OPAP — ‘Hefty’ retail recovery

OPAP (ASE: OPAP)

Currency in EUR

Last close As at 25/01/2023

EUR13.22

−0.13 (−0.97%)

Market capitalisation

EUR4,851m

Research: Consumer

OPAP — ‘Hefty’ retail recovery

OPAP’s Q222 results highlighted a continued strong recovery in revenue, profitability, helped by cost containment, and cash generation following the disruption caused by COVID-19-related lockdowns and restrictions. The growth was driven by its land-based activities (easier comparative), while its online revenues normalised (tougher comparative). A more cautious macroeconomic outlook led management to trim its FY22 EBITDA guidance by 4%. The company’s strong financial position means it is well placed to fund its attractive dividend profile.

Russell Pointon

Written by

Russell Pointon

Director, Consumer

Consumer

OPAP

‘Hefty’ retail recovery

H122 results

Travel and leisure

15 September 2022

Price

€13.26

Market cap

€4,777m

Net debt (€m) at 30 June 2022 post IFRS 16 (net debt pre IFRS 16: €73.4m)

26.3

Shares in issue

360.3m

Free float

50.2

Code

OPAP

Primary exchange

ASE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.2

(3.9)

(0.8)

Rel (local)

5.2

(5.5)

7.6

52-week high/low

€14.57

€11.81

Business description

OPAP was founded in 1958 as the Greek national lottery and is the exclusive licensed operator of all numerical lotteries, sports betting, instant & passives, VLTs and horse racing. It was listed in 2001 and fully privatised in 2013. Allwyn has a 49.8% stake and significant board representation.

Next events

Q322 results

22 November 2022

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 Q222 results highlighted a continued strong recovery in revenue, profitability, helped by cost containment, and cash generation following the disruption caused by COVID-19-related lockdowns and restrictions. The growth was driven by its land-based activities (easier comparative), while its online revenues normalised (tougher comparative). A more cautious macroeconomic outlook led management to trim its FY22 EBITDA guidance by 4%. The company’s strong financial position means it is well placed to fund its attractive dividend profile.

Year
end

GGR*
(€m)

EBITDA**
(€m)

EPS**
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/20

1,129.8

263.9

0.32

0.55

41.7

4.1

12/21

1,538.8

551.2

0.82

1.50

16.1

11.3

12/22e

2,000.5

697.0

1.19

1.19

11.2

8.9

12/23e

2,039.4

700.2

1.14

1.14

11.6

8.6

12/24e

2,079.4

708.8

1.17

1.17

11.3

8.8

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

Revenue growth and operational gearing

OPAP’s Q222 revenue growth of 12% y-o-y to €442m with operational leverage, mainly due to cost control, led to a more significant 16% growth in EBITDA to €167m, a margin of 37.7% versus 36.2% in Q221. On a like-for-like basis, EBITDA increased by c 19%. This followed the strong recovery that began in Q122. The strong profit growth fed through to higher free cash flow generation in absolute terms and relative to net gaming revenue (NGR). The resulting low net debt at the period end of €26m pre IFRS 16 liabilities enabled the declaration of a 10-year high interim dividend of €0.30/share (€0.1/share H121).

Management trims FY22 EBITDA guidance by c 4%

Increased macroeconomic uncertainty led management to reduce is revenue and EBITDA expectations for FY22 versus its guidance from the start of the year. The new FY22 guidance for EBITDA of approximately €700m (€720–740m previously) on GGR of approximately €2bn (€2.175–2.215bn previously) implies a higher margin of 35% (33% previously), recognising the good cost control to date. It includes the assumption of a typical seasonally stronger H2, which should benefit from the FIFA World Cup. Our new FY22 estimates are in line with management’s new guidance.

Valuation: Prospective dividend yield of 8.9%

Our DCF-based valuation reduces to €15.9/share (€18.3 previously) as we incorporate a higher estimated WACC of 8.0% (7.5% previously) due to higher bond yields of 4.2% (3% previously), the modest reduction in our estimates and a higher number of shares following the scrip dividend. Despite being one of the few gaming companies to generate a positive share price return over the last 12 months, OPAP continues to trade at a significant discount to its peers while offering a superior prospective dividend yield of 8.9%.

