My favorite Greek play

Greece is still not recovering. It will. Especially when they finally agree to write off part of the debt as IMF is repeatedly suggesting. My favorite Greek recovery play is OPAP. You get a 6.5% dividend yield for waiting and an upside from Greek recovery and from implementation of VLT machines

Until recently most analysis attributed no value to the VLT machines build up, due to low visibility. The visibility is now improving. See below just published research summary from Wood and Co.

*** OPAP: Greek non-financials top pick ***

We maintain our BUY rating on OPAP and increase our 12M price target (PT) to EUR 11.60/share (from EUR 10.00), due to: i) our forecasts increases; and ii) our WACC cut. First, we have increased our 2017-19E EBITDA forecasts by 1-7%, to factor in the new agents’ commission scheme, the details of which were announced together with the 4Q16 results. Second, following the recent EUR 200m bonds issue in March at 3.5%, barely half the Greek sovereign bond yield, we now consider our old WACC assumption of 11% as excessive. With respect to the multiples, despite the 50% rally since mid-2016, OPAP is still only trading at a 2018E EV/EBITDA of 7.1x, 29% below its peers’ average. Moreover, with a dividend yield of 6.6%, the stock is strongly ahead of its 4.4% peer average. Overall, despite the 50% rally since mid-2016, we still see OPAP’s risk/reward profile as appealing. OPAP remains our top pick within our Greek non-financial universe. To download the report, please click on the following link: Greece_Consumer Discretionary_OPAP_Update_12Apr2017.pdf, (504 KB)

New agents’ commissions should cut costs. Together with its 4Q16 results, OPAP announced the details of its new commission scheme, which has already been accepted by 90% of agents. Under the new arrangement, OPAP has replaced the old system, based on c.8% of wagers, with the share of NGRs easing from 39% in 2017 (triggering virtually no change in costs to ensure a smooth transition), to 37% in 2018E and to 35% +1% in 2019-21E. We estimate that the new set-up should save c.EUR 33m in 2019E. We have increased our EBITDA forecasts by 1% to EUR 308m in 2017E, 5% to EUR 409m in 2018E and 7% to EUR 469m in 2019E. Accordingly, we have upped our earnings and DPS forecasts by 8% for 2018E and 11% for 2019E.

EUR 200m bonds issue at half the Greek sovereign rate. In mid-March, OPAP issued EUR 200m of five-year bonds at a yield of 3.5%, which is barely half the Greek state 10-year bond yield. Interestingly, according to the company, the issue was more than 2x oversubscribed (total demand of EUR 421m). As a result, OPAP has not only improved the efficiency of its capital structure, but has also proved that our previous assumptions of a cost of debt of 9% (7% sovereign + 2ppts debt premium) and an effective WACC of 11% were inappropriate. To address both these issues, we have trimmed our cost of debt assumption to 3.5% and our WACC to 8.1%.

Our new PT of EUR 11.60/share offers 34% total return potential. Our valuation methodology is 50/50 based on our DCF model and our 2018E multiples. Adjusting for our higher forecasts and the WACC cut, our new DCF model implies a 12-month PT of EUR 11.70, up 25%, from EUR 9.40 previously. With respect to the multiples, despite the 50% rally since mid-2016, OPAP is still only trading at a 2018E EV/EBITDA of 7.1x, 29% below its peers’ average. Moreover, with a dividend yield of 6.6%, the stock is strongly ahead of its 4.4% peer average.

Risks. The major downside risks for our positive stance are: a deeper slowdown in the Greek economy; regulatory risks, especially in the case of VLTs; losing exclusivity to online gambling; and further GGR tax hikes.