Continuous product enhancement
OPAP’s portfolio of games is split between fixed-odds betting games and mutual betting games (where the total amount is distributed to winners). Numerical lotteries comprise c 50% of total revenues, with the contribution from other divisions (specifically VLTs) expected to steadily become more significant. Following the €145m investment into Stoiximan (online casino and sports betting), we have assumed this business will be fully consolidated from H219 (see below for more details). We show the separate line item in our forecasts, although this is likely to be included in sports betting in the future.
Exhibit 4: Gross gaming revenue split
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Source: OPAP, Edison Investment Research
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Numerical lottery games (50% of GGR): Moving online in FY19
Numerical lottery games comprise the largest portion of GGR and consist of six games. The fixed odds games are Kino, Super 3 and Extra 5 and the mutual games are Joker, Lotto and Proto. The two key games are Kino and Joker, which OPAP is planning to bring online during FY19.
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Kino was launched in 2003 and is still OPAP’s most successful game. Product enhancements are coming from both the new online platform as well as new Kino features (side bets) launched in late 2018. The Kino application will be rolled out across the whole SSBT estate in H119.
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Joker was launched in 1997 and is the best-known brand in the portfolio. In 20 years of operation, Joker has distributed over €1bn to first tier winners. Although the brand has slowly been waning over the years, OPAP is concentrating on rebuilding engagement. Similar to Kino, the aim is to attract new online players from FY19 onwards.
Sports betting (28% of GGR): New products and online to drive growth
Sports betting games include fixed odds games Pame Stoixima and Monitor Games and the mutual betting games Propo, Propogoal, Horse Racing Stoixima and Pame Stoixima Virtual Sports. The main game in this category is Pame Stoixima.
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Virtual sports were launched in April 2017 to target a younger demographic and have clearly contributed a boost to the betting segment, contributing 15% to sports betting revenues in FY17.
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SSBTs were launched in August 2017, with Virtual games introduced to the terminals in November 2017. In Greece, OPAP has 4,900 SSBTs across 2,170 shops and in Cyprus it has 765 SSBTs in 168 shops. Within the relevant agencies, SSBTs have already contributed over 20% to total betting turnover, demonstrating both the appeal of the product and the potential for future revenue growth.
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Online is currently a minimal contributor to OPAP’s GGR. As we discuss below, OPAP has recently relaunched its online sportsbook, offering competitive odds, live streaming, cash-out and a wide variety of betting events and markets. Additionally, through the €145m investment for a controlling stake in Stoiximan (Greece and Cyprus), OPAP is well positioned ahead of the expected regulation of the online market (possibly by Q419). See below for more details.
Instants and Passives (9% of GGR): Low growth, but steady business
OPAP holds a 67% stake in Hellenic Lotteries which has operated Passive and Instant lotteries since 2014. The three Passive brands are Laiko (weekly jackpot), Ethniko (using unique numbers) and State Lottery (the traditional draw game on New Year’s Eve). Instant lotteries include Scratch. Passive and Instant Lotteries are available at OPAP agencies and street vendors and Scratch games can be found at kiosks, post offices etc.
VLTs (13% of GGR): Pace of roll-out is key to growth
As part of its growth strategy, OPAP is rolling out 25,000 VLTs (certified retail slot machines), into ‘Play’ gaming halls and selected agencies. This ongoing investment in VLTs and 300+ new concept shops is one of the largest and fastest gaming store roll-outs in Europe, over one and a half years. The majority of the new Play stores will contain 30–50 machines, although OPAP is also opening 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 recently reduced FOBT stake limits in the UK. Importantly, unlike the traditional OTC games, players are required to register and there were 270,000 registered players at September 2018 (which helps populate OPAP’s database). In terms of demographics, 40% of VLT players are younger than 35 and 30% are women. Importantly for incremental revenues, 20% of all VLT players are new to OPAP. Apart from the general reliance on the macro environment, a key driver for the VLT business will be to shift revenues away from the illegal machines towards OPAP venues. OPAP is hopeful that its VLT jackpots in H119 will provide a suitable incentive for players to shift allegiance. See below for more details on illegal gaming.
