OPAP — Significant new dividend commitment

The first-time consolidation of Stoiximan’s results from December 2020 complicates a straight comparison of OPAP’s Q221 reported results versus the prior year, as it was previously accounted for as an associate. In addition, comparison of the underlying results is affected by the differing level of COVID-19 related store closures and operating restrictions in the respective periods: Q220 was in the eye of the storm following the initial outbreak of the COVID-19 pandemic and during Q221, OPAP’s main assets, the retail network and street vendors, began to open/trade from 12 April 2021, followed by the Video Lottery Terminals (VLTs) on 24 May. Across the whole of H121, there were c 40% fewer trading days versus the prior year, with more closed days in Q121 than Q120, and vice versa for Q2.

On a reported basis (ie not adjusting for Stoiximan consolidation) Q221 revenue increased by 120% y-o-y to €396m, gross profit from gaming operations by 152% to €173m, and EBITDA (OPAP’s definition) almost eightfold to €143m (Q220 €16m). Note, OPAP’s definition of EBITDA includes associate profits (€0.7m in Q221) and exceptional items (negative €0.8m), which we typically exclude from EBITDA. While the items broadly offset each other in Q221, in Q220 they reduced OPAP’s EBITDA definition by €5.7m to €16.2m.

Excluding Stoiximan’s contribution, OPAP’s Q221 revenue increased by c 170% to €306m and H121 declined by 26% to c €376m. For H121, OPAP’s underlying EBITDA increased by 66% to €166m, the margin increased from 19.7% in the prior year to 44.0%.

It is apparent revenue has recovered relatively quickly post the end of lockdowns, given current revenue (from 1 June through 12 September) for land-based Lotteries and Sports Betting are marginally down (negative 0.9%) versus the same dates in FY19, whereas VLTs are just over 24% ahead of FY19 levels. Management attributes the recovery, in part, to its CRM and loyalty programmes.

OPAP’s online revenue, excluding Stoiximan, increased by c 60% y-o-y to €16m in Q221, but both OPAP and Stoiximan generated lower revenue in Q2 than Q1 due to the re-opening of land-based activities and lower betting margins below long-term averages. Management believes the declines from Q1 to Q2 were in line with the overall online market.

Stoiximan’s active (online) monthly players were broadly stable from Q1 (203k) to Q2 (202k), but OPAP saw more of a reduction, from Q1 (163k) to Q2 (145k), albeit the latter still represented y-o-y growth of five thousand customers, due to its land-based exposure.

With respect to levies and commissions, all ratios were as expected however the profitability of Instant & Passives remained burdened with a €25m (€50m annual pro rata) levy rather than the variable 30% (€11.1m Edison estimate), which remains subject to arbitration given OPAP’s lower revenue was due to mandatory government closures and restrictions because of COVID-19.

The higher absolute levels of revenue coupled with continued good control of costs and the new ‘other income’ accounting entry for the licence extension (€55.3m in Q221 and €100.8m in H121) delivered the improved EBITDA margin from Q1 to Q2. There were underlying declines of 11% for payroll expenses and c 6% for other operating costs, but marketing was ramped up as land-based activities re-opened and ahead of the UEFA European Championship. In aggregate, total operating costs increased by c 25%, due mainly to the consolidation of Stoiximan.

Following the payment of the dividend declared for FY20 of €0.55 per share, an interim dividend for FY21 of €0.1 per share has been declared, the first interim dividend declared since H118, at a level consistent with levels prior to COVID-19. The record date for the dividend is 20 October 2021, and there is a scrip alternative.

Management has updated its dividend policy, committing to dividend distributions that exceed net profit with a minimum dividend of €1 per share. The payout in excess of net profit, to reach the minimum €1 dividend per share or to pay special dividends, can be funded from the share premium account, which has consistently increased due to OPAP’s ‘attractive’ scrip dividend, and retained earnings. At H121 share premium and retained earnings at the company (ie not group) level were equal to €219m and €185m, respectively, a combined €404m, or €1.15 per share. Our prior DPS forecasts were based on distributions equivalent to the majority of underlying free cash flow and 50% of enhanced cash flow from lower licence payments. For FY21, we assume a dividend of €1 per share versus our prior estimate of €0.79 per share (a payout ratio of 120% on our EPS estimate of €0.83). For future years, we conservatively estimate a payout ratio of 100%.

The higher level of profitability fed through to a significant increase in operating cash flow (post interest and tax paid) to €161m from €37m in the comparative quarter. There was a broadly consistent level of working capital inflow on an absolute basis (€27m in Q221 versus €24m in Q220) despite the significantly higher revenues earned in Q221. The total investment in tangible and intangible assets in Q221 of €13m is consistent with our FY21 forecast of €45m, following minimal investment (less than €1m) in Q121. Therefore, the free cash flow generation led to an improvement in OPAP’s cash position, €617m at end H121 from €486m (Q121) and €507m (FY20). OPAP’s gross debt excluding IFRS 16 of €1,044m, and including IFRS 16 of €1,097m were practically unchanged from Q121 therefore the improved cash position led to net debt excluding/including IFRS 16 of €427m/€481m respectively. The company’s definition of net debt (€477m under IFRS 16) includes €4m of short-term investments.

Accompanying the results, management provided an update on the outlook for the Greek online gaming market following the recent award of licences and their aspirations for OPAP’s activities as it seeks to develop more online revenue.

The Greek online gaming market is expected to grow from €588m in 2020 to €1,182m in 2026, a CAGR of 12.3% versus 18.2% from 2013 to 2020 (Source: H2GC).

The Hellenic Gaming Commission has awarded seven-year online gaming licences to 15 operators (12 pre-existing operators and three new entrants), with go-live dates from August 2021. OPAP and Stoiximan both have a new casino and sports betting licence. The licences include a betting limit of €2 per click in online casino random number generator (RNG) games versus no limit previously, and there are no monthly betting or deposit limits as have been introduced in other countries. At the time of the results there was limited information as to how the betting limit is affecting customer behaviour. The online operators have requested the betting limit per click should be lifted to prevent customers moving from the regulated online market to illegal operators.

OPAP’s total online market share, including Stoiximan, is estimated to be 49% in FY20. Management doesn’t expect a significant increase in competition but over time it expects, as market leader, to cede some modest market share. In the long term it anticipates online revenue will represent a c mid-30’s percentage of OPAP’s total group revenue, from an estimated c 29% in FY21.

Management believes it has significant scope to further penetrate the online market by:

To achieve these aims, there will be a significant amount of product innovation to enhance and expand the games offer across sports, casino and lottery. As customers move online, management expects to gain more insight into customer behaviour and envisages better customer relationship management (CRM) and marketing to stimulate demand.

We trim our revenue and EBITDA forecasts for FY21 and FY22 and introduce forecasts for FY23.

For FY21 our forecasts for OPAP’s gaming activities and operating costs are unchanged but we reduce other operating income (telephony and e-money services) by €7m, which flows straight through to a reduction to our EBITDA forecast from €575m to €568m.

In FY22 we trim our revenue forecast by less than 2% (from €2,075m to €2,042m) due to modest reductions for Lotteries and Sports Betting, reduce other operating income as above in FY21 and increase personnel expenses and marketing expenses by a combined 6% to reflect the increased development of online games noted above. These lead to a reduction in our EBITDA forecast of c 4%, from €772m to €739m.

Our new forecast for FY23 includes revenue growth of 1% to €2,072m and relatively flat EBITDA versus FY22 of €740m. The key drivers of the growth in revenue are modest declines for land-based Lotteries and Sports Betting of c 1%, offset by further growth for online revenue of 10%.

Further down the P&L, we reduced the corporation tax rate by two percentage points (from 26% to 24%) to reflect the recent retrospective reduction in the Greek corporation tax rate to 22%. OPAP’s effective tax rate is typically two percentage points above the standard tax rate. We also increase the number of shares in issue to reflect the scrip dividend.

As highlighted above, our DPS forecasts for FY22 and FY23 represent a conservative 100% payout ratio.

The combination of the modest EBITDA downgrades and more shares in issue for the scrip dividend offsets the improved net debt position at H121 and lower expected tax rate to leave our DCF-based valuation of €16.6 per share unchanged.