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CFA Institute Research Challenge Hosted by
CFA Society Greece
Athens University of Economics and Business
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 1
Athens University of Economics and Business Consumer Discretionary Sector, Consumer Services Industry Accounting and Finance Department Athens Stock Exchange This report is published for educational purposes only by students competing in the CFA Research Challenge OPAP S.A.
Reference Date: 31/1/2017 Ticker: OPAP:GA (Bloomberg)
Recommendation: BUY
Target Price: €10.73
Current Price: €8.2
Upside Potential: 30.8%
Executive Summary
Valuation Results
We issue a BUY recommendation on OPAP S.A. with a target price of €10.73,
implying a 30.8% upside potential from the current price. To calculate the above
target price we have used the Discounted Free Cash Flows to the Firm model and
have also performed Residual Income Valuation resulting to €10.30 target price, to
further substantiate our recommendation. Peer Group Analysis provided that OPAP
is 25% discounted compared to peers implying a target price of €10.98.
Robust Business Model
OPAP is the leading company in the Greek Gaming Market with a 72.7% market
share and controls the widest commercial network in Greece with 10,311 POS. The
game diversity is outstanding as OPAP holds 4 exclusive licenses to operate 14
different games. The regulatory framework prevents potential rivals from entering
the gaming market and provides OPAP with a significant comparative advantage
under a fully protected environment.
VLTs to maximize growth potential
The Video Lottery Terminals (VLTs) project is expected to dramatically boost the
robustness of the company with a 10% estimated 5Y GGR CAGR. The exclusive
license provided by the Hellenic Gaming Commission, allows OPAP to launch
35,000 VLTs throughout the country by 2019.
Impressive efficiency drives profitability
The expected high VLT driven revenue growth combined with asset depreciation
and minimum CAPEX requirement rapidly increases the efficiency, as measured by
asset turnover, from 0.8x in (FY2016) to 1.7x in (FY2021), causing expected ROE
to surge from 13.80% in (FY2016) to 31% in (FY2021).
Strong FCF generation which is paid out as dividends
OPAP’s elevated amortization (over €100 million), is expected to push FCF Yield
from 5.75% (FY2016) to 15.1% (FY2021), exceeding reported net profit. Taking
into account the over €1 billion in retained earnings, OPAP’s Dividend Yield is
estimated to grow from 8.8% (FY2016) to 11.3% (FY2017), aligned with
management’s intention to distribute the generated FCFs as dividends.
Mild-impact Investment Risks
The most important risk for OPAP is the highly unstable macroeconomic
environment. In case of a stagnation in the Greek economy (assumption of a
constant Caa3 Moody’s sovereign credit rating), the valuation derives a target price
of €8.52. The results of the Monte Carlo Simulation performed on our FCFF model,
strongly supported our BUY recommendation with a 87% probability and a
minimum target price of €8.54 in a 90% confidence interval.
Market Data
Market Cap. €2,647M
Shares Outstand. 318,112,195
52wk price range €5.4 – €8.9
Avg daily volume 564,131
Free Float 62%
Important Terms
GGR: Gross Gaming Revenue
NGR: Net Gaming Revenue
VLT: Video Lottery Terminal
2015A 2016* 2017E 2018E 2019E 2020E 2021E GGR (€ thousand) 1.399.671 1.391.490 1.501.910 1.839.766 2.117.878 2.248.611 2.235.980 GGR Growth Rate (%) 1,6% -0,6% 7,9% 22,5% 15,1% 6,2% -0,6% EBITDA (€ thousand) 377.102 278.549 327.200 407.764 471.825 502.806 499.635 EBITDA Margin (%) 26,9% 20,0% 21,8% 22,2% 22,3% 22,4% 22,3% Net Income (€ thousand) 209.900 144.797 171.396 209.707 241.964 272.864 244.995 EPS Growth (%) 5.4% -31.0% 21.8% 21.7% 15.0% 12.5% -10.0%
P/E 12,5 18,0 15,2 12,5 10,8 9,6 10,7 P/B 2,2 2,5 2,5 2,7 2,8 2,9 3,2 Debt to Equity (%) 12,2% 34,7% 35,4% 37,1% 29,5% 22,5% 24,7% Dividend Yield (%) 4,9% 15,7% 9,8% 11,2% 12,0% 12,5% 11,3%
Source: Team Estimates *Pro-forma
-30%
-20%
-10%
0%
10%
20%
30%
40%
ATHEX Composite Index OPAP
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
2
1. Investment SummaryWe issue a BUY recommendation, with a target price of €10.73 implying a 30.8% upside
potential from the current price of OPAP.
Valuation Techniques Our target price derives exclusively from a 10Y Discounted Free Cash Flows to the Firm
Model. We have opted for an extended 10Y period to integrate the impact of a potential
market deregulation due to the expiring VLT license in 2027. Additionally, to further
substantiate the results, we have performed a 10Y Residual Income valuation, returning a
target price of €10.30 combined with 25.6% upside potential.
Gross Gaming Revenue (GGR) to reach 10% CAGR Our recommendation is highly based on the huge potential of the new investment project of
OPAP regarding Video Lottery Machines (VLTs). It is anticipated to create a 10% 5Y
GGR CAGR despite the gradually declining gross margin from 33% (FY2015) to 21%
(FY2021). The sharp increase reflects the potential of OPAP to constrain the illegal slot
machine market which is estimated around €1 billion (in GGR). VLT revenues are
expected to contribute 39% to the aggregate GGR by 2021 and raise EPS with a 11.5% 5Y
CAGR.
Robust Profitability and Outstanding Cash Flow Generation OPAP operates under a straight forward business model with strong receivable and liability
turnover ratios. Taking into account the elevated - over €100 million – annual amortization
of the exclusive licenses, OPAP’s FCF exceeds reported net profit, with 2017 being the
only exception due to the elevated €90 million CapEx. With robust profitability levels and
a rapidly growing asset turnover driven by the increased efficiency of the VLTs’
deployment, OPAP’s ROE is expected to surge from 13.78% (FY2016) to an impressive
31.00% (FY2021). The robust, cash-intensive business model is the foundation of OPAP’s
dividend policy. Management is committed to distributing the entire free cash flow to the
shareholders and we have considered a generous dividend policy with payouts exceeding
100% for the next 5 years.
VLTs to generate added value OPAP’s new investment project regarding VLTs is expected to boost residual income from
€23.1 million (FY2017) to €154 million (FY2021) taking into account that there will be no
significant increase in Invested Capital. OPAP has followed the least capital intensive
solution for this project in order to minimize additional capital investments and upfront
payments to vendors. Consequently, ROIC will reach an impressive 23.5% (FY2021)
exceeding by far the minimum expected return as defined by 9.45% (FY2021) WACC.
OPAP’s growth potential is greater than peers’ Having conducted the peer group analysis, we have reached an implied price equal to
€10.98. OPAP’s fair value is estimated by using the PEG ratio as it embodies the expected
growth of OPAP in the next 3 years, implying a 34% upside potential from the current
price. Even though OPAP seems overvalued for 2017, the increasing ROE from 17%
(FY2017) to 26.5% (FY2019) together with the estimated 3-year EPS CAGR of 13.2%
further support our expectations for 34% upside potential.
Investment Risks The most significant risk for OPAP in terms of likelihood and impact is the volatility in the
Greek macroeconomic environment. To examine the sensitivity of the implied target price
to this risk, we have assumed that Greece’s sovereign credit rating will remain constant at
Caa3 (Moody’s) and we reached a target price of €8.52. Furthermore, we have performed a
Monte Carlo Simulation on our DCF model to stress several assumptions simultaneously
such as the credit rating of Greece, the Wagers/VLT/day, the cannibalization rate, the
market share loss due to potential market deregulation and the perpetual growth rate from
2027 onwards. The results support our €10.73 DCF target price and return a standard
deviation of €1.12. The price can fluctuate between €8.54 and €12.22 in 90% confidence
interval with the minimum observation in our 10,000 iterations being €6.72.
Figure 1: GGR (€ billion)
Figure 2: Strong Cash Flows (€ million)
Source: Company Data, Team Estimates
1.40 1.39 1.501.84
2.12 2.25 2.2433%
21%
GGR Gross Margin
Source: Team Estimates
5%
10%
15%
20%
25%
ROIC WACC
Figure 3: Added value
Source: Team Estimates
0
100
200
300
400
500
Net Profit Dividend FCFF
Macroeconomic Risk
Regulatory Framework
VLTs’ Investment
Online Competition
Relationship with the agents
Illegal Betting Markets
Illegal Actions
IT and Cyber Security
GGR Contribution
Figure 4: Investment Risks
Source: Team Estimates
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
3
2. Business Description
History-Overview OPAP (Greek Organization of Football Prognostics) is the indisputable leader in the Greek
Gaming Market since 1958, controlling a leading 72.7% market share. In 2001 the company
was listed on the Athens Stock Exchange and in 2013 became fully private as the Greek
State transferred the last 33% of OPAP to Emma Delta. The robust business model has
enabled OPAP to sustain profitability despite the recession in the Greek economy.
Games’ Portfolio Analysis OPAP owns a fully diversified portfolio of 14 unique betting games offered throughout
Greece and Cyprus. “PAME STOIHIMA” (a sport betting game launched in 2000), “KINO”
(a numerical fixed odds game introduced in 2005) and “SKRATS” (an instant lottery
launched in 2014) account for almost 90% of the company revenues. In order to improve the
accuracy of our analysis we have classified all 14 games into 4 categories: Lotteries, Sports
Betting, Instants/Passives and Other Games (Appendix 12).
€ million 2015A 2016* 2017E 2018E 2019E 2020E 2021E
Lotteries
Wagers 2,219 2,206 2,226 2,149 2,083 2,088 2,125 % change -0.57 % 0.89 % -3.47 % -3.04 % 0.21 % 1.79 %
GGR 754 750 757 730 708 710 722 % of Total 53.9% 53.9% 50.4% 39.7% 33.4% 31.6% 32.3%
Sports Betting
Wagers 1,385 1,372 1,357 1,378 1,391 1,366 1,268 % change -0.88 % -1.11 % 1.53 % 0.96 % -1.79 % -7.21 %
GGR 414 411 406 412 416 409 379% of Total 29.6% 29.5% 27.0% 22.4% 19.7% 18.2% 17.0%
Instants/ Passives
Wagers 437 434 451 471 490 506 515 % change -0.57 % 3.89 % 4.53 % 3.96 % 3.21 % 1.79 %
GGR 170 169 175 183 190 197 200 % of Total 12.1% 12.1% 11.7% 10.0% 9.0% 8.7% 8.9%
Other Games
Wagers 217 221 223 225 227 229 232 % change 1.46 % 1.00 % 1.00 % 1.00 % 1.00 % 1.00 %
GGR 61 62 63 63 64 65 65 % of Total 4.4% 4.5% 4.2% 3.4% 3.0% 2.9% 2.9%
VLTs
Wagers 1,011 4,094 6,157 6,682 6,682 % change 305.11 % 50.39 % 8.54 % 0.00 %
GGR 101 450 739 869 869 % of Total 6.7% 24.5% 34.9% 38.6% 38.9%
Total Wagers 4,257 4,233 5,267 8,317 10,348 10,872 10,822 % change -0.57 % 24.43 % 57.90 % 24.43 % 5.06 % -0.46 %
GGR 1,400 1,392 1,502 1,840 2,118 2,249 2,236
Source: Company Data, Team Estimates *Pro-forma
The linear regression of the annual change of the wagers (Y variable) on the real GDP
change (X variable), produces a statistically significant coefficient of 2.13 (t=2.786).
Incorporating the real GDP projections of the next 5 years provided by the IMF World
Economic Outlook (issued November 2016), we have estimated a strong 5.5% 5Y wager
CAGR, reflecting the upside potential of the Greek economy.
In order to improve the accuracy of our projections we have performed a divisional
breakdown of wagers - Lotteries, Sports Betting, Instants/Passives, Other Games - and have
introduced additional drivers tailored to the particularities of each category. The VLTs’
launching is expected to “cannibalize” Lotteries’ Wagers more than 30% during the next 5
years limiting Lotteries’ estimated 5-year CAGR from 5.5% to -0.7%. Online Competition
in the Sports Betting division will lessen wagers of OPAP by 33% by 2021, leading to -
1.6% estimated 5-year CAGR. Seasonality effects contributing to 2% of Sports Betting
wagers variability, have also been integrated in year 2020 in respect with the upcoming
European Football Championship. The impact of the “cannibalization” on Instants and
Passives has been estimated at a 2% y-o-y wager decline, that will be counterbalanced by
the 5.5% estimated 5Y CAGR implied by GDP projections (Appendix 21).
