The HGC has already granted online licences to OPAP and Stoiximan with go-live dates expected to be 1 August 2021. Under the current proposed regulations, the seven-year licences will cost €3m for sports betting and €2m for live casino and poker, the holders must pay a GGR tax of 35%, and there is no limit to the number of potential licences. The blacklisting of unlicensed operators will continue and licensees will be required to have a registered office in Greece or another EU country.

OPAP’s business model is predicated on continuing cash flow from the monopoly businesses, supplemented by product enhancements and growth from online. The main sensitivities to the business are:

OPAP’s financial results have been affected by COVID-19 related lockdowns and operating restrictions. In FY20 OPAP generated adjusted EBITDA (excluding associates and one-off items) of €263.6m in FY20, with a small deterioration in EBITDA margin of 220bp to 23.3% despite operating with no closures or restrictions for just 20% of the year. FY21 results will continue to be affected as the national lockdown that commenced in Greece on 7 November 2020, and part of Cyprus from 12 November, began to ease from mid-April, following partial re-openings in Q121.

In FY20 GGR declined by c 30% y-o-y to €1,129.8m, NGR by c 32% to €737.3m (higher taxes and levies on GGR due primarily to mix changes), gross profit from gaming operations by c 32% to €421.2m, and EBITDA by 36% to €263.6m. The EBITDA margin of 23.3% compared with FY19’s 25.5% and reflects the slightly lower gross margin and some expense deleveraging. OPAP’s definition of EBITDA differs slightly from our own, as it includes associate income (€18.2m) and one-off items (€21.5m cost), therefore using OPAP’s definition, EBITDA declined by c 37% to €260.3m, c 32% on a like-for-like (l-f-l) basis. Operating income of €232.7m was c 19% lower than FY19 due to higher impairment charges on fixed and intangible assets of €36.8m, and a one-off gain (on remeasurement of the previously held equity investment in Kaizen) of €142.7m. Excluding these one-off items, normalised operating profit fell by 51.5% to €232.3m. Reported PBT of €216.9m in FY20 declined by 19% y-o-y as the lower reported operating income was helped by higher associate income. A lower effective tax charge due to the above gain led to a 3% y-o-y decline in EPS to €0.614, but on a normalised basis EPS fell by c 53.3% to €0.321.

In Q121 GGR declined by c 47% y-o-y to €174.2m as the physical locations were closed for most of the period, NGR by c 51% to €105.6m, gross profit from gaming operations by c 38% to €75.6m, and adjusted EBITDA by 26% to €60.7m. The EBITDA margin of 34.9% compares with Q120’s margin of 25.0% and reflects the benefit of other income from the licence extension of €45.5m as well as the consolidation of Stoiximan.

The effects of the closures and operating restrictions on OPAP’s non-Kaizen GGR in FY20 are summarised as follows:

In FY20, OPAP’s physical locations were open and operating with no restrictions for only 72 days (c 20% of the year), therefore for c 80% of the year the locations were either closed or operating with restrictions such as shorter opening hours or restricted dwell times. When ‘open’ GGR increased in FY19 by €1.3m per ‘complete’ month. When in lockdown, the lost GGR per ‘complete’ month of closure was €130m, at the lower end of management’s initial estimated financial impact of COVID-19 of €130-140m per month.

Post the ending of lockdowns, we broadly assume that OPAP generates revenue in offline locations equivalent to 80% of FY19 levels in the first month of re-opening, with gradual monthly increases thereafter so that by the fifth month it achieves 100% of FY19 revenues.

For FY21, we forecast GGR growth of 40% due to the full year consolidation of Stoiximan, which contributes GGR of c €348m, as well as the underlying recovery post lockdowns. For FY22, we forecast a further 31% growth in GGR to €2,075m. For Lotteries, Sports Betting and Instant and Passives we forecast FY22 GGR to be marginally lower than FY19.

For FY21 and FY22 we forecast adjusted EBITDA growth of 118% and 34% respectively.

OPAP’s business model is very cash generative given the franchise structure, limited working capital and the fact that all licence payments have been made. Despite the disruption caused by COVID-19, the balance sheet remains robust.

At FY20, OPAP had gross debt of €1,041.9m, IFRS 16 lease liabilities of €57.7m and cash of €506.9m to give a net debt position of €591.7m, which equated to net debt/EBITDA of 2.4x, a higher ratio than the company’s recent history of 1.2–1.4x, mainly due to the negative effect of COVID-19 on OPAP’s financial results. In addition to the above, at the end of FY20, the company had short-term investments of €4.6m, giving an ‘adjusted’ net debt figure of €587.1m.

Compared to FY19, OPAP’s year-end cash position reduced by c €127m from €633.8m with the main drivers being lower operating cash flow (€186.4m vs €279.3m in FY19), M&A spend (€90.2m) and the payment of higher dividends (€214.7m vs €168.4m in FY19). Relative to NGR, OPAP’s operating cash flow generation in FY20 of 25.3% was broadly consistent with the prior year’s (25.7%), as the improved profitability was offset by an increase in working capital investment, higher interest payments and lower cash tax payments.

OPAP’s free cash flow (after interest and tax and including dividends received) for FY20 of €174.3m declined by just 30% y-o-y, in line with the decline in GRR but lower than the decline in NGR (32%) and EBITDA (36.9%).

At the end of Q121, OPAP’s gross debt position of €1,042.5m was broadly stable with the year-end debt position of €1,040.9m, and the net debt position including IFRS 16 had increased to €612.3m due to a total cash outflow of c €21m in Q121.

The recovery in underlying profitability, consolidation of Kaizen and more beneficial GGR levies will lead to strong growth in operating and free cash flow and an improving financial position. We assume further payments for Kaizen of €80m in FY21 and €50m in FY22. By the end of FY21 we forecast net debt (including lease liabilities) of €456m and €183m by the end of FY22.

We have performed a DCF valuation, with a terminal growth rate of 1.5% and a terminal EBITDA margin of 25% in 2031 to reflect the end of the concession in October 2030, which boosts the EBITDA margin to 37–38% during its term. We assume that OPAP pays €1bn between 2028 and 2029 to renew the Lotteries and Sports Betting licence beyond 2030. Using a WACC of 7.5% produces a value per share of €16.6. Our DCF valuation would equate to a P/E multiple for FY21e of 19.3x and FY22e of 12.8x, and dividend yields of 4.8% and 7.5%, respectively. Our WACC of 7.5% assumes a cost of equity of 8% comprised of a risk-free rate of 1%, risk premium of 7% and a Beta of 1.0 (source: Refinitiv) and a post-tax cost of debt of 2.6%. Exhibit 15 highlights the sensitivity of the DCF to changes in assumptions of the WACC and terminal growth rate.

Although OPAP is a listed gaming business, its business model is different from the other listed European gaming companies (ie they are not monopolies, mostly do not participate in lotteries, and usually are far more reliant on online revenues).

We consider La Francaise des Jeux to be OPAP’s closest peer given its exposure to lotteries and scratch cards. As OPAP begins to grow its online presence, the comparison with other peers could become more relevant. OPAP trades at a discount to the broader average on all multiples and offers a higher dividend yield.