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OPAP SA


mpauls
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You're all intelligent enough to recognize the obvious risks involved in Greece, so I'll just provide the numbers.

 

Summary Data

http://mattpauls.com/opap/opapsum.png

 

Income Statement

http://mattpauls.com/opap/opapIncome.png

 

Balance Sheet

http://mattpauls.com/opap/bal1.png

http://mattpauls.com/opap/bal2.png

 

Other

http://mattpauls.com/opap/totals.png

 

 

(For those interested) Comps

http://mattpauls.com/opap/comps.png

 

 

Total % Change 2005-2009

Earnings      30%

Price          -65%

 

 

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OPAP operates a monopoly in the gaming industry (mostly lottery and sports gambling).  The Greek government owns 30%, which is why they pay-out almost everything to shareholders via dividends.  The Greek gaming market is about to expand to allow online gambling.  OPAP will capture most if not all of this market, which will consist of former customers lost in recent years to illegal online gambling.

 

 

Average 10-year Return on Equity is 100%.  OPAP has no debt...

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Nice find. It seems like there are three risks to OPAP:

 

1. The state could start increasing their windfall tax against the company. Greece needs tax revenues and here is one area where they are clearly getting revenues. Even though they own 30%, a windfall tax and dividend payments still result in the money going to the same place -- the Greek gov. So I don't see why they would not increase the tax from the current 10% to a higher rate.

 

2. The possibility of them not receiving their renewed monopoly. I will assign this a low probability, just because they seem so dependent upon tax revenues and any disruption to that could be problematic.

 

3. If austerity measures do not pan out for Greece, the Greek sovereign bonds on their balance sheet could fall and if Greece has to leave the EU, the currency/dividends you are paid in could severely decline due to the process from Euros to whatever the Greek currency is.

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Other info:

 

OPAP Background

 

OPAP S.A. (The Greek Organization of Football Prognostics) operates the lottery and sports betting games of Greece and Greek Cyprus.  The company was founded as a state-owned company in 1958.  It was reorganized in 2000 and also also a 20-year license as the sole operator of these games in Greece.  It went public on the Athens Stock Exchange in 2001, with the Greek government owning an approximate 34% stake in the company.  

 

As of 2007, OPAP controlled about 50% of the overall gaming market in Greece (including legal and illegal gaming).  OPAP has a right of first refusal on any new games offered or legalized by the Greek government until 2020.  Its most popular games are Stihima and Kino.  

 

Current Greek Financial Crisis

 

On May 9, 2010, Europe’s Finance Ministers approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility.  

 

On May 2, 2010, a loan agreement was reached between Greece, other EU members and the International Monetary Fund (“IMF”), consisting of an immediate 45 billion Euro loan provided in 2010, with more funds available later and totaling 110 billion Euros.  The terms of the loan include a 5% interest rate and specific and severe austerity measures which Greece has promised to abide by.  Including in these austerity measures is the proposed selling off of government held shares of public companies, like OPAP, to raise funds to pay for national debt.  However, the Greek government has expressed their interest in retaining their current level of OPAP ownership primarily because OPAP is one of their few assets which generates a healthy profit for them.

 

Political & Regulatory Risks

 

Competition risk.  March 2009, European Parliament adopted overwhelming majority resolution calling for solution to online gaming regulation at the  national level.  An EU inquiry was launched in 2009 into OPAP’s monopolistic status in the Greek gaming market.  The Greek government referred this inquiry to the European Court of Justice (“ECJ”).  The ECJ has not addressed this referral yet; however, the ECJ has ruled in favor of a Portuguese company similarly situated in Portugal as OPAP is in Greece.  There was a similar ruling for a Swedish company by the ECJ.  Overall, signs point to the EU continuing to inquire into monopolistic national gaming operators with the hope of slowly chipping away at their monopolies.  Also, the EU appears to have a long term desire of taking away from nations their domestic right to regulate gaming.  However, it is doubtful this will occur before OPAP’s current contract with the Greek government expires in 2020.  This reinforces our view that future earnings calculations for OPAP should be made only until 2020 to be conservative.  

 

Current bans on online gaming have hurt OPAP’s business because OPAP faces a formidable competitor in online illegal gaming.  It is estimated that illegal, online gaming in Greece generates revenue amounts comparable to OPAP’s top line numbers.    This means that OPAP only controls half of the market share (50%) despite having a legal monopoly.  The Greek government has indicated that it plans to tackle this issue and signs indicate they may do so by legalized forms of online gambling so that OPAP can compete with the illegal operators.  OPAP’s legitimacy as a legal business sanctioned by the Greek government will attract players of the illegal games.  Of course, some people will continue to play the illegal games mainly because the illegal games offer higher pay-outs.  

 

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What is €300,000,000 a year for 10 years worth to you today?

 

I think this is a good way to think about OPAP.

 

Companies in the business of selling annuities, as of August 2, 2010, will provide €300,000,000 annually for 10 years at a cost of €2,514,000,000. Depending how well you're able to compound capital, €300,000,000 may be worth way more than €2,514,000,000 to you. All else equal, if you can reinvest at 10% annually over the period, the income stream reasonably commands a value of €3,439,000,000 This also assumes OPAP is worthless at the end of the period.  To put this into context, OPAP earned an average of €572,000,000 over the last 5 years.  Were OPAP only able to earn $430,000,000 annually, assuming a 30% tax on distributed earnings, US investors would effectively earn €300,000,000.  

 

Currently OPAP sells for €3,688,500,000.

 

 

 

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  • 4 weeks later...
  • 4 years later...

Bumping this old topic.

 

OPAP down another 5% today. How do people here think about the risk of a possible currency devaluation for Greece? I think for companies like Intralot the effect would be much smaller as the get 95% of their revenue outside of Greece. But OPAP is a pure Greek play and outside investors might suffer some serious consequences in a devaluation.

 

After going to Athens earlier this year, I'm reasonably confident however that gambling is the national sport and that revenues won't plummet even if the crisis worsens. And what if things improve 5-10 years out? You'd own a great moat (legal) monopoly company with a big dividend and a nice capital gain.

 

 

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So market cap is 780m with a net cash position. And they made 140m last year, so a PE of 5.5?

 

It looks like revenue and op profit was up, but taxes were also up. So it could potentially be cheaper then a PE of 5. Probably best to wait this one out and hope for a PE of 2-3x? Could get ugly if they leave the euro.

 

What is interesting is that they had 250m debt in 2012 and 45m this year. And it is a cash flow machine. So you get dividends every year which reduces risk.

 

So if they go strong for 1-2 years they could pay 300m in dividends, and there would be little risk after that because they are unlevered.

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