Regarding payout to winners, we do not expect significant fluctuations and have used 66%,
70% and 61% payouts for Lotteries, Sports Betting and Instants/Passives, respectively
(weighted average payouts based on the last 3 years).
Figure 7: GDP-Wagers
Source: IMF World Economic Outlook, Team estimates
54% 30%
12% 4%
2016
32%
17% 9% 3%
39%
2021
Lotteries Sports BettingInstants/Passives Other GamesVLTs
-20%
-10%
0%
10%
20%
% Change in GDP (real)
% Change in Wagers
33%
5%
62%
Emma Delta Baupost Free Float
Figure 5: Shareholders’ Structure
Figure 6: GGR breakdown
Source: Company Data
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
4
VLTs to Drive Revenue Surge OPAP has acquired a 10-year exclusive license enabling it to introduce 35,000 VLTs,
16,500 operated through its network and another 18,500 operated through sub-contractors.
The roll-out procedure has already started and will gradually be completed by May 1, 2018
(by 2019 for the sub-contracted machines). Incorporating the average €811 wagers/VLT/day
generated in Greek casinos and the €1 billion (in GGR) illegal slot machine market, we have
assumed a conservative €640 gradually declining to €523 up until 2021 reflecting the
maturity of the market. The management’s guidance was that VLTs will operate under an
aggressive 90% payout to winners, gradually declining to 87% up until 2021 according to
our estimations. Consequently, VLTs are expected to contribute a tremendous 36% to the
aggregate revenues of OPAP by 2021, exceeding every single existing game (Appendix 20).
Commercial Network in Greece OPAP offers most of its games through the widest commercial network in Greece (including
banks, gas stations and posts). It counts 10,311 points of sale: 4,739 of these are authorized
agencies and the rest consist of third party distributors. The new VLT project will contribute
to the enhancement of the commercial network with the addition of technologically
advanced Gaming Halls under the trademark “OPAP Play”. Each Gaming Hall will be
capable of hosting up to 25 VLTs while up to 3 machines can be installed in existing
authorized agencies. OPAP has also recently signed several agreements with technological
providers concerning the installation of Self-Service Betting Terminals (SSBTs) and Player
Account Management (PAM) systems in the existing agencies (Appendix 11).
“2020 Vision” As presented in the new strategic plan “2020 vision”, OPAP aims at constructing a world-
class portfolio of products and services. The first strategic step is the expansion of the VLTs
network starting with 1,000 VLTs at the end of March 2017. Within the next two years,
OPAP will have introduced improved technological infrastructure in the agencies such as
self-service devices and e-wallet payments. Regarding services, OPAP has signed an
agreement with Inspired Gaming for the development of virtual betting games which will
become available to the customers both via OPAP’s commercial network and online.
All in all, OPAP’s main strategic priority is to serve the stakeholders’ interests.
The principal target is to provide an unparalleled entertainment package framed by the
principles of responsible gaming. It has also created a strategic plan concerning employees’
development including special training and additional benefit plans. Regarding the State and
the Hellenic Gaming Commission, OPAP wants to further enhance the cooperation and
avoid potential conflicts.
Corporate Social Responsibility (CSR)
It has left an unchallenging footprint while upholding CSR values
OPAP has set the foundations of both professional and recreational sport games since 1958.
It has left an indisputably positive footprint among the Greek society regarding athletics.
Other areas of social contribution are health and employment, with a particular interest in
sensitive social groups and environmental issues. One of the most significant projects OPAP
has undertaken is the renovation of two Children’s Hospitals which started in 2014
(Appendix 13).
3. Industry Overview and Competitive Positioning
Business Environment OPAP is able to generate profits in an ever-changing and challenging business environment.
The recession in the Greek economy during the last 7 years led to a 41% GDP decline, 26%
unemployment rate and 177% debt-to-GDP ratio. The political environment is highly
unstable, taking into consideration the frequent elections. OPAP also abides by a unique
legal framework for betting games which is subject to numerous sudden changes as well.
Adding the rapid social restructuring and the technological advancement, it is clear that the
external environment is highly volatile. However, OPAP’s business model is based on long
lasting pillars enabling it to effectively tackle external challenges with minimum financial
impact (P.E.S.T.L.E Analysis, Appendix 16).
Source: HGC Annual 2015 Report
2
3
1 2
1
Rivarly
Substitutes
SuppliersCustomers
Newentrants
Figure 8: VLTs launching
Figure 9: Commercial Network
Source: Company Data
10,536
25,344 35,000 35,000 35,000
Number of VLTs
Source: Team Estimates
Focused on providing an unparalleled entertainment package
0
5
10
OPAP CasinosState Lotteries Horse Races
Figure 10: Wagers of the Greek Gaming Market(€ billion)
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
5
Greek Gaming Market The Greek Gaming Market, has gone through a significant 35% downsizing, following the
cumulative 41% decline in GDP (2009-2015). However, it still comprises 0.98% of the
national GDP which is considerably higher compared to the EU-28 equivalent average of
0.59%. Online betting revenues contribute 6.73% to the total wagers in the GGM which is
lower compared to the EU average of 15.37%. Key driver for the underperforming online
segment is the low Internet penetration rate (69% Greece vs 85% EU). The technological
advancements will enable more people to gain Internet access in the future, creating an
upside potential in the Greek online market segment. Although Greece’s GDP per capita is
the 11th lowest among EU peers, GGR per adult hits an impressive €194, being the 10th
highest among the same rank. It is also crucial to highlight that there is a huge illegal
betting market estimated at €1 billion (in GGR). This market is strategically important for
OPAP as a potential pool of additional revenues in respect with the brand new VLT project.
Regulatory Framework The Hellenic Gaming Commission bears the entire responsibility for the regulation of the
betting games’ market in Greece. Every company has to be licensed by the regulatory
authority in order to establish business activity in the Greek Gaming Market. OPAP S.A.
and its subsidiaries have acquired several exclusive licenses for their products as shown in
Figure 12. However, the regulatory framework is significantly rigid and only few other
companies have maintained special licenses, mostly casinos and online betting platforms.
Consequently, there are numerous obstacles for potential new entrants protecting the
dominant position of OPAP.
Competitive Positioning
Porter’s Five Forces
The Greek Gaming Market scores an average of 1.8/5 which means that it is barely
competitive, enhancing OPAP’s strategic position. Concerning rivalry, there are 9 casinos
and 24 online betting platforms accounting for 22% of the market. Online betting platforms
offer almost identical online sports betting games with those of OPAP but competition takes
place only in a limited market share. The illegal gaming market also acts like an “invisible”
competitor especially for the upcoming VLT project. All in all, rivals do not pose a serious
threat, taking into consideration the market capitalization and product diversity of OPAP.
Moving on to the substitute products, there are only 6 games offered exclusively at
casinos. However, the entrance fees and the distance of casinos from major city centers
reduce the substitution threat for OPAP. In the gaming market, companies are not highly
dependent on specific suppliers and the latter do not hold a strong bargaining position. The
customer base of OPAP consists of millions of people with low betted amount per capita.
So, the company does not rely on specific clients and only the agents hold some bargaining
power. Last but not least, the existing regulatory framework prevents new companies from
entering the Greek Gaming Market. Even if it did not exist, the market capitalization and
the wide commercial network that OPAP has established, would make it extraordinarily
difficult for them to enter (Appendix 14).
SWOT Analysis
OPAP is a robust company, spearheading the future of the Greek Gaming Market. The
successful business model has been built on steady, long-lasting pillars such as the
diversified gaming portfolio consisting of 15 games, including VLTs and the widest
commercial network of 4,739 POS throughout Greece and Cyprus. As a result, OPAP is
the leader in the Greek Gaming market holding a 72.7% market share. In financial terms,
OPAP generates strong cash flows that translate into an impressive dividend payout stream
of over 100% to the shareholders. Concerning weaknesses, OPAP has to face 24 online
sports betting platforms holding the 12% of the market and also to cope with game
cannibalization coming from the VLTs introduction. We have estimated cannibalization to
cut down 30% on OPAP’s revenues during the next 5 years. The VLTs project in
conjunction with the unexploited illegal slot machine market is definitely an opportunity for
the company to increase aggregate GGR by more than 60% by 2021, according to our
estimations. On the other hand, OPAP has to face threats like the continuous increasing
volatility in the regulatory framework and the highly unstable macroeconomic environment.
However OPAP is able to effectively manage upcoming threats and transform them into
opportunities (Figure 14, Appendix 15).
2 3
1 2
1
Rivarly
Substitutes
SuppliersCustomers
Newentrants
Figure 12: Exclusive Licenses of OPAP
Figure 14: SWOT Analysis
Figure 11: GGM participation in the GDP
Instants
Horse Races
VLTs
Sport Betting
Lotteries
Online Betting Classic Betting
Figure 13: Porter’s Five Forces
Source: Team Estimates
Source: Team Estimates
Source: HGC Annual 2015 Report
Source: Company Data
84.63% 93.27%
15.37% 6.73%
70%
80%
90%
100%
EU Greece
Land Based Online
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
6
4. Financial Analysis
1.Profitability Ratios
2015A 2016* 2017E 2018E 2019E 2020E 2021E
GGR margin 32.88% 32.87% 28.52% 22.12% 20.47% 20.68% 20.66%
growth 1.60% -0.58% 7.94% 22.50% 15.12% 6.17% -0.56%
NGR margin 44.68% 39.29% 39.80% 37.22% 35.31% 34.59% 34.59%
growth 1.93% -12.56% 9.34% 14.53% 9.21% 4.01% -0.54%
EBITDA margin 26.94% 20.02% 21.79% 22.16% 22.28% 22.36% 22.35%
growth 8.82% -26.13% 17.47% 24.62% 15.71% 6.57% -0.63%
EBIT margin 21.63% 15.83% 18.01% 17.62% 17.16% 17.86% 16.19%
growth 2.22% -27.25% 22.83% 19.79% 12.11% 10.54% -9.88%
Net Profit margin 15.00% 10.41% 11.74% 11.67% 11.66% 12.36% 11.18%
growth 5.36% -31.02% 21.80% 21.72% 15.03% 12.51% -10.03%
2.Solvency Ratios
2015A 2016* 2017E 2018E 2019E 2020E 2021E
Total Debt to Equity 12.23% 34.73% 35.22% 37.00% 29.48% 22.48% 24.81%
Interest Coverage Ratio 31x 8.5x 10.1x 12.3x 18.7x 26.6x 27.3x
Source: Company Data, Team Estimates *Pro-forma
NGR margin decomposition
Increased GGR state contribution constrains 2016 margins
During 2016, the Hellenic Parliament decided to increase the state tax contribution on
GGR for OPAP from 30% to 35%. Consequently, OPAP’s 2016 profitability margins have
declined reflecting the increased GGR contribution from €412 million (FY2015) to €487
million (FY2016).
Agents’ Commissions
Agent commission fees for the 16,500 VLTs that will be operated through the commercial
network of OPAP (OPAP “Play”), will be calculated as 25% of the GGR generated by
these machines. The rest 18,500 VLTs will bear a 30% sub-contractor commission fee
instead of 25% agent commission. The relevant fees for the existing games are calculated
as a percentage of Wagers and they are classified into 3 categories – 8%, 10%, 12% -
according to the game. The weighted average commission rate accounts for 8.4% of the
wagers or 25.4% of the GGR. However, OPAP is in process of renegotiating the
relationship with the agents to fully align the interests of both parties. As a result we
expect a decline in the average commission rate from 8.4% to 8%.
Vendors’ Commission to limit NGR margin
The cost of the entire 35,000 machines will be covered through a Revenue Sharing
Agreement with vendors and OPAP will not be burdened with any upfront payments.
Vendors’ commissions are expected to restrict NGR margin by 4.8% under full
deployment, with the actual rates varying from 10% up to 15%, depending on the contract.
Regarding the first 16,500 VLTs, contracts have been signed with 4 leading multinational
vendors: IGT, Inspired Gaming, Scientific Gaming and Synot.
Licenses’ Amortization will not restrain EBIT margin OPAP has paid €560 million (€16,000 per VLT) to acquire the exclusive right to operate
35,000 VLTs. The license will be amortized using a method that “would reflect the
deployment and the economic ramp up of the business” according to Michal Houst (CFO).
The rest of the licenses are amortized using the straight line method (Figure 17).