Q222 results: ‘Hefty’ improvement in retail activities

Income statement: Revenue recovery and operational gearing

OPAP’s GGR increased by c 12% y-o-y to €442m in Q222, which led to a slightly higher increase in NGR of +13% y-o-y to €304m, and EBITDA of +16% y-o-y to €167m, a margin of 37.7% versus 36.2% in Q221. On a like-for-like basis, EBITDA increased by c 19%. Note that our definition of EBITDA differs slightly to that of the company’s as we exclude the associate contribution (a loss of €0.4m) and one-off costs of €0.2m. There was a modest increase in the net finance charge, mainly due to the remeasurement of the discounting of interest receivable on the licence extension income. The effective tax rate reduced to 24.6% (from 27.1% in Q221) as a result of the phasing of profitability and varying tax rates of the different jurisdictions in which OPAP’s businesses are registered (Greece, Cyprus and Malta).

The above follows the very strong recovery in Q122, which enjoyed a much easier comparative due to COVID-19-related restrictions, to give H122 GGR growth of 58% to €899m, NGR growth of 65% to €617m, and EBITDA growth of 64% to €336m. On a like-for-like basis, EBITDA grew by c 64%. OPAP has demonstrated good operating leverage through the recovery to date, with good cost control. The strong profit performance and improved financial position (see below) enabled a significant, ie threefold, increase in the declared interim dividend to a 10-year high of €0.30/share.

Exhibit 1: Summary income statement

€m

Q121

Q221

H121

Q122

Q222

H122

Gross gaming revenue (GGR)

174.2

395.9

570.1

457.2

442.1

899.3

Growth y-o-y

(46.9%)

120.4%

12.2%

162.5%

11.7%

57.7%

GGR contribution and levies

(68.6)

(127.8)

(196.4)

(144.6)

(138.1)

(282.7)

As % of GGR

39.4%

32.3%

34.5%

31.6%

31.2%

31.4%

Net gaming revenue (NGR)

105.6

268.0

373.7

312.6

304.0

616.7

Growth y-o-y

(51.4%)

127.4%

11.5%

195.9%

13.4%

65.0%

As % of GGR

60.6%

67.7%

65.5%

68.4%

68.8%

68.6%

Payroll expense

(18.6)

(17.9)

(36.5)

(20.2)

(19.9)

(40.1)

Growth y-o-y

(6.0%)

0.6%

(2.7%)

8.5%

11.1%

9.8%

As % of GGR

10.7%

4.5%

6.4%

4.4%

4.5%

4.5%

Marketing

(16.0)

(28.3)

(44.4)

(23.3)

(22.6)

(45.9)

Growth y-o-y

27.2%

162.3%

89.5%

45.2%

(20.1%)

3.5%

As % of GGR

9.2%

7.2%

7.8%

5.1%

5.1%

5.1%

Other operating expenses

(29.8)

(40.5)

(70.3)

(45.0)

(40.5)

(85.5)

Growth y-o-y

N/A

N/A

N/A

51.0%

(0.1%)

21.6%

As % of GGR

17.1%

10.2%

12.3%

9.8%

9.2%

9.5%

Operating income - licence extension

45.5

55.3

100.8

56.6

56.4

113.0

EBITDA (Edison)

60.7

143.5

204.3

166.3

167.5

333.8

Margin

34.9%

36.3%

35.8%

36.4%

37.9%

37.1%

Growth y-o-y

(25.9%)

557.4%

96.9%

173.9%

16.7%

63.4%

Associates

0.1

0.7

0.8

2.7

(0.4)

2.3

One-offs

0.6

(0.8)

(0.2)

(0.1)

(0.2)

(0.4)

EBITDA (OPAP)

61.3

143.5

204.8

168.8

166.9

335.7

Margin

35.2%

36.2%

35.9%

36.9%

37.7%

37.3%

Growth y-o-y

(29.0%)

787.9%

99.8%

175.2%

16.3%

63.9%

Net finance costs

(11.0)

(10.5)

(21.5)