19,000 VLTs by YE19, but GGR per VLT per day is slowing
The VLT product was officially launched in January 2017. Over the year, OPAP rolled out 10,000 machines with an anticipated 19,000 finalised by YE18 and 25,000 by YE19. At Q318, 16,043 VLTs were operational in 320 Play gaming halls and 1,762 agencies. At this stage, there are indications that VLTs in the Play gaming halls are performing better than within the agencies, although we believe it is too early to discern a long-term trend.
At Q318, VLTs generated €51m GGR, up from €16m in the prior year and from €46m in Q218. We note that GGR per VLT per day has declined from a high of €51 in Q417 to €40, suggesting the second batch of machines has experienced a more limited ramp up. However, we believe this metric should rise to c €45–50 in FY19 onwards.
Exhibit 5: Roll-out of VLTs
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Exhibit 6: VLT GGR performance
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Source: OPAP. Note: Q218 GGR/VLT/day excludes first three weeks of August (and would otherwise be 38)
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Exhibit 5: Roll-out of VLTs
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Exhibit 6: VLT GGR performance
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Source: OPAP. Note: Q218 GGR/VLT/day excludes first three weeks of August (and would otherwise be 38)
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Online strategy: Beginning in earnest in 2019
Unlike its other listed peers, OPAP’s online presence has been negligible to date and the company does not yet break-out online GGR. One of the reasons for the delay into online has been agents’ concerns about cannibalisation of retail revenues (and hence lower commission). However, following the migration of all games to the new IT platforms, OPAP is now focusing on providing an online option across many of its products, starting with online sports betting from late 2018 and also importantly an online offering for Joker and Kino in 2019.
Ahead of the upcoming regulation of the online market, OPAP has relaunched its online sports book (Pamestoixima.gr) in November 2018, which has more betting opportunities and competitive odds. OPAP has also announced a €145m investment for a controlling stake in the largest online sports player in Greece (as detailed below), which will be run independently from pamestoixima.gr and will clearly extend OPAP’s online presence.
€145m investment into Stoiximan: Leading online sportsbook operator
In September 2018, OPAP announced the acquisition of a 36.75% stake in TCB Holdings for €50m, followed by a further €94.9m investment in January 2019. As a result, OPAP will have a 69% controlling stake in TCB’s Greek and Cypriot operations and a 36.75% stake in the other markets.
TCB Holdings comprises two online gaming brands: Stoiximan in Greece and Cyprus and the Betano brand in Romania and Germany (and possibly Portugal). TCB’s online market share is 49% in Greece, 44% in Cyprus and 10% in Romania.
In FY17, Stoiximan reported GGR of €136m and EBITDA of €16m. The implied valuation for the deal is therefore 8.5x EV/EBITDA, which is in line with the international peer group.
The deal will enable OPAP to leverage the latest in digital technology, ahead of the anticipated regulatory changes in FY19, when operator licences for online sports betting, live casino and poker could be granted. We note that the deal is still subject to regulatory approval.
The deal will enhance OPAP’s presence in the Greek and Cypriot online sports betting markets but will be run independently from the existing business.
Given the 69% controlling stake in the key Greek and Cypriot markets, we have fully consolidated Stoiximan into our figures from H219, contributing €11m and €25m to EBITDA in FY19 and FY20. We note that the transaction has not yet concluded and thus there is no auditor’s approval on the consolidation method.
Cost structure: High GGR tax, but stable fixed costs
Within OPAP’s cost structure, the two major variable components are the GGR tax and agents’ commission. As discussed in more detail below, the GGR tax was raised from 30% to 35% in 2016. In terms of agents’ commission, OPAP has realigned the commission to reflect NGR rather than wagers. The company has also succeeded in maintaining stable operating costs, in the context of rising revenues, which has helped contribute to a steady increase in underlying EBITDA margins.