Growing FCFs will be distributed to the shareholders OPAP’s FCFs are expected to grow from €161 million (FY2016) to €393 million
(FY2021), reaching a 15.07% FCF Yield. The company is committed to distributing the
entire FCFs to the shareholders with Dividend Yield always exceeding 9%. Aggregate DPS
will reach a €1.03 peak in 2020 (Figure 18), following the 11.5% estimated 5Y profit
CAGR. Dividend yield for the same year has been estimated at an outstanding 12.5%,
making OPAP’s dividend policy one of the most generous in the Greek stock market. In
the long term we have considered a slightly more conservative and sustainable dividend
policy using 100% payout ratios.
Figure 16: NGR per VLT in 2017
Figure 18: Dividend Policy
Source: Company Data, Team Estimates
Figure 15: Profitability margins
Source: Team Estimates
8.8% 9.8%
11.2% 12.0% 12.5%11.3%
0.00
0.25
0.50
0.75
1.00
DPS Dividend Yield
Wagers 233,600 Payout (90%) (210,240)
GGR 23,360 Tax Contribution (35%)
(8,176)
Agent’s Commission (25%)
(5,840)
Vendor’s Commission (12.5%)
(2,920)
Net Gaming Revenue 6,424
Amounts in €, Source: Team Estimates
Figure 17: Amortization
Source: Team Estimates
2.3% 2.8%
3.8% 4.2% 4.4%
5.4%
0
50
100
150
Horse races Instants/Passives
Lotteries/Sports VLTs
Amort./GGR
5%
-31%
22% 22%
15% 13%
-10%
0%
5%
10%
15%
20%
25%
30%
EBITDANet ProfitNet Profit Growth
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
7
5. Valuation
WACC (Weighted Average Cost of Capital)
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Rf 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24%
Beta 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79
ERP 5.47% 5.47% 5.47% 5.47% 5.47% 5.47% 5.47% 5.47% 5.47% 5.47%
CRP 12.63% 10.51% 9.12% 9.12% 7.72% 7.72% 7.72% 7.72% 7.72% 7.72%
Rating Caa2 Caa1 B3 B3 B2 B2 B2 B2 B2 B2
CoE 14.54% 12.87% 11.76% 11.76% 10.66% 10.66% 10.66% 10.66% 10.66% 10.66%
CoD 4.56% 4.56% 4.56% 4.56% 4.56% 4.56% 4.56% 4.56% 4.56% 4.56%
D/(E+D) 26.05% 27.01% 22.77% 18.35% 19.88% 19.88% 19.88% 19.88% 19.88% 19.88%
WACC 11.94% 10.62% 10.12% 10.44% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45%
Source: Team Estimates
To start with, we have used the trailing redemption yield of 10-year German bonds as Risk
Free Rate (0.24%) and Beta (0.79) has been calculated by performing a linear regression of
OPAP’s monthly returns on ATHEX’s monthly returns (2013-2016). The Country Risk
Premium (CRP) has been calculated as the credit default spread corresponding to the 2017
sovereign credit rating of Greece (Moody’s), adjusted by equity market volatility. CRP
declines from 12.63% (FY2017) to 7.72% (FY2026) following our estimations for
improved credit rating from Caa2 (FY2017) to B2 (FY2026). The Equity Risk Premium
(ERP) of 5.47% has been estimated employing Ibbotson’s build-up method. Taking into
account that the cost of debt is not estimated to fluctuate, WACC is expected to be
improved from 11.94% (FY 2017) to 9.45% (FY2026).
Terminal Growth Rate At the end of the 10-year period, we have estimated an additional FCFF for 2027 in order
to integrate revenues’ adjustment in agreement with the expiring VLTs license. We have
applied conservative assumptions in 2027, including a 0% terminal growth rate taking into
Leverage OPAP has signed 7 loan contracts with major systemic banks reaching an aggregate €365
million with 34.7% Debt-to-Equity ratio (FY2016). We have considered that OPAP will
renew 2 expiring loan contracts in order to maintain the same level of leverage in 2017 and
2018 to cover capex for technological upgrades in the agencies. Later on, the completion of
VLTs launching will boost cash flow generation and OPAP will be able to gradually pay
back loans starting with a €90 million repayment in 2019.
Outstanding Liquidity to be sustained Cash and cash equivalents account for an impressive 82% of total current assets (FY2016)
and are able to cover the entire current liabilities (1x Cash Ratio). Despite the anticipated
€135 million capex for technological upgrades in the agencies, OPAP will preserve the
exceptional liquidity reaching a 1.59x CFO/Net profit ratio in 2021.
DuPont Analysis
2015A 2016* 2017E 2018E 2019E 2020E 2021E
Net Profit Margin [A] 15.00% 10.41% 11.74% 11.67% 11.66% 12.36% 11.18%
Asset Turnover [B] 0.8x 0.8x 0.9x 1.1x 1.4x 1.6x 1.7x
ROA [AxB] 12.3% 8.5% 10.4% 13.1% 16.5% 20.1% 19.3%
Equity Multiplier [C] 1.4x 1.6x 1.6x 1.7x 1.6x 1.6x 1.6x
ROE [AxBxC] 17.45% 13.78% 17.02% 21.76% 26.47% 31.23% 31.00%
Source: Team Estimates *Pro-forma
Net profit margin will be reduced from 15% (FY2015) to 10.41% (FY2016) driven mainly
by the 5% increase in the state tax contribution levied upon the GGR. From 2017 onwards,
it will be slightly improved in respect with the low operating expenses of the VLTs project.
Asset Turnover will reach an outstanding 1.7x in 2021 taking into account the 9.95%
estimated 5-year GGR CAGR and the gradually declining asset value due to an elevated
annual amortization of over €100 million. We do not expect significant fluctuations in the
Equity Multiplier so as to reflect the estimated relatively stable capital structure.
Consequently, ROE is expected to gradually double up by 2021 and reach 31% (Extended
DuPont, Appendix 5).
2017 Cost of Equity (CoE): 14.54% Rf + Beta *(ERP + CRP)
2017 Equity Risk Premium (ERP): 5.47% Real GDP
growth (EU) + Inflation
(EU) +Div.Yield
(Stoxx) 1.6% + 1.1% + 2.77%
2017 Country Risk Premium(CRP): 12.63% Credit Default
Spread *σ(Equities) /σ(Bonds)
10.4% * 37.83 / 31.16
0
100
200
300
400
Long term Loans Short term Loans
Figure 20: DuPont Analysis
Source: Company Data, Team Estimates
Figure 19: Debt Levels (€ million)
Source: Company Data, Team Estimates
12% 8%
10% 13%
16% 20% 19%
17%
14% 17%
22%
26%
31% 31%
ROA ROE
*We have assumed 0% P/E growth
Moody’s Rating and Credit Default Spreads
Caa2 10.40%
Caa1 8.66%
B3 7.51%
B2 6.36%
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
8
account the volatility in the regulatory framework.
Capital Expenditure (Capex) In accordance with management guidance, we expect €90 million capital expenditure in
2017 concerning the installation and improvement of technological infrastructure in
agencies and Gaming Halls. In further detail, OPAP will have to proceed to technological
upgrades in order to support the operation of VLTs and will also introduce the Self Service
Betting Terminals (SSBTs) gradually, throughout its commercial network. In 2018, we
expect an additional €45 million CAPEX for completing the technological upgrade.
Thereafter, we do not expect significant capital expenditures.
Discounted Free Cash Flow to the Firm Model (FCFF) Our Discounted Free Cash Flows to the Firm model produces a 12-month target price of
€10.73 implying a 30.8% upside potential from the current price of OPAP. We have opted
for a 10-year initial stage FCFF in order to integrate the financial impact of potential
market restructuring due to the expiration of exclusive VLT licenses in 2027.
€ million 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027*
NOPAT 198.5 236.4 262.5 288.1 259.9 254.7 254.9 258.0 266.7 254.1 283.3
Depr./Amort. 56.6 83.7 108.5 101.2 137.7 137.7 137.7 137.7 129.8 121.8 42.5
CAPEX 91.0 46.0 5.0 4.0 3.0 3.0 3.0 3.0 3.0 3.0 42.5
Δ(NWC) 2.8 11.3 9.4 4.2 1.3 -1.4 -0.1 0.7 0.7 -0.9 0.1
FCFF 161.4 262.8 356.6 381.2 393.2 390.8 389.7 392.0 392.8 373.8 283.2
WACC 11.9% 10.6% 10.1% 10.4% 9.4% 9.4% 9.4% 9.4% 9.4% 9.4%
Disc. FCFF 161.4 234.8 288.0 279.5 261.1 237.1 216.0 198.5 181.7 158.0
Source: Team Estimates *2027 has been used only for Terminal Value calculation
Residual Income Valuation The Residual Income Model returns a 12-month target price of €10.30 implying 25.6%
upside potential from the current price of OPAP. The model is based on identical 10-year
projections with the FCFF model in order to verify the target price implied by the latter.
We have discounted the added value (residual income) generated each year that is
calculated from the difference between NOPAT (Net Operating Profits After Tax) and
Capital charge. ROIC outperforms the WACC level each year driven by the sustainable
profitability levels and declining invested capital, created by the VLT investment.
€ million 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027*
NOPAT 198.5 236.4 262.5 288.1 259.9 254.7 254.9 258.0 266.7 254.1 283.3
Inv. Capital 1,416 1,401 1,351 1,208 1,090 982 982 982 982 982 982
Res. Income 29.5 87.5 125.7 162.0 156.9 162.0 162.1 165.2 174.0 161.3 190.6
ROIC 14% 17% 19% 24% 24% 26% 26% 26% 27% 26%
WACC 11.9% 10.6% 10.1% 10.4% 9.4% 9.4% 9.4% 9.4% 9.4% 9.4%
Disc. RI 29.5 79.1 103.1 120.4 106.6 100.5 91.9 85.6 82.3 69.7
Source: Team Estimates *2027 has been used only for Terminal Value calculation
Peer Group Analysis
According to the peer group analysis we have reached the conclusion that OPAP’s
implied fair value equals €10.98, having an upside potential of 34%. In our analysis, we
have used a group of six peer companies which are all European large caps firms operating
in the gaming and gambling sector with similar gross revenue.
P/E EV/EBITDA ROE EPS CAGR PEG
2017 2018 2019 2017 2018 2019 2017 2018 2019 3FY 2017
William Hill 12.5 11.7 10.9 7.6 7.0 6.3 16.8% 16.8% 16.3% 13.7% 0.9
Ladbrokes 18.4 12.2 9.7 6.6 5.5 n/a 12.8% 15.7% 15.9% 29.8% 0.6
Paddy P. 26.8 21.9 19.3 15.0 14.6 n/a 27.8% 19.2% 9.4% 15.7% 1.7
Betsson 14.5 15.9 16.1 9.7 10.1 9.8 25.0% 21.1% 20.9% -2.9% -4.9
Rank Group 13.4 12.4 11.5 6.6 5.9 5.4 15.8% 15.8% 15.7% 4.5% 3.0
IGT 12.4 11.5 10.7 8.1 2.1 n/a 9.6% 10.1% 14.5% 5.0% 2.5
Median 14.0 12.3 11.2 7.8 6.5 6.3 16.3% 16.3% 15.8% 9.4% 1.50
OPAP 14.8 12.2 10.6 8.9 7.2 3.9 17.0% 21.8% 26.5% 13.2% 1.1
Prem./Disc. 6% -1% -6% 14% 11% -38% 4% 34% 68% 41% -25%
Source: Thomson One, Team Estimates
0
50
100
Tangible Assets Intangible Assets
Figure 21:Capex (€ million)
Source: Team Estimates
PV 2017-2026 2,216.0
PV Terminal Value 1,267.3
EV 3,483.3
Net Debt -71.3
Market Cap. 3,412.0
Shares Outst. 318,112,195
Target Price 10.73
PV 2017-2026 868.8
PV Terminal Value 872.1
Equity+Debt 1,415.8
EV 3,156.7
Net Debt -71.3
Market Cap. 3,085.4
Shares Outst. 318,112,195
Target Price 10.30
14.0
7.8
14.8
8.9
P/E EV/EBITDA
Median OPAP
Figure 22: In 2017, OPAP seems to be overvalued….