(15.5)

(11.9)

(27.4)

Reported profit before tax

14.2

97.1

111.0

119.5

102.6

222.1

Tax

(5.0)

(26.3)

(31.3)

(29.6)

(25.2)

(54.8)

Effective rate

34.9%

27.1%

28.2%

24.8%

24.6%

24.7%

Reported profit after tax

9.2

70.7

79.8

89.9

77.4

167.2

Growth y-o-y

N/A

N/A

N/A

874.7%

9.4%

109.7%

Dividend per share (€)

0.10

0.30

Source: OPAP

OPAP’s revenue growth was driven by the ‘hefty’ and ongoing recovery in OPAP’s retail, ie land-based activities, which increased GGR by over 20% y-o-y to €347m from €289m, as all COVID-19-related operating restrictions in Greece were removed by the end of the period. Having been a key beneficiary of the operating restrictions that negatively affected the retail-based activities to varying degrees in H120 and H121, OPAP’s online revenue declined by 10% to €96m, a trend that is consistent with other gaming companies that have a mix of online and offline activities. OPAP and Stoiximan both increased the number of active players in Q222 versus the comparative period.

Exhibit 2: Online GGR by brand (€m)

Exhibit 3: Active monthly online players (‘000s)

Source: OPAP

Source: OPAP

Exhibit 2: Online GGR by brand (€m)

Source: OPAP

Exhibit 3: Active monthly online players (‘000s)

Source: OPAP

By the end of H122, OPAP’s total GGR of €899m was 15% ahead of pre-COVID-19 levels, ie H119. Its new online revenues, primarily following the consolidation of Stoiximan, are greater than the decline experienced by the majority of the retail-focused activities, Lottery, Sports Betting and Instant & Passives, over this period.

Exhibit 4: OPAP’s gross gaming revenue

€m

H119

H120

H121

H122

H122 v H119

Gross gaming revenue

779.6

507.9

570.1

899.3

15%

Growth y-o-y

(35%)

12%

58%

Lottery

379.3

257.5

186.9

335.1

(12%)

Growth y-o-y

(32%)

(27%)

79%

% of total

49%

51%

33%

37%

Sports Betting

191.9

128.4

89.7

177.4

(8%)

Growth y-o-y

(33%)

(30%)

98%

% of total

25%

25%

16%

20%

Instant & Passives

68.5

33.6

37.1

50.0

(27%)

Growth y-o-y

(51%)

10%

35%

% of total

9%

7%

7%

6%

VLTs

139.9

88.4

36.1

143.9

3%

Growth y-o-y

(37%)

(59%)

N/A

% of total

18%

17%

6%

16%

Online Betting

0.0

0.0

124.2

109.2

N/A

Growth y-o-y

N/A

N/A

(12%)

% of total

0%

0%

22%

12%

Other Online Games

0.0

0.0

96.0

83.7

N/A

Growth y-o-y

N/A

N/A

(13%)

% of total

0%

0%

17%

9%

Source: OPAP

The sole land-based revenue source that is ahead of pre-COVID-19 levels is Video Lottery Terminals (VLTs), which has benefitted from the addition of new machines with more games, and management expects it to be a good source of future growth. VLTs have continued to demonstrate sequential month-on-month growth from June through August despite the more challenging macroeconomic conditions.

Management has been active in developing its product offering and technology/interfaces to improve the number of customer interactions and add incremental revenue.

The expansion in OPAP’s EBITDA margin to 37.7% in Q222 reflects a combination of lower GGR contribution and other levies and duties (110bp), marketing expenses (210bp) and other operating expenses (110bp), all relative to GGR. These were offset by a lower contribution from other operating income that derives from the licence extension (120bp). The relative reduction in GGR contribution and other levies and duties was a function of changes in revenue mix – each source of revenue is subject to differing levels of levies and commissions. Marketing expenses reduced by 30% like-for-like as the prior year included extra spend to support the reopening of retail locations post COVID-19 lockdowns and the UEFA Euro competition. Operating income from the licence extension increased by 2% in absolute terms from €55m in Q221 to €56m in Q222. Its lower relative contribution reflects the growth in revenue from sources outside the scope of the licence which covers Lottery and Sports Betting.