Continuing operating cost controls: Leading to higher EBITDA margins
As a direct result of OPAP’s ongoing cost controls, other operating costs have remained relatively stable since 2013 despite the commencement of several material projects (Hellenic Lotteries, Horse Racing, VLTs and Virtual Games). This has been the key reason for underlying EBITDA margin growth (ie excluding the additional 5% GGR tax) and we forecast relatively stable operating costs going forward (see pages 18-19 for further details).
Exhibit 7: Total operating costs (gaming operations only)
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35% GGR tax: At the top end of European taxes
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 tax was further increased to 35% (January 2016) and this is now at the very top end of gaming taxes across Europe. As a reference, other European gaming markets are levelling out at c 20% tax (eg 21% in UK from April 2019, 18% in Sweden, 20% in Spain, 20% in Denmark, 25% in Italy).
Franchise network, variable agents commission
OPAP operates via a franchise network of shops throughout Greece and Cyprus, paying commissions to agents and committing only limited resources to the kit-out of the shops. The company has recently renegotiated its agents’ commission structure and the dynamics of the estate have also altered.
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Rejuvenating the estate: in terms of the shops, OPAP has been gradually churning and rejuvenating its estate since renegotiating the agents’ commissions. As a result of the negotiations, c 15% of the network (500–600 shops) was closed, but OPAP has since opened 500 shops during 2018. About half of these were white-label stores to replace the closures, with the remainder being relocations/restorations of existing shops. At November 2018, OPAP had 3,902 stores, which compares to 4,367 in 2017. As discussed above, OPAP is also developing a new network of gaming Play stores for its VLTs and, at November 2018, there were already 331 Play shops across Greece.
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Agents’ commissions are now fully aligned with the business. For traditional games, agents previously received a variable fee based on wagers. However, the new commission structure has moved to a percentage of net gaming revenues, going from 39% in 2017 to 37% in 2018 and 36% from 2019 onwards. Assuming the same level of NGR, this equates to a €20–25m cost saving in 2019 versus 2017, although management notes the average growth in individual agents’ commission is 6%. For VLTs, the agents’ commissions are 36% in gaming galls and 25% of NGR within agencies.
Exhibit 8: Agents’ commission aligned with OPAP business objectives
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Concessions: Barrier to entry with possible tax upside
Key to OPAP’s strategy is that it holds exclusive concessions in all land-based gaming in Greece, apart from casinos. The core games exclusive licence has been extended until 2030, the Scratch tickets and Passives licence expires in 2026 and the Horse Racing licence expires in 2036. Additionally, the exclusive licence to operate 25,000 video lottery terminals (VLTs) in Greece expires in 2035. To date, OPAP has paid €1.43bn for these concessions.
Pre-paid taxes provide further upside
Τhe lottery and betting products concession was originally granted for the 2000–20 period. When extended in 2011 (for an additional 10 years up until 2030), a consideration of €375m was agreed. 80% of the €375m consideration paid (namely €300m or a future value of €1.8bn) corresponded to the prepayment of GGR contribution over 2021–30 based on projections for GGR performance for this period. OPAP will be also liable for the payment of a 5% duty post 2020. In 2030, at the end of the 10-year period, there will be a settlement between OPAP and the Greek State, depending on the nominal tax that will actually apply over 2021–30 (35% based on the current regime). In 2030, OPAP will either pay an additional consideration, which will be calculated and adjusted annually in the years 2020–30, or in the event that the settlement amount is negative, this will be paid by the Greek State back to OPAP.
This estimated €1.8bn is therefore the sum that the government is contractually bound to return to OPAP in 2030 (assuming that the GGR projections are correct). As we discuss in the valuation section, we estimate that the present value equates to c €650m or €2/share (if taken at face value). In our view, however, it is highly likely that the Greek government will seek to renegotiate, given the implications for the country’s coffers. We believe a more realistic outcome would be that OPAP is granted a further extension of the monopoly in lieu of reduced tax payments. This is clearly also a big positive, but falls outside our discounted cash flow calculation.
Exhibit 9: Concessions – secure backlog with long maturities
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Source: OPAP. Note: 1Total consideration of €190m paid by consortium (OPAP, Scientific Games, Intralot) of which €127m was paid by OPAP for its 67% stake.
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