Source: Thomson One, Team Estimates
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
9
Based on the 2017 P/E and EV/EBITDA ratios, OPAP seems overvalued compared to
peers by 6% and 14% respectively. However, using the same multipliers in 2019, we
noticed that OPAP is undervalued compared to peers by 6% and 38% (using P/E
and EV/EBITDA respectively). OPAP’s 2019 ROE is estimated at 26.5% which is 68%
greater than the peer median. To capture this growth potential in valuation, we have used
the PEG ratio. The 3Y EPS CAGR that is expected at 13.2% and exceeds the peer median
by 9.4%, provides a PEG of 1.1, 25% in discount compared to the 1.50 of the peer group
median. This 25% discount leads us to a 34% upside potential for OPAP. The €10.98
implied target price has been derived exclusively by this 34% upside potential and reflects
the expectations for increased revenue generation related to the VLT project.
6. Investment Risks
Economic Risks Macroeconomic Risk in Greece (ER1): Greece is going through an adverse recession
period that has devastating implications for the Greek economy as a whole. Political
stability is yet to be reclaimed and the possibility of a GREXIT has not completely
disappeared while the current sovereign rating is very low and may remain low for a long
time. Potential lack of liquidity in the banking system increases the macroeconomic risk.
Regulatory Risks Regulatory Framework (RR1): We consider OPAP’s monopoly to be crucial for the
company’s longevity and prosperity. A change in the regulatory framework will definitely
lead to a significant revenue loss for the company. In such a case, there would be an asset
value drop and OPAP would have to redefine its strategy towards new investment projects.
Tax Contribution (RR2) : In January 2013, a 30% GGR contribution was introduced for
OPAP and further increased to 35% in January 2016. An additional special tax contribution
of €0.05 on some lotteries was also introduced in 2016. Although we do not expect a
further increase in tax contribution, volatility in tax rates is highly possible to affect OPAP.
Market Risks Illegal Betting Markets (MR1): One of OPAP’s main goals, regarding the VLT project, is
to gain the market share that illegal rivals currently own. However, the revenues of the
illegal rivals are not burdened with tax and as a result they could offer more attractive
returns compared to those of OPAP, without altering their profit margins. The illegal
market may also expand in other segments (apart from slot machines) that operate as
substitute games.
Online Competition (MR2): Currently there are 24 companies that operate under
transitional regime. These companies are considered highly competitive as they offer
attractive game returns and operate in tax heavens. It is highly possible that they will get an
official license after 2020 and they will increase capital investments.
Operating Risks VLT’s investment (OR1): The VLT’s project is anticipated to almost double the
company’s GGR. As we are referring to an unexploited market, our estimations concerning
Wagers/VLT/day are subject to increased uncertainty due to the lack of historical data
regarding the VLT market segment.
Relationship with agents (OR2): There have been reported conflicts between the agents,
represented by their federation (POEPPP), and OPAP’s BoD, concerning the commission
percentage on the wagers. Consequently, we expect a significant risk to come up during the
renegotiation of the relationship between the two parties that OPAP wants to achieve.
IT and Cyber Security (OR3): Adaptation to the latest technological advances comes with
a significant cost for OPAP. Existing games depending on algorithms (i.e. VLTs and Kino)
might become targets of an attack through the Cyber network. The implications in case of
an attack may vary, from a simple “crash” of the network, to severe loss of trustworthiness
among customers.
Illegal actions connected with sports betting (OR4): Match “fixing” for the purpose of
making risk free profit on betting is a technique that has been witnessed worldwide.
Although it is quite difficult to notice, it can be documented at times, through the betting
patterns of a group of players, potentially affecting the sports reputation and customers
betting behavior.
Figure 24: Risk Matrix
Figure 25: Altman’s Z Score
Source: Company Data, Team Estimates
Source: Team Estimates
11.2
6.3
10.6
3.9
P/E EV/EBITDA
Median OPAP
Figure 23: ….but in 2019 it will be undervalued
Source: Thomson One, Team Estimates
CFA Research Challenge 2017
Athens University of Economics and Business Accounting & Finance Department
10
Risk Scenarios We have stressed individual variables (ceteris paribus) on our FCFF model to illustrate the
volatility of the target price to negative scenarios related to the most important risk
categories. Starting with ER 1, we got a target price of €8.52 assuming that Greece’s
sovereign credit rating will not be upgraded and WACC will remain constant at 12.78%. In
case of an unexpected change in the regulatory framework (RR 1) that prevents the
deployment of the 18,500 sub-contracted VLTs, target price has been estimated at €8.83. If
our assumptions regarding Wagers/VLT/day from 2020 onwards (OR 1) are too optimistic
(wagers/VLT/day €400 instead of €523), the target price will be €9.91. In case that online
competitors acquire 30% of OPAP’s wagers instead of 9% in 2020 (MR 2), the target price
will slightly drop at €10.16. Lastly, if potential agent strikes prevent OPAP from reducing
the agent commission fees, we will get a target price of €10.22.
Monte Carlo Simulation We have selected 3 major risks - ER1, RR1, OR1- and we have stressed the relevant
assumptions of our FCFF model by performing a Monte Carlo Simulation. We have set our
major assumptions such as the credit rating of Greece, the Wagers/VLT/day, the
cannibalization rate, the market share loss due to potential market deregulation and the
perpetual growth rate from 2027 onwards, as dynamic variables following certain statistical
distributions. After performing 10,000 iterations, we have reached a mean target price of
€10.21 with €1.12 Standard Deviation. The minimum value of the final distribution is €6.72
reflecting the worst case scenario regarding revenue generation and macroeconomic
recovery of Greece. Our estimation is that company price will fluctuate between €8.54 and
€12.22 as defined from the 90% confidence level (Appendix 25).
7. Corporate GovernanceOPAP S.A. has adopted The Hellenic Corporate Governance Code (Code) since 2013,
aiming at developing a Group Code of Conduct in alignment with high ethical standards.
Employee engagement is key for OPAP as evidenced by the high involvement of the
company's staff in the engagement survey results and initiatives (focus Group sessions,
cooperation with PwC on engagement results interpretation and improvement).
It is the BoD’s firm belief that the compliance with the best practice advice from regulatory
and governance bodies should be in accordance with business core values and objectives.
OPAP aims to maximize shareholder value and manage the business effectively, responsibly
and with integrity in order to create effectiveness, accountability and maintain the trust of
their stakeholders. In addition, the Company’s management and employees have read and
understood the Code and they will adhere to and comply with its principles and provisions.
Reports on employee compliance are subject to review by the Audit Committee. Moreover,
regarding whistleblowing, illegal gaming and responsible gaming, hotlines are operated by
OPAP and the reports they develop can be reviewed by the Audit Committee. To further
support our argument for enhanced integrity, we have calculated the Beneish’s M score (-
2.36, Appendix 23), which classifies the reporting practices of OPAP as non manipulating
and high quality ones. Last but not least, we have performed an assessment of major aspects
related to corporate governance (Figure 29, Appendix 22) and we have reached the
conclusion that OPAP has developed a framework of high added value principles enabling it
to achieve the best practices witnessed worldwide.
3 3
3.5
3.5
4 3
3.5
3.5
4
012345
Composition
Information and Support
Evaluation
Financial and BusinessReporting
Risk Management andInternal Control
Audit Committee andAuditors' Report
Remuneration Committeeand Director's Report
Relations withshareholders
The Annual GeneralMeeting
54%
23%
23%
Non executives
Independent nonexecutives
Executives
Figure 28: BoD Structure
Source: OPAP Financial Statements
Figure 29: Beneish’s M Score
Source: Team Estimates
Figure 27: Monte Carlo Simulation
Statistics Summary
Min 6.72 Variance 1.26
Max 16.17 Skewness 0.55
Mean 10.21 Kurtosis 3.72
Std Dev 1.12 Median 10.11
Number of Iterations: 10,000
Number of Inputs: 30
Source: Team Estimates
Source: Team Estimates
Risk Stressed Variable Price ER 1 WACC €8.52 RR 1 VLTs Number €8.83 OR 1 Wagers/VLT/day €9.91 MR 2 Market Share €10.16 OR 2 Agents’ Commission €10.22
Source: Team Estimates
Figure 26: Risk Scenarios
Figure 30: CG major aspects assessment
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 11
Appendix 1 : Profit & Loss Statement
(All data are in 000s) 2014A 2015A 2016* 2017E 2018E 2019E 2020E 2021E
Amounts wagered 4.259.072 4.257.317 4.233.004 5.267.047 8.316.699 10.348.278 10.871.568 10.821.730
Amounts to the winners -2.881.393 -2.857.646 -2.841.514 -3.765.136 -6.476.933 -8.230.400 -8.622.958 -8.585.750
Revenue (GGR) 1.377.679 1.399.671 1.391.490 1.501.910 1.839.766 2.117.878 2.248.611 2.235.980
GGR contribution -404.535 -411.964 -487.022 -525.669 -643.918 -741.257 -787.014 -782.593
Agents' Commission -359.653 -362.369 -357.697 -365.783 -428.216 -437.717 -437.523 -433.536
Revenue Sharing with vendors
-12.632 -56.290 -92.349 -108.588 -108.588
Sub contractor's fee 0 0 0 0 -26.631 -98.779 -137.751 -137.751
Net Gaming Revenue (NGR) 613.491 625.338 546.772 597.827 684.710 747.776 777.735 773.512
Other operating income 23.736 128.662 108.896 110.724 112.589 114.490 116.430 118.408
Payroll expenses -58.571 -46.098 -58.490 -55.829 -56.934 -56.934 -56.934 -56.934
Marketing Expenses -78.904 -69.468 -59.705 -60.887 -62.093 -62.093 -62.093 -62.093
Other operating expenses -153.228 -261.332 -258.924 -264.635 -270.507 -271.415 -272.331 -273.257
EBITDA 346.524 377.102 278.549 327.200 407.764 471.825 502.806 499.635
Depreciation/Amortization and impairment
-50.321 -74.332 -58.278 -63.644 -90.662 -115.485 -108.178 -144.678
Results from operating activities 296.203 302.770 220.270 263.557 317.102 356.340 394.628 354.958
Financial Income 3.786 1.732 3.581 2.471 2.861 3.251 3.641 4.031
Financial Expenses -2.192 -6.400 -20.362 -25.097 -25.097 -19.317 -14.500 -14.500
Other financial income/expenses 7.782 1.490 450 473 496 521 547 574
Profit before Tax 305.579 299.592 203.939 241.403 295.361 340.795 384.316 345.063
Income tax expense -105.878 -100.835 -59.142 -70.007 -85.655 -98.830 -111.452 -100.068
Deffered taxes -477 11.143 0 0 0 0 0 0
Profit after tax 199.224 209.900 144.797 171.396 209.707 241.964 272.864 244.995