Cash flow and balance sheet: Limited net debt at period end

OPAP’s free cash flow generation improved on an absolute basis (€271m in H122 vs €128m in H121) and relative to OPAP’s NGR (44% in H122 vs 34% in H121), due to its higher profitability and a more favourable, ie less negative, working capital outflow. The free cash flow helped to fund an earnout payment for Stoiximan (€106m) and the repayment of borrowings excluding leases (€210m) with a resulting lower period-end cash balance of €810m (€860m end-FY21). With lower gross debt of €887m at the period end (€1,098m end-FY21), OPAP’s net debt (excluding IFRS 16 liabilities of €47m) was minimal at €26m at the end of H122.

Management’s FY22 guidance trimmed: More cautious macroeconomic outlook

In recognition of the more uncertain economic outlook, management trimmed its FY22 EBITDA guidance by c 4% to approximately €700m from the mid-point of the prior range of €720–740m. The new guidance implies a higher EBITDA margin (35%) on reduced revenue expectations (approximately €2bn) versus the previously guided margin (c 33%) on higher revenue expectations (€2.175–2.215bn). The new guidance implies y-o-y revenue growth of c 30% and EBITDA growth of c 27% versus FY21. It includes the assumption of a typical seasonally stronger H2, which should benefit from the FIFA World Cup.

We reduce our FY22 estimates to be in line with management’s new guidance and maintain our prior estimates for revenue growth rates for FY23 and FY24. Further down the income statement, we have adjusted the number of shares to incorporate those issued (7.4m shares) in August 2022 for the scrip alternative for the H221 dividend.

Valuation

Our lower DCF-based valuation of €15.9/share (€18.3 previously) reflects an increase in our estimated WACC to 8.0% from 7.5% previously to reflect a higher Greek 10-year bond yield of 4.2% (3% previously), as well as the c 3% reduction in our FY22 EBITDA estimates and subsequent reductions beyond FY22, and the higher number of shares. The sensitivity of the valuation to changes in WACC and terminal growth rate assumptions is shown below.

Exhibit 5: DCF sensitivity (€/share)

Terminal growth rate

0.5%

1.0%

1.5%

2.0%

2.5%

WACC

10.50%

11.6

11.8

12.1

12.4

12.7

10.00%

12.1

12.4

12.7

13.0

13.4

9.50%

12.7

13.0

13.3

13.7

14.2

9.00%

13.3

13.7

14.1

14.6

15.1

8.50%

14.0

14.4

14.9

15.5

16.2

8.00%

14.8

15.3

15.9

16.6

17.4

7.50%

15.7

16.3

17.1

17.9

19.0

7.00%

16.8

17.5

18.4

19.5

20.8

6.50%

18.0

19.0

20.1

21.4

23.1

6.00%

19.5

20.7

22.1

23.8

26.1

Source: : Edison Investment Research

OPAP’s share price has performed very well versus its peers during the last 12 months, as they have suffered from slowing rates of growth and/or increasing regulation uncertainty. Despite the outperformance, OPAP’s share price continues to trade at a discount to peers on most valuation measures and offers a superior dividend yield.

Exhibit 6: Peer group valuation table

Company

Year end

Share price (local ccy)

Ccy

Market cap (€m)

Share price change 1 year %

Sales growth CY22 (%)

Sales growth CY23 (%)

EBIT mgn CY22 (%)

EBIT mgn CY23 (%)

EV/ EBIT CY22 (x)

EV/ EBIT CY23 (x)

P/E CY22 (x)

P/E CY23 (x)

Div yield CY22 (%)

Div yield CY23 (%)

888 Holdings

Dec

126.3

GBP

645

(68)

116

4

9.9

12.4

1.8

1.4

7.6

5.4

0.0

0.7

bet-at-home.com

Dec

6.5

EUR

45

(75)

N/A

(5)

0.4

2.5

24.9

3.8

215.0

40.3

0.0

0.0

Betsson

Dec

68.4

SEK

768

(10)

13

10

14.1

14.0

7.5

6.8

9.6

9.0

5.3

5.6

Entain

Dec

1,258

GBP

8,479

(34)

11

8

13.9

17.4

15.9

11.9

20.7

13.7

1.4

1.8

Flutter Entertainment

Dec

10,710

GBP

21,568

(26)

21

17

10.7

14.3

28.3

18.0

40.6

22.8

0.4

1.7

La Francaise des Jeux

Dec

33.1

EUR

6,271

(25)

6

4

18.4

18.8

14.0

13.2

19.6

18.3

4.2

4.5

Kindred Group

Dec

94.3

GBP

1,986

(40)

(15)

20

7.7

13.3

21.2

10.1

25.1

11.8

2.9

4.5

LeoVegas (publ)

Dec

60.9

SEK

553

70

10

11

8.5

9.7

16.6

13.2

16.9

13.7

3.1

3.6

Rank Group

Jun

80.5

GBP

432

(52)

43

11

9.2

10.3

10.9

7.5

6.9

5.6

4.5

5.5

Average excluding bet-at-home.com

26

11

11.6

13.8

14.5

10.3

18.4

12.5

2.7

3.5

OPAP

Dec

13.4

EUR

4,828

9

30

2

28.8

27.5

8.5

8.7

11.3

11.7

8.9

8.5

OPAP premium/(discount) to average

17%

(82%)

150%

100%

(41%)

(15%)

(39%)

(6%)

224%

143%

Source: Refinitiv, Edison Investment Research. Note: Priced 12 September 2022.

Exhibit 7: Financial summary

€m

2020

2021

2022e

2023e

2024e

31-December

ISA

ISA

ISA

ISA

ISA

INCOME STATEMENT

Revenue

 

 

1,129.8

1,538.8

2,000.5

2,039.4

2,079.4

NGR

 

 

737.3

1,043.9

1,360.6

1,385.0

1,409.9

Cost of Sales

(672.7)

(883.7)

(1,170.1)

(1,192.7)

(1,212.9)

Gross Profit

457.1

655.2

830.4

846.8

866.6

Other Income

42.5

217.4

237.9

237.4

236.8

EBITDA

 

 

263.9

551.2

697.0

700.2

708.8

Operating profit (before amort. and excepts.)

 

147.2

408.6

576.6

561.0

569.6

Impairments

(36.8)

(4.7)

(18.8)

0.0

0.0

Exceptionals

121.2

(0.5)

41.8

0.0

0.0

Share-based payments

0.0

(2.2)

(2.2)

(2.2)

(2.2)

Reported operating profit

231.6

401.3

597.4

558.9

567.4

Net Interest

(33.5)

(43.6)

(28.5)

(24.0)

(19.0)

Joint ventures & associates (post tax)

18.3

(0.4)

4.0

0.0

0.0

Profit Before Tax (norm)

 

 

132.0

364.6

552.1

537.0

550.6

Profit Before Tax (reported)

 

 

216.4

357.3

572.9

534.9

548.4

Reported tax

(17.3)

(96.4)

(121.5)

(118.1)

(121.1)

Profit After Tax (norm)

100.3

284.4

430.7

418.9

429.5

Profit After Tax (reported)

199.1

260.9

451.5

416.7

427.3

Minority interests

6.1

(1.4)

(7.5)

(8.4)

(9.7)

Net income (normalised)

106.4

282.9

423.2

411.5

421.8

Net income (reported)

205.2

259.4

444.0

408.3

417.6

Average Number of Shares Outstanding (m)

334

344

357

360

360

EPS - normalised (c)

 

 

31.83

82.28

118.68

114.21

117.06

EPS - normalised fully diluted (c)

 

 

31.83

82.28

118.68

114.21

117.06

EPS - basic reported (€)

 

 

0.61

0.75

1.25

1.13

1.16

Dividend (€)

0.55

1.50

1.19

1.14

1.17

Revenue growth (%)

(30.3)

36.2

30.0

1.9

2.0

Gross Margin (%)

40.5

42.6

41.5

41.5

41.7

EBITDA Margin (%)

23.4

35.8

34.8

34.3

34.1

Normalised Operating Margin

13.0

26.6

28.8

27.5

27.4

BALANCE SHEET

Fixed Assets

 

 

1,806.4

1,695.0

1,685.4

1,569.1

1,452.7

Intangible Assets

1,578.9

1,476.0

1,491.3

1,391.6

1,292.0

Tangible Assets

127.5

105.6

88.9

72.2

55.5

Investments & other

100.0

113.4

105.2

105.2

105.2

Current Assets

 

 

629.1

1,007.5

830.8

829.7

845.5

Stocks

6.2

4.7

6.1

6.2

6.3

Debtors

68.5

90.9

120.0

122.4

124.8

Cash & cash equivalents

506.9

860.4

653.1

649.6

662.8

Other

47.6

51.6

51.6

51.6

51.6

Current Liabilities

 

 

(366.1)

(571.5)

(623.3)

(627.6)

(632.0)

Creditors

(149.4)

(168.2)

(220.1)

(224.3)

(228.7)

Tax and social security

(27.8)

(60.7)

(60.7)

(60.7)

(60.7)

Short term borrowings

(40.7)

(62.5)

(62.5)

(62.5)

(62.5)

Other

(148.2)

(280.2)

(280.2)

(280.2)

(280.2)

Long Term Liabilities

 

 

(1,286.7)

(1,181.7)

(1,008.3)

(892.7)

(774.9)

Long term borrowings

(1,057.9)

(1,035.2)

(825.2)

(675.2)

(525.2)

Other long-term liabilities

(228.8)

(146.5)

(183.1)

(217.5)

(249.7)

Net Assets

 

 

782.7

949.4

884.6

878.5

891.3

Minority interests

(41.1)

(38.5)

(41.9)

(46.3)

(51.9)

Shareholders' equity

 

 

741.6

910.9

842.7

832.3

839.4

CASH FLOW

Op Cash Flow before WC and tax

263.9

553.4

699.1

702.4

711.0

Working capital

(34.8)

21.1

21.3

1.8

1.9

Exceptional & other

4.5

(4.5)

34.4

32.2

30.1

Tax

(12.1)

(46.1)

(121.5)

(118.1)

(121.1)

Operating Cash Flow

 

 

221.4

523.9

633.4

618.3

621.8

Net interest

(32.5)

(30.1)

(28.5)

(24.0)

(19.0)

Capex

(18.9)

(24.2)

(25.0)

(25.0)

(25.0)

Acquisitions/disposals

(90.2)

(19.0)

(115.0)

0.0

0.0

Equity financing

(0.1)

(0.2)

0.0

0.0

0.0

Dividends

(214.7)

(91.0)

(512.1)

(418.8)

(410.5)

Net new borrowings

(12.1)

0.5

(210.0)

(150.0)

(150.0)

Other

20.0

(6.3)

49.9

(4.1)

(4.1)

Net Cash Flow

(126.9)

353.5

(207.3)

(3.5)

13.2

Opening cash

 

 

633.8

506.9

860.4

653.1

649.6

Closing cash

 

 

506.9

860.4

653.1

649.6

662.8

Closing net debt/(cash)

 

 

591.7

237.3

234.6

88.1

(75.2)

Source: OPAP, Edison Investment Research

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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

General disclaimer and copyright

This report has been commissioned by OPAP and prepared and issued by Edison, in consideration of a fee payable by OPAP. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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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Loop Energy’s patented PEM fuel cell technology has a leading combination of fuel efficiency, power density and durability, resulting in an attractive total cost of ownership (TCO), providing the company with a competitive advantage. This is supported by a recent transformational commercial order with electric truck maker Tevva, won via a competitive tender process. Loop Energy is targeting disruptors and early movers in electrification of the return-to-base fleet segment of road transport, which should help it to ramp up sales and drive down costs relatively quickly. We consider only the truck and bus markets, which are a portion of the company’s total addressable market, and estimate a US$4bn market in 2030 and a c US$60bn market by 2050. Our DCF valuation for Loop Energy implies C$4.5/share at a 15% cost of capital, which is more than double the current share price. This increases sharply as the investment case de-risks.

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