Source: Team Estimates *Pro-forma
(All data are in 000s) 2022E 2023E 2024E 2025E 2026E
Amounts wagered 10,759,502 10,757,831 10,792,268 10,827,043 10,687,123
Amounts to the winners -8,542,168 -8,540,153 -8,563,431 -8,586,937 -8,503,671
Revenue (GGR) 2,217,335 2,217,678 2,228,837 2,240,105 2,183,452
GGR contribution -776,067 -776,187 -780,093 -784,037 -764,208
Agents' Commission -428,558 -428,424 -431,179 -433,961 -422,768
Revenue Sharing with vendors -108,588 -108,588 -108,588 -108,588 -108,588
Sub contractor's fee -137,751 -137,751 -137,751 -137,751 -137,751
Net Gaming Revenue (NGR) 766,371 766,728 771,226 775,769 750,138
Other operating income 118,408 118,408 118,408 118,408 118,408
Payroll expenses -56,934 -56,934 -56,934 -56,934 -56,934
Marketing Expenses -62,093 -62,093 -62,093 -62,093 -62,093
Other operating expenses -273,257 -273,257 -273,257 -273,257 -273,257
EBITDA 492,494 492,851 497,349 501,892 476,261
Depreciation/Amortization and impairment
-137,678 -137,678 -137,678 -129,761 -121,844
Results from operating activities 354,817 355,173 359,672 372,131 354,416
Financial Income 3,628 3,265 2,939 2,645 2,380
Financial Expenses -13,775 -13,086 -12,432 -11,810 -11,220
Other financial income/expenses 500 500 500 500 500
Profit before Tax 345,169 345,852 350,678 363,465 346,077
Income tax expense -100,099 -100,297 -101,697 -105,405 -100,362
Deffered taxes 0 0 0 0 0
Profit after tax 245,070 245,555 248,981 258,060 245,714
Source: Team Estimates
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 12
Appendix 2 : Balance Sheet
(All data are in 000s) 2014A 2015A 2016* 2017Ε 2018Ε 2019Ε 2020Ε 2021Ε
Intangible Assets 1,269,998 1,222,987 1,201,548 1,159,404 1,090,242 1,000,257 916,580 795,402
Tangible Assets(for own use) 44,205 56,238 53,506 130,006 161,506 148,006 134,506 121,006
Investments in Real Estate Property 1,540 1,398 1,398 1,398 1,398 1,398 1,398 1,398
Goodwill 14,183 14,183 14,183 14,183 14,183 14,183 14,183 14,183
Investments in associates 9,732 11,225 11,675 11,792 11,910 12,029 12,149 12,271
Long-term Receivables 527 112 51 51 51 51 51 51
Other Non Current Assets 3,177 2,962 3,035 3,035 3,035 3,035 3,035 3,035
Deffered tax asset 0 9,815 0 0 0 0 0 0
Total Non Current Assets [A] 1,343,362 1,318,920 1,285,396 1,319,869 1,282,325 1,178,959 1,081,902 947,346
Cash and Cash Equivalents 297,418 301,695 345,111 293,717 270,511 221,255 196,350 246,526
Inventories 2,976 4,166 2,854 2,965 3,100 3,223 3,327 3,387
Receivables 92,250 55,234 41,745 45,057 55,193 63,536 67,458 67,079
Other current assets 16,731 28,818 32,131 32,131 32,131 32,131 32,131 32,131
Total Current Assets [B] 409,375 389,913 421,840 373,871 360,935 320,146 299,267 349,124
Total Assets [A+B] 1,752,737 1,708,833 1,707,236 1,693,739 1,643,259 1,499,105 1,381,169 1,296,469
Short Term Loans 1 32,097 90,000 75,000 140,000 125,000 100,000 50,000
Trade Payables 170,353 127,091 126,372 127,000 126,012 125,085 124,941 123,287
Tax Liabilities 178,228 129,942 54,382 54,382 54,382 54,382 54,382 54,382
Other Payables 109,301 35,853 65,448 65,448 65,448 65,448 65,448 65,448
Short-term Liabilites [C] 457,883 324,983 336,202 321,830 385,842 369,915 344,771 293,117
Long Term Loans 0 115,000 275,000 290,000 225,000 150,000 100,000 150,000
Differed Tax Liability 1,284 0 0 0 0 0 0 0
Employee benefit plans 847 1,036 1,036 1,036 1,036 1,036 1,036 1,036
Provisions 51,316 59,061 37,676 38,053 38,433 38,818 39,206 39,598
Other Long-term Liabilities 6,343 5,926 6,482 6,482 6,482 6,482 6,482 6,482
Long-term Liabilities [D] 59,790 181,023 320,194 335,571 270,951 196,336 146,724 197,116
Shareholder's Equity [E] 1,235,064 1,202,827 1,050,840 1,036,339 986,467 932,854 889,674 806,237
Total Shareholders' Equity and Liabilities [C+D+E]
1,752,737 1,708,833 1,707,236 1,693,739 1,643,259 1,499,105 1,381,169 1,296,469
Source: Company Data, Team Estimates *Pro-forma
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 13
Appendix 3 : Cash Flow Statement
(All data are in 000s) 2014A 2015A 2016* 2017Ε 2018Ε 2019Ε 2020Ε 2021Ε
Profit before tax 305,579 299,592 203,939 248,403 302,361 347,795 391,316 352,063
Depreciation, Amortization and Impairment 50,321 74,332 58,278 56,644 83,662 108,485 101,178 137,678
Financial Result -3,312 -858 16,331 22,154 21,740 15,545 10,312 9,895
Other provisions 1,532 10,322 -21,385 377 381 384 388 392
Change in associate investments -7,792 -1,493 -450 -117 -118 -119 -120 -121
Sub Total 346,328 381,895 256,714 327,460 408,026 472,090 503,074 499,906
Change in Inventories -724 -1,191 1,312 -111 -135 -123 -104 -60
Change in Receivables and other assets -41,417 26,609 10,164 -3,313 -10,136 -8,342 -3,922 379
Change in Payables(except banks) 73,988 -59,424 29,432 628 -988 -926 -144 -1,655
Tax payment -93,670 -149,453 -124,887 -72,037 -87,685 -100,860 -113,482 -102,098
Cash Flow From Operating Activities [A] 284,505 198,436 172,734 252,628 309,083 361,838 385,422 396,472
Purchase of intangible assets 38,142 -12,441 -21,192 -1,000 -1,000 -1,000 -1,000 -1,000
Purchase of tangible assets -8,499 -27,977 -12,915 -90,000 -45,000 -4,000 -3,000 -2,000
Interest received 3,297 1,350 4,031 2,943 3,357 3,772 4,188 4,605
Cash Flow From Investing Activities [B] 32,940 -39,068 -30,076 -88,057 -42,643 -1,228 188 1,605
Change in borrowing -181,750 147,096 217,903 0 0 -90,000 -75,000 0
Treasury shares acquisition 0 -2,719 -3,916 0 0 0 0 0
Interest Expenses -437 -720 -20,362 -25,097 -25,097 -19,317 -14,500 -14,500
Dividends paid -79,811 -298,750 -292,867 -190,867 -264,549 -300,547 -321,014 -333,401
Cash Flow From Financing Activities [C] -261,998 -155,093 -99,243 -215,965 -289,646 -409,864 -410,515 -347,901
Cash and Cash Equivalents (beginning of fiscal year) 242,061 297,418 301,695 345,111 293,717 270,511 221,255 196,350
Change in Cash and Cash Equivalents [A+B+C] 55,447 4,275 43,416 -51,394 -23,206 -49,255 -24,905 50,176
Cash and Cash Equivalents (end of fiscal year) 297,508 301,693 345,111 293,717 270,511 221,256 196,350 246,526
Source: Team Estimates *Pro-forma
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Appendix 4 : Financial Ratios
2014A 2015A 2016* 2017Ε 2018Ε 2019Ε 2020Ε 2021Ε
Panel A: Profitability Ratios
Gross Margin 32.35% 32.88% 32.87% 28.5% 22.1% 20.5% 20.7% 20.7%
Net Gaming Margin 44.53% 44.68% 39.29% 39.8% 37.2% 35.3% 34.6% 34.6%
EBITDA Margin 25.15% 26.94% 20.02% 21.8% 22.2% 22.3% 22.4% 22.3%
EBIT Margin 21.50% 21.63% 15.83% 18.0% 17.6% 17.2% 17.9% 16.2%
NOPAT Margin 13.96% 15.16% 11.24% 12.8% 12.5% 12.2% 12.7% 11.5%
Net Profit Margin 14.46% 15.00% 10.41% 11.7% 11.7% 11.7% 12.4% 11.2%
Return on Equity 16.13% 17.45% 13.78% 17.0% 21.8% 26.5% 31.2% 31.0%
Return on Assets 11.89% 12.13% 8.48% 10.4% 12.9% 15.7% 19.3% 18.7%
Return on Net Operating Assets 19.36% 21.37% 14.76% 17.6% 21.0% 25.0% 30.3% 31.1%
Panel B: Solvency Ratios
Total Debt to Equity 0.00% 12.23% 34.73% 35.22% 37.00% 29.48% 22.48% 24.81%
Net Debt to Equity -24.08% -12.85% 1.89% 6.88% 9.58% 5.76% 0.41% -5.77%
Total Debt to EBITDA 0.00 0.39 1.31 1.12 0.90 0.58 0.40 0.40
Interest Coverage Ratio (With Profits) 90.89 32.80 7.11 7.03 8.55 12.78 19.16 17.24
Interest Coverage Ratio (With Cash Flows) 129.79 31.01 8.48 10.07 12.32 18.73 26.58 27.34
Panel C: Efficiency Ratios
Total Asset Turnover 0.79 0.82 0.82 0.89 1.12 1.41 1.63 1.72
PP&E Turnover 29.46 27.87 25.36 16.37 12.62 13.69 15.92 17.50
Inventory Turnover 714.56 391.95 396.44 516.18 606.62 669.82 686.50 665.97
Trade Receivables Turnover 21.67 18.98 28.70 34.61 36.70 35.68 34.33 33.24
Trade Payables Turnover 11.47 9.41 10.98 11.86 14.54 16.87 17.99 18.02
Average Inventory Holding Period 0.51 0.93 0.92 0.71 0.60 0.54 0.53 0.55
Average Days to Collect Receivables 16.84 19.23 12.72 10.55 9.94 10.23 10.63 10.98
Average Days to Pay Payables 31.82 38.78 33.24 30.79 25.10 21.64 20.29 20.26
Operating Cycle 17.35 20.16 13.64 11.25 10.55 10.78 11.16 11.53
Cash Conversion (Trade) Cycle -14.47 -18.62 -19.60 -19.53 -14.55 -10.86 -9.13 -8.73
Panel D: Liquidity Ratios
Current Ratio 0.89 1.20 1.25 1.16 0.94 0.87 0.87 1.19
Quick Ratio 0.89 1.19 1.25 1.15 0.93 0.86 0.86 1.18
Cash Ratio 0.65 0.93 1.03 0.91 0.70 0.60 0.57 0.84
Defensive Interval 133.32 118.90 123.03 103.08 87.61 73.16 65.76 79.50
EBIT to Interest Expense 135.13 47.31 10.82 10.78 12.91 18.81 27.70 24.96
EBIT to Net Interest Expense -31.59 95.27 13.49 12.21 14.91 23.37 38.95 36.58
The ratios in Panel A and Panel C are calculated using average balance sheet accounts. *Pro-forma
Exemptions: ROE, Total Asset Turnover
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Appendix 5 : DuPont and Advanced DuPont Analysis
Panel A: Standard DuPont Model 2014A 2015A 2016* 2017Ε 2018Ε 2019Ε 2020Ε 2021Ε
Net Profit Margin [A] 14.46% 15.00% 10.41% 11.74% 11.67% 11.66% 12.36% 11.18%
Asset Turnover [B] 0.79 0.82 0.82 0.89 1.12 1.41 1.63 1.72
Equity Multiplier [C] 1.42 1.42 1.62 1.63 1.67 1.61 1.55 1.61
ROE [AxBxC] 16.13% 17.45% 13.78% 17.02% 21.76% 26.47% 31.23% 31.00%
Panel B: Advanced DuPont Model 2014A 2015A 2016* 2017Ε 2018Ε 2019Ε 2020Ε 2021Ε
RNOA [D=ExF] 20.51% 20.24% 14.61% 17.34% 21.29% 26.15% 31.92% 33.83%
NOA Turnover [E] 1.47 1.33 1.30 1.35 1.70 2.15 2.52 2.94
NOPAT Margin [F] 13.96% 15.16% 11.24% 12.79% 12.51% 12.18% 12.68% 11.49%
Net Borrowing Cost After Tax [G] 2.33% -1.46% 58.30% 22.07% 16.34% 20.54% 200.60% -15.10%
Net Financial Leverage [H] -24.08% -12.85% 1.89% 6.88% 9.58% 5.76% 0.41% -5.77%
ROE [D+(D-G)xH] 16.13% 17.45% 13.78% 17.02% 21.76% 26.47% 31.23% 31.00%
*Pro-forma
Return on Net Operating Assets = Net Operating Profit After Tax / Net Operating Assets
Net Operating Profit After Tax = Profit After Tax + (Financial Expense) x (1 - Marginal Tax Rate)
Net Operating Assets = (Total Assets - Cash & Cash Equivalents) - (Total Liabilities - Short-term Debt - Long-term Debt) = Equity + Net Debt
NOA Turnover =Wagers / Net Operating Assets
NOPAT Margin = Net Operating Profit After Tax / Wagers
Net Borrowing Cost After Tax = [(Financial Expense - Financial Income) x (1 - Marginal Tax Rate)] / Net Debt
Net Financial Leverage = Net Debt / Equity
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Appendix 6 : Weighted Average Cost of Capital
2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Cost of equity
Risk Free Rate (1) 0,240% 0,240% 0,240% 0,240% 0,240% 0,240% 0,240% 0,240% 0,240% 0,240% 0,240%
Beta (2) 0,79 0,79 0,79 0,79 0,79 0,79 0,79 0,79 0,79 0,79 0,79
Equity Risk Premium (3) 5,47% 5,47% 5,47% 5,47% 5,47% 5,47% 5,47% 5,47% 5,47% 5,47% 5,47%
Adjusted CRP 12,63% 10,51% 9,12% 9,12% 7,72% 7,72% 7,72% 7,72% 7,72% 7,72% 7,72%
Cost of equity 14,54% 12,87% 11,76% 11,76% 10,66% 10,66% 10,66% 10,66% 10,66% 10,66% 10,66%
Cost of Debt
Cost of debt (pre-tax) 6,42% 6,42% 6,42% 6,42% 6,42% 6,42% 6,42% 6,42% 6,42% 6,42% 6,42%
Corporate tax 29% 29% 29% 29% 29% 29% 29% 29% 29% 29% 29%
Cost of Debt 4,56% 4,56% 4,56% 4,56% 4,56% 4,56% 4,56% 4,56% 4,56% 4,56% 4,56%
Total Debt / (Total Debt+Total Equity)
26,14% 27,06% 22,78% 18,34% 19,84% 19,84% 19,84% 19,84% 19,84% 19,84% 19,84%
WACC 11,93% 10,62% 10,12% 10,44% 9,45% 9,45% 9,45% 9,45% 9,45% 9,45% 9,45%
Sources:
(1) Trailing redemption yield of 10-year german bond.
(2) Beta derived from monthly observations, since 2013.
(3) Market risk premium = Real GDP Growth (EU) + Inflation (EU) + Dividend Yield (Euro Stoxx) + P/E Growth = 1.6% + 1.1% + 2.77% + 0% = 5.47%
Country Risk Premium Calculation
Moody's Rating Caa2 Caa1 B3 B3 B2 B2 B2 B2 B2 B2 B2
Credit default spread(4) 10,40% 8,66% 7,51% 7,51% 6,36% 6,36% 6,36% 6,36% 6,36% 6,36% 6,36%
Adjusted CRP 12,63% 10,51% 9,12% 9,12% 7,72% 7,72% 7,72% 7,72% 7,72% 7,72% 7,72%
Adj. Factor 1,214
(5) Std deviation in Equities 37,834
(6) Std deviation in Bonds 31,163
(4) The country's default spread - based on the country sovereign rating from Moody's, Damodaran Tables, Jan 2017.
(5) Standard Deviation in Equities- Datastream, daily observations
(6) Standard Deviation in Bonds- Datastream, daily observations
Bond Default Spread – Damodaran Table
Caa3 11.55% B1 5.20% Baa2 2.20% Aa3 0.70%
Caa2 10.40% Ba3 4.16% Baa1 1.84% Aa2 0.57%
Caa1 8.66% Ba2 3.47% A3 1.39% Aa1 0.46%
B3 7.51% Ba1 2.89% A2 0.98% Aaa 0.00%
B2 6.36% Baa3 2.54% A1 0.81%
Cost of Equity = Risk Free Rate + Beta*(Mature market Risk Premium + Bond Default Spreads*(Std. Dev. in Equities / Std. Dev. in Bond Price))
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Appendix 7 : Discounted Cash Flows Valuation
(Data are in 000s) 2017Ε 2018Ε 2019Ε 2020Ε 2021Ε 2022E 2023E 2024E 2025E 2026E 2027E
EBIT 270,557 324,102 363,340 401,628 361,958 354,817 355,173 359,672 372,131 354,416 395,768
EBIT Margin (%) 18.01% 17.62% 17.16% 17.86% 16.19% 16.00% 16.02% 16.14% 16.61% 16.23% 19.57%
Less: Operating Taxes -72,037 -87,685 -100,860 -113,482 -102,098 -100,099 -100,297 -101,697 -105,405 -100,362 -112,448
Tax Rate (%) 26.63% 27.05% 27.76% 28.26% 28.21% 28.21% 28.24% 28.27% 28.32% 28.32% 28.41%
NOPAT 198,520 236,417 262,479 288,147 259,860 254,718 254,876 257,975 266,726 254,054 283,320
NOPAT Margin (%) 13.22% 12.85% 12.39% 12.81% 11.62% 11.49% 11.49% 11.57% 11.91% 11.64% 14.01%
Plus: Depr. & Amort. 56,644 83,662 108,485 101,178 137,678 137,678 137,678 137,678 129,761 121,844 42,525
Depr. & Amort./GGR(%) 3.77% 4.55% 5.12% 4.50% 6.16% 6.21% 6.21% 6.18% 5.79% 5.58% 2.10%
Less: CAPEX 91,000 46,000 5,000 4,000 3,000 3,000 3,000 3,000 3,000 3,000 42,525
CAPEX/GGR (%) -6.06% -2.50% -0.24% -0.18% -0.13% 0.14% 0.14% 0.13% 0.13% 0.14% 2.10%
Less: Increase in NWC 2,796 11,259 9,393 4,170 1,336 -1,379 -100 700 707 -852 100
NWC/GGR (%) -11.1% -8.45% -6.89% -6.31% -6.28% -6.28% -6.27% -6.27% -6.27% -6.39% -7.20%
FCFF 161,368 262,820 356,571 381,154 393,201 390,774 389,654 391,952 392,780 373,750 283,220
WACC 12.78% 11.94% 10.62% 10.12% 10.44% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45%
Discount Factor 1.0000 0.8934 0.8076 0.7333 0.6640 0.6067 0.5543 0.5064 0.4627 0.4228 0.3863
Disc. FCFF 161,368 234,792 287,954 279,509 261,081 237,070 215,983 198,502 181,748 158,013 109,402
Perpetual Growth Rate 0%
Disc FCFF (2017-2026) 2,216,020
Disc. Terminal Value 1,267,279
Target Price 10.73
Enterprise Value 3,483,299
Current Price 8.2
Less: Total Debt -365,000
Upside Potential 30.80%
Plus: Cash 293,717
Market Cap. 3,412,016
Shares Outst. 318,112,195
Appendix 8 : Residual Income Valuation
(All data are in 000s) 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
NOPAT 198,520 236,417 262,479 288,147 259,860 254,718 254,876 257,975 266,726 254,054 283,320
Equity+Loans 1,415,840 1,401,339 1,351,467 1,207,854 1,089,674 981,730 981,730 981,730 981,730 981,730 981,730
Residual Income 29,503 87,545 125,658 162,024 156,902 161,959 162,117 165,216 173,967 161,295 190,561
WACC 11.94% 10.62% 10.12% 10.44% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45%
Discount Factor 1.00 0.90 0.82 0.74 0.68 0.62 0.57 0.52 0.47 0.43 0.40
Disc. Residual Income 29,503 79,138 103,148 120,425 106,550 100,490 91,904 85,575 82,329 69,743 75,284
Perpetual Growth Rate 0%
Present Value (2017-2026) 868,805
Present Value (2026+) 872,065
Target Price 10.30
Enterprise Value 3,156,710
Current Price 8.2
Less: Total Debt -365,000
Upside Potential 25.6%
Plus: Cash 293,717
Market Cap 3,085,427
Shares Outst. 318,112,195
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Appendix 9 : Relative Multiples Valuation
1) Metrics € million Country Market cap. 3Y EPS CAGR ROE Dividend Yield EBITDA margin Revenues(GGR)
Company
(27/12/2016) 2016-2019 2017 2018 2019 2016 2017 2016 2017 2016 2017
William Hill UK 2,548 13.72% 17% 17% 16% 4.08% 4.43% 25.00% 21.33% 1,597 1,699
Ladbrokes UK 2,274 29.80% 13% 16% 16% 2.64% 4.12% 13.63% 18.39% 1,273 2,447
Paddy Power Ireland 7,306 15.72% 28% 19% 9% 1.82% 2.25% 23.55% 27.23% 1,468 1,738
Betsson Sweden 10,695 -2.94% 25% 21% 21% 5.07% 5.35% 26.08% 27.33% 4,040 4,515
Rank Group UK 754 4.47% 16% 16% 16% 3.32% 3.73% 18.09% 16.83% 709 773
IGT UK 4,397 4.99% 10% 10% 15% 1.92% 2.47% 55.00% 35.58% 1,968 2,145
Median
0.09 16% 16% 16% 2.98% 3.93% 24.27% 24.28%
Average
0.11 20% 18% 18% 3.14% 3.72% 26.89% 24.45%
OPAP
2,759 0.13 15% 18% 24% 15.93% 9.90% 20.02% 21.79% 1,391 1,502
OPAP vs Median
41.2% -7.4% 13.1% 48.8% 435.0% 152.1% -17.5% -10.3%
OPAP vs Average
20.5% -24.3% 0.8% 32.5% 407.0% 165.8% -25.6% -10.9%
2) Multipliers
P/E EV/EBITDA EV/GGR P/BV EV/EBIT
Company 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019
William Hill 12.48 11.71 10.89 7.60 6.99 6.28 1.61 1.50 1.31 1.67 1.55 1.48 9.96 9.69 8.89
Ladbrokes 18.43 12.20 9.73 6.63 5.52 n/a 1.22 1.10 n/a 1.56 1.44 n/a 10.30 7.61 n/a
Paddy 26.84 21.91 19.25 14.96 14.61 n/a 4.08 3.62 n/a 1.70 1.64 n/a 18.56 16.03 n/a
Betsson 14.53 15.94 16.14 9.68 10.11 9.77 2.61 2.36 2.12 3.00 2.85 2.69 12.14 13.13 12.97
Rank 13.45 12.36 11.48 6.55 5.94 5.37 1.11 1.03 0.95 1.98 n/a n/a 10.36 9.31 8.28
IGT 12.36 11.50 10.70 8.06 2.13 n/a 2.83 0.74 n/a 1.47 1.36 1.73 12.10 3.82 n/a
Median 13.99 12.28 11.18 7.83 6.46 6.28 2.11 1.30 1.31 1.68 1.55 1.73 11.23 9.50 8.89
Average 16.35 14.27 13.03 8.91 7.55 7.14 2.24 1.73 1.46 1.90 1.77 1.97 12.24 9.93 10.05
OPAP 14.79 12.15 10.56 8.92 7.16 3.90 1.94 1.59 1.38 2.52 2.64 2.80 10.79 9.01 8.04
OPAP vs Median
5.7% -1.0% -5.5% 14.0% 10.8% -37.9% -7.9% 22.4% 4.9% 49.4% 70.9% 61.6% -3.9% -5.2% -9.6%
OPAP vs Average
-9.5% -14.8% -18.9% 0.1% -5.2% -45.3% -13.4% -8.0% -5.9% 32.6% 49.7% 42.2% -11.8% -9.3% -20.0%
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Appendix 10 : Organizational Structure
Appendix 11 : Geographical Distribution of Commercial Network
Appendix 12 : Games’ Participation to Wagers
KINO 43.99%
JOKER 6.32%
LOTTO 0.87%
PROTO 0.50%
SUPER 3 0.31%
EXTRA 5 0.13%
STIHIMA 31.35%
MONITOR GAMES 1.04%
PROPO 0.13%
PROPO-GOAL 0.01%
LAIKO 2.43%
ETHNIKO 1.00%
SKRATS 6.82%
Other 5.11%
Lotteries 52% Sports
Betting 32%
Instants and
Passives 11%
Other 5%
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Appendix 13 : Social Responsibility
Health:
In 2014, OPAP commenced the renovation of two Children’s Hospitals, “Aghia Sophia” and “Panagioti & Aglaias Kyriakou”.
The main purpose of this project is the upgrade of Hospital’s Nursing Units and Outpatient clinics in conjunction with the
creation of a pleasant therapeutic environment for the children. Within a year, two floors were completed and delivered.
Since 2014, OPAP, as a Grand Sponsor of Athens Marathon, invites citizens to download the mobile application “Something
Better” in order to support its social responsibility actions. Via this application, they were able to make virtual contributions,
which have been converted into financial support. In 2016, more than 200,000 people used the application and approximately 3.3
million euros were collected –almost 5 times more than 2015.
OPAP also supports Harokopio University’s “Evaluation of Students’ Physique, Eating Habits and Physical Activity” program,
which assesses the health parameters, such as dietary habits, physical activity and fitness, of the student population in all
educational levels in Greece since 2012.
Sports:
In 2014, OPAP initiated the “Sports Academies” program, which supports 125 amateur football academies throughout Greece
and addresses to more than 10,000 young athletes. This program aims to bring the children closer to sports by providing the
academies with an integrated educational “package”.
OPAP is also the Grand Sponsor of the Paralympic Committee since 2011.
Employment:
OPAP designs an integrated social program, which aims to provide support to developing companies.
Sensitive Social Groups & Community Support:
Since 2014, OPAP supports the “Together for Children” association through the initiative “Wishing Ornaments”. In further
detail, presents are offered to children during Christmas and the facilities under the association are further enhanced through the
funding of OPAP. In 2015, the company completed the construction of a modern playground for the “Smile of the Child”
organization and contributed in infrastructure development activities to “SOS Children Villages”.
Since 2015, OPAP supports "Music Loves Autism", an Onassis Cultural Centre's initiative, which helps children with autism to
improve their sensory capacities.
Environmental Impact:
In order to ensure that the environmental impact from its operations is mitigated, OPAP developed a certified Environmental
Management System according to ISO14001:2004, specifically for OPAP S.A. and OPAP Services S.A.
Protecting the players:
OPAP supports responsible gaming by being subject to the Hellenic Game Commission’s regulations and by carrying out an
awareness campaign for players.
Employees:
OPAP provides its employees with a pleasant work environment and aims to further development of their skills and educational
background. In order to achieve these objectives, the company takes into consideration the employees’ proposals, provides
training programs and offers additional benefits.
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Appendix 14 : Porter’s Five Forces
Intensity of competitive rivalry (2):
Casinos and online betting platforms consist the most
important competitors of OPAP
These competitors hold the 22% of the gaming market share
while OPAP SA and its subsidiaries hold the rest
78%.Potential expansion is limited due to the existing
regulatory framework
Currently, the illegal gaming market can be perceived as the
most important competitor, taking into consideration that its
value is estimated around € 1 billion in a yearly basis.
However, the investment of OPAP SA in VLTs will minimize
the market share of casinos and significantly reduce the
revenues of the illegal market
Threat of substitute products (3):
The vast majority of OPAP SA products are unique in the Greek
gaming market. Casinos offer slightly different games which are
more expensive and more difficult to access. Exceptions are the
online betting platforms which offer similar products to those of OPAP SA.
OPAP SA and its subsidiaries have established a highly diversified product portfolio. However, it is possible that a small
scale competitive interaction takes place between some of these products.
Bargaining Power of Suppliers (1)
OPAP SA does not rely heavily on specific suppliers due to the nature of its business activity. So, the bargaining power of the
suppliers does not pose a threat for the company.
Bargaining Power of Customers (2)
The main characteristics of the customer base are the high population and the small per capita spending for betting games
(€194). Consequently, the bargaining power of the customers is not significant.
The agents who function as intermediaries between OPAP SA and the final customer have sometimes bargaining power
especially when it comes to bad debt.
Threat of new entrants (1)
The regulatory framework is not flexible
The market capitalization of OPAP SA is €2.8 billion, making it impossible for potential medium sized companies to set up
business in this segment
There is an already established commercial network of 4791 POS which comes first among other Greek companies. It is
extremely difficult for new entrants to acquire and maintain a network like this
OPAP SA has a strong brand name closely linked with the Corporate Social Responsibility (CSR) and the contribution to the
Greek society
1 Low 2 Low to Medium 3 Medium 4 Medium to High 5 High
2
3
1 2
1
Rivarly
Substitutes
SuppliersCustomers
New entrants
Average: 1.8
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Strengths
• Market leader • Widest commercial
network in Greece • Strong cash flows
• Game diversification
Weaknesses
• Online sport betting competition
•Lack of geographical diversification
• Games' "cannibalization"
Opportunities
• VLTs market • Virtual sports games
• Illegal Betting Markets
• Customer base enhancement
Threats
• Macroeconomic Environment • Regulatory Framework
Appendix 15 : SWOT Analysis
Strengths OPAP S.A. is currently the leader in the Greek Gaming
Market, holding a 73% market share, which mostly derives
from owning exclusive licenses. Moreover, its commercial
network is expanded throughout Greece and Cyprus having
an aggregate total of 4,739 POS (as of 31.01.2015). This
classifies OPAP’s retail network as the largest and most
widespread in Greece, exceeding the number of the banks
and post offices combined. The strong cash flows that the
company produces, ensures the prospective stability and
profitability while its generous dividend policy remains
intact if not ascending at times. The diversification of
games is wide enough to fulfil the most demanding
costumers’ expectations as OPAP offers 14 different games,
save the ongoing VLT project.
Weaknesses
OPAP has to face intense competition in the online sport
betting market by the 24 online platforms operating under
transitional regime, despite owning a strong brand name and
using modern user friendly interfaces. Another structural
weakness is the lack of geographical diversification, as
OPAP operates exclusively in Greece and only 5% of its revenues derive from Cyprus. Furthermore, OPAP has to cope with
game “cannibalization”, as newly added games often generate profit in the expense of its older ones.
Opportunities
The upcoming and highly anticipated VLTs are expected to cause significant impact in the market and finally lead in a market
transformation by almost doubling the company’s GGR. Concerning the farfetched opportunities, Virtual sports will definitely
be high enough in the target list of OPAP, as it will enable the company to step into the broader entertainment industry. With
the actions mentioned above there is definitely room for growth for OPAP, especially by acquiring a share from the unexploited
illegal betting markets. However, the biggest challenge will be the evolution of the existing betting agencies in order to further
enhance the experiential impact on its customers.
Threats
OPAP’s intangible assets consist mostly from exclusive operating licenses with an aggregate value exceeding € 1 billion. In
other words, OPAP has a huge dependence on the existing regulatory framework and a potential market deregulation, as the
one that froze the VLT project in 2015, could lead to significant market share loss. The biggest threat, however, arises from the
macroeconomic environment, as OPAP’s wagers and GGR depend highly on the GDP.
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 23
Appendix 16 : P.E.S.T.L.E. Analysis
Starting with the political factors, political instability in the years of the economic crisis
has considerably raised the level of uncertainty. On the other hand, Greece is a member
state of the EU and has established strategic alliances with international organizations
such as NATO, IMF, OECD etc. which counterbalances political uncertainty. A
structural problem in the political environment is the extremely frequent changes in laws
and tax rates. Concerning OPAP, the Greek State has levied a special tax calculated as
35% of the Gross Gaming Revenue (GGR) which is considerably higher compared to the
European average. Last but not least, capital controls have been imposed to minimize the
instability in the national banking system after the political uncertainty created by the
recently elected government.
Proceeding to the economic environment, Greece suffers from deep recession for more
than half a decade pushing several companies to stop their operational activity.
Moreover, unemployment rate has skyrocketed, restricting purchasing power to a
historical low together with the minimization of the disposable income. On this context,
the Greek Gaming Market has gone through an aggregate loss of 38% since 20081.
Despite the adverse recession period and the market decline, people have preserved their
consuming habits towards betting. In particular, Greeks seem to be very keen on betting
games, as the Greek Gaming Market consists 0.98% of the GDP, outperforming most of
the European peers. Internet betting platforms seem to be more attracting to young age
groups, while the older age groups prefer the traditional games. However, there is an
overall increase of internet users. Lastly, the minimization of the gender inequality has
eliminated the prevalent belief, that lucky games and betting is a men’s case.
Technological advance during the last decade has fundamentally changed the
communications, transactions and the means of entertainment. As a result, not only there
are new online and digital games available but the classic ones have been revolutionized
as well. OPAP follows tightly the technological transformation, by adding innovative
games to its portfolio and redesigning the already existing ones to match with the
expectations of the 21st century.
Environmental problems and the climate change do not affect the gaming industry
significantly and there is no specific regulatory framework for the companies operating in
the segment. Nevertheless, OPAP follows the ISO 14001:2004 concerning environmental
protection. Moreover, the company has reduced energy consumption and has extended
recycling, especially paper.
The legal framework issued by the Hellenic Gaming Commission makes it quite difficult
for competitors to enter the market, as most of the licenses are exclusive. The current
situation is very helpful for OPAP and enables it to operate without any significant threat
from competitors. On the other hand, the framework obliges OPAP to abide by specific
requirements in terms of game specifications which leads to increased operational costs
and reduced efficiency.
1 Hellenic Gaming Commission Data
P E S T L E Political Economic Social Cultural Technological Legal Environmental
Political Instability
High Taxation
Capital controls
Economic Depression
High rates of unemployment
Betting Habits Increase of Internet users
Demographics
New games
Alternatives
New means of payment
Lottery monopoly
Responsible gaming
OPAP follows the ISO 14001:2004
55%
85%
25% 69%
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Internet Penetration Rate
European Union Greece
Source: Eurostat
0
100
200
300
400
500
600
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Δισ
εκα
τομ
μύ
ρια
Debt - GDP (€ billion)
Debt GDP
Source: Eurostat
0
2
4
6
8
10
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Wagers in the GGM (€ billion)
OPAP Casinos
State Lotteries Horse Races
Source: HGC Annual 2015 Report
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 24
Appendix 17 : VLT regulation
In 2011, OPAP acquired an exclusive license for Video Lottery Terminals (VLTs) operation, paying €560 million. However, the
investment did not proceed as expected due to the deterioration of the regulating framework. More specifically, OPAP supported
that the new VLT regulation introduced in 2015 is about to reduce dramatically the efficiency of the investment project. As a
result, the company decided to postpone the VLT project and filed a request for arbitration with the London Court of
International Arbitration for damages in excess of €1 billion. In the 2nd
of November, the Hellenic Gaming Commission decided
to change once more the regulatory framework concerning VLTs, in order to enable OPAP to initiate the project. The company
announced promptly, that “all of the appropriate conditions are now in place to allow OPAP to restart plans for the operation of
VLT products in Greece”.
Regulation2 2015, 158/2 2016, 225/2 Daily Loss €80 Set by player Session Loss €20 Set by player
Operating Hours 10:00-24:00
(10:00-02:00 Fridays Saturdays and holidays)
10:00-02:00 (10:00-04:00 Fridays
Saturdays and holidays) Maximum Jackpot 20,000 50,000 Minimum Distance between VLT venues
200m No limit
Obviously, the new regulation is less strict for OPAP. However, there are still limitations in order to protect players and enhance
responsible gaming:
Only adults over 21 years old are allowed to enter and use the VLTs
The whole VLTs project will work online and the Hellenic Gaming Commission will have full access
There must be at least 3m2 of space per VLT
Limitations concerning proximity to schools
Minimum payout ratio is 80%
The 21st of December 2016, European Commission asked the Hellenic Gaming Commission to freeze the VLT project once
more because progress in terms of player of protection has been reverted with the introduction of the new regulation. On the
other hand, Hellenic Gaming Commission insists that the current regulatory framework, concerning VLTs, is fully aligned with
the European standards in terms of responsible gaming.
We have conducted research regarding the European Commission Recommendation3 and our verdict is that the VLT
regulation complies with the European Standards for responsible gaming. Moreover, we have compared the VLT regulation with
the major principles of responsible gaming publicized by the European Gaming and Betting Association4:
Age restriction to ensure that minors do not access gambling websites
Information, educational initiatives and warnings for all customers
Pre- commitment on monetary limits
Reality checks which allow players to be in control of their activities
The ability to (permanently) self-exclude or choose ‘cooling off’ periods
Direct communication with players
Providing a clear link to the website of at least one organization qualified to assist problem gamers
Not providing credit to customers
2Decision 225/2/25.10.2016, publicized in the Official Government Gazette, No3528, 2
nd issue, 01/11/2016
3 Commission Recommendation of 14 July 2014, on principles for the protection of consumers and players of online gambling services
and for the prevention of minors from gambling online (2014/478/EU), Official Journal of the European Union, 19/7/14 4 www.egba.eu/media/FACTSHEET_RESPONSIBLEGAMING1.pdf
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 25
Appendix 18 : Exclusive Licenses
Title Description Games Expiry Date Cost
VLTs
OPAP was granted in 2011 the right to operate 35.000 video
lottery terminals in Greece. Since then, the project has been
suspended until the beginning of 2017, due to changes in the
regulatory framework.
35.000 VLTs 2027 €560
million
Instants and
Passives
In 2013 OPAP renewed through Hellenic Lotteries S.A. its
license concerning Instant & Passives. OPAP SA controls
67% of Hellenic Lotteries while the rest is equally distributed
between Scientific Games and Intralot. The joint venture
consists of companies leaders in the Lottery Tickets segment
and the exclusivity of the license provides significant potential
for expansion.
Scratch, Ethniko,
Laiko
2035
€190
million +
30% of the
GGR
Numerical Lotteries
and Sports Betting
OPAP holds an exclusive license for numerical lotteries and
sport betting games that expires in 2020. In 2011, signed the
expansion of the license till 2030. As a result OPAP has the
right to organize, conduct and manage the existing 13 games,
along with operating new games, permitted by law, by any
mean possible.
Stihima, Joker,
Lotto, Propo,
Proto, Super 3,
Extra 5, Propo-
Goal, Kino,
Monitor Games
2030 Online
Numerical
Lotteries: 2030
Online Sports
Betting: 2020
€375
million +
5% of the
GGR (from
2020 to
2030)
Horse Races
OPAP has acquired in 2016 the exclusive right to organize
and conduct Horse races in Greece and organize mutual
betting on them. The license also includes organizing and
conducting mutual betting on horse races online.
Land Based and
Online Horse
Races
2035 (Online: 2020)
€40
million
Appendix 19 : Product Portfolio based on GGR
(The size of the circles represents the participation rate on the GGR)
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 26
Appendix 20 : VLT Assumptions
1)VLT number
31/12/2017 31/12/2018 31/12/2019 31/12/20203
Actual1
Weighted2
Actual1
Weighted2
Actual1
Weighted2
Actual1
Weighted2
Operated by OPAP 10,536 4,326 16,500 15,008 16,500 16,500 16,500 16,500
Sub-contracted 0 0 8,844 3,685 18,500 13,266 18,500 18,500
Total 10,536 4,326 25,344 18,693 35,000 29,766 35,000 35,000 1We have assumed that the introduction of VLTs will be linear.
2Weighted VLTs in year X1 = (Actual VLTs in December X0) + (Actual VLTs introduced in January X1 * (11/12)) + (Actual VLTs introduced
in February X1 * (10/12)) + ……… + (Actual VLTs introduced in December X1 * (1/12)) 32020 onwards, Actual VLTs = Weighted VLTs
2) Wagers-GGR
2017 2018 2019 2020
2021
Wagers/VLT/day 640 600 567 523 523
Wagers1
1,010,554 4,093,840 6,156,601 6,682,308 6,682,308
Payout Ratio 90.00% 89.00% 88.00% 87.00% 87.00%
Payout to winners2
909,498 3,643,518 5,417,809 5,813,608 5,813,608
GGR3
101,055 450,322 738,792 868,700 868,700 1Wagers = (Wagers/VLT/day) * (Weighted VLTs) * (365)
2Payout to winners = Wagers * Payout Ratio
3GGR = Wagers – Payout to winners
3) License Amortization
2017 2018 2019 2020
……. 2026
Amortization1
8,135 35,154 55,976 65,819 ….... 65,819 1Value of the license = (X * Weighted VLTs in 2017/35,000) + (X * Weighted VLTs in 2018/35,000) + …… + (X * Weighted VLTs in
2026/35,000)
4)Fees
2017 2018 2019 2020 2021
Agents' Commission1
25,264 90,388 102,383 102,383 102,383
Sub-contractors' fee2
0 26,631 98,779 137,751 137,751
Vendors' Commission3
12,632 56,290 92,349 108,588 108,588 1Agents’ Commission = GGR of VLTs operated through the network of OPAP * 25%
2Sub-contractors’ fee= GGR of the sub-contracted VLTs * 30%
3Vendors’ Commission = GGR (of the entire VLTs) * 12.5%
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 27
Appendix 21 : Wagers Assumptions
Lotteries Sports Betting Instants and Passives
Factor GDP1 Market
Transformation Total GDP
1 Seasonality Competition Total GDP
1 Market Transformation
Total
2016 0.13%
0.13% 0.13%
0.13% 0.13%
0.13%
2017 5.89% -5.00% 0.89% 5.89% -2.00% -5.00% -1.11% 5.89% -2.00% 3.89%
2018 6.53% -10.00% -3.47% 6.53%
-5.00% 1.53% 6.53% -2.00% 4.53%
2019 5.96% -9.00% -3.04% 5.96%
-5.00% 0.96% 5.96% -2.00% 3.96%
2020 5.21% -5.00% 0.21% 5.21% 2.00% -9.00% -1.79% 5.21% -2.00% 3.21%
2021 3.79% -2.00% 1.79% 3.79% -2.00% -9.00% -7.21% 3.79% -2.00% 1.79%
2022 1.00% -1.00% 0.00% 1.00%
-6.00% -5.00% 1.00% -1.00% 0.00%
2023 1.00% 1.00% 1.00%
-3.00% -2.00% 1.00% -1.00% 0.00%
2024 1.00% 1.00% 1.00%
0.00% 1.00% 1.00% -1.00% 0.00%
2025 1.00% 1.00% 1.00%
0.00% 1.00% 1.00% -1.00% 0.00%
2026 1.00% 1.00% 1.00%
0.00% 1.00% 1.00% -35.00% -34.00%
2027 1.00% 1.00% 1.00%
0.00% 1.00% 1.00%
1.00%
In 2017, the introduction of
VLTs is expected to minimize
wagers from lotteries.
Especially the VLTs that will
be installed in the already
existing agencies are expected
to obtain a significant
percentage of the lottery
revenues. We assume that the
revenue cannibalization will be
gradually reduced until 2022.
The exclusive license for
lotteries has been extended up
until 2030 and consequently we
do not expect any kind of
market deregulation or
competitive rivalry.
In 2017, we have calculated a 2% reduction in
wagers due to the European Championship
that took place in 2016 and had created a
temporary positive impact to the financial
results. Similar seasonality adjustments are
expected for 2020 and 2021 due to the
European Championship of 2020.
Competition is already pushing down OPAP
revenues from online sports betting. We
expect competition in the future to be more
intense, as internet penetration rate will be
increased and online market will acquire a
bigger market share. Moreover, the online
betting rivals operate under a transitional
framework which is expected to become
permanent by the expiration of the online
betting license of OPAP in 2020.
VLTs, virtual reality games and
other intuitive betting products are
expected to slightly affect the
instants and passives market.
Technologically advanced
products will grab the customers’
interest and demand for traditional
batting games will be reduced.
However the overall result will be
either positive or neutral due to the
GDP push. In 2025, the exclusive
license is about to expire and we
asuume a significant market share
loss for OPAP, as it is highly
possible more rivals to get into the
market.
1
GDP: running a linear regression between the annual change in wagers of OPAP (%) and the annual changes in real
GDP (%), we noticed that there is a positive correlation. So, we used real GDP projections from the World Economic
Outlook Database, of IMF in order to calculate the impact on the amounts wagered in the future.
Historic real GDP Data
Projected real GDP Data
2016E 2017E 2018E 2019E 2020E 2021E
0,06% 2,77% 3,07% 2,80% 2,45% 1,78%
Source: www.imf.org/external/pubs/ft/weo/2016/02/weodata/index.aspx
2007 2008 2009 2010 2011 2012 2013 2014 2015
3,27% -0,34% -4,30% -5,48% -9,13% -7,30% -3,20% 0,65% 0,23%
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 28
Appendix 22 : Corporate Governance
Effectiveness
Board’s Composition OPAP’s policy is to offer equal
opportunities, which is demonstrated by the
diversity amongst the Board. Decision
making process is taking place through a
male-based Board, whereas 75% of BoD
members are not Greek and 20.58% of the
Top 34 managers are female. Regarding the
Executives, the 41.6% are female and the
58.33% are non-Greek nationals.
Information and Support
Every member of the Board has access to
reports regarding upcoming meeting
agendas; even Directors who were absent
can review and raise issues on the relevant
briefing papers. The Company Secretary, who ensures that the correct Board procedures are followed and proper records are
maintained, is also accessible to each Director and in accordance to a specific procedure, members are able to take independent
advice at company’s expense in furtherance of their duties
Evaluation Listed companies have to undertake a predefined evaluation process at least once every two years.
During 2015, OPAP’s annual evaluation was performed by the Board, internally. However, an external evaluation is under
consideration to be performed next year. Each Director’s performance is undertaken by the Chairman through one-to-one
discussions. The performance of the Executive Directors of the Board is also reviewed by the Remuneration Committee.
Accountability and Remuneration
Financial and business reporting The Board is responsible for the integrity of OPAP’s consolidated and the Company’s financial statements. Therefore, there is a
series of accounting and treasury policies, practices and controls, that are designed to ensure the identification of changes in
accounting standards, which constitutes the Finance function.
Risk management and Internal Control
The Board has established a risk and control structure designed to manage the achievement of OPAP’s objectives, which is
surrounded by the principles of Business Conduct, included in the Internal Rules and Regulations, and a range of ISO policies
and procedures on corporate, social and environmental responsibility.
Audit Committee and Auditors’ Report The Audit Committee recognizes that external auditors must be independent, with sufficient knowledge of the Company's
operations and to cooperate effectively with the Audit Committee under the Annual Audit Plan. The Company’s independent
auditors is KPMG
Director’s remuneration report and Remuneration Committee
OPAP’s remuneration philosophy is based on simplicity, shareholder alignment and performance-based remuneration. There is
also the Remuneration Committee which is chaired by Pavel Saroch and comprises three non-executive and independent
members. In particular, bonus schemes, that build incentives via specific KPIs, exist as well as qualitative criteria such as
managerial skills, training & development of the working teams, project deliveries, external communication.
Relation with Shareholders
Relations The Executive Directors and the Director of Investor Relations meet with institutional Shareholders and financial analysts to
discuss matters relating to the Company’s business strategy and performance, develop strategies in order to attract investors,
based on OPAP’s strategy of shareholder value enhancement and analyze Market feedback to Management
The Annual General Meeting
Shareholders are able to ask questions of the Chairman, the Chairs of Board Committees and the Board as a unit. The results of
the poll are released to the Stock Exchange and published on the website shortly after the AGM.
Major Codes’ Provisions 1) non-executive directors with diversified characteristics
2) two non-executive Vice Chairmen
3) the Audit Committee Chairman is an independent non-executive member
4) Special declaration regarding Executive BoD member’s position as non-executive member in another non-related corporation
5) Remuneration Committee constituted from the two Vice-Chairmen of the Board along with other independent and non-executive members
3 3
3.5
3.5
4 3
3.5
3.5
4
-1
1
3
5Composition
Information and Support
Evaluation
Financial and Business Reporting
Risk Management and InternalControl
Audit Committee and Auditors'Report
Remuneration Committee andDirector's Report
Relations with shareholders
The Annual General Meeting
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 29
Appendix 23 : Beneish M Score
Index Name Index Formula
DSRI Days Sales in Receivables Index (Net Receivablest / Wagerst) / (Net Receivablest-1 / Wagerst-1) 1.052
GMI Gross Margin Index [(Wagerst-1 – Payoutt-1) / Wagerst-1] / [(Wagerst – Payoutt ) / Wagerst ] 1.000
AQI Asset Quality Index [1 - (Current Assetst + PP&Et) / Total Assetst] / [1 - ((Current Assetst-1 + PP&Et-1) / Total Assetst-1)] 0.985
SGI Sales Growth Index Wagerst / Wagerst-1 0.994
DEPI Depreciation Index [(Depreciationt-1/ (PP&Et-1 + Depreciationt-1)] / [(Depreciationt / (PP&Et + Depreciationt)] 0.962
SGAI SGA Expenses Index (SG&A Expenset / Wagerst) / (SG&A Expenset-1 / Wagerst-1) 1.025
LVGI Leverage Index [(Current Liabilitiest + Total Long Term Debtt) / Total Assetst] / [(Current Liabilitiest-1 + Total Long
Term Debtt-1) / Total Assetst-1] 1.369
TATA Total Accruals to Total Assets (Income from Continuing Operationst - Cash Flows from Operationst) / Total Assetst 0.046
5 variable equation M = -6.065+(0.823*DSRI)+(0.906*GMI)+(0.593*AQI)+(0.717*SGI)+(0.107*DEPI)
8 variable equation M = -4.84+(0.920*DSRI)+(0.528*GMI)+(0.404*AQI)+(0.892*SGI)+(0.115*DEPI)-(0.172*SGAI)+(4.679*TATA)-(0.327*LVGI)
M-score Result
5 variable equation -2.89 <-2.22, Non Manipulator
8 variable equation -2.36 <-2.22, Non Manipulator
See Beneish, D.M., Lee, M.C. and Nichols, D.C. (2013) Earnings Manipulation and Expected Returns, Financial Analysts Journals, Vol. 67, n. 2.
Appendix 24 : Altman’s Z Score for non-manufacturing companies
Variable Value
X1 = (Current Assets − Current Liabilities) / Total Assets 0.05
X2 = Retained Earnings / Total Assets 0.52
X3 = Earnings Before Interest and Taxes / Total Assets 0.13
X4 = Book Value of Equity / Total Liabilities 1.64
Z = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4 = 4.64
Z > 2.6 -“Safe” Zone
1.1 < Z < 2.6 -“Grey” Zone
Z < 1.1 -“Distress” Zone
Result: Safe
We have calculated the Altman’s Z score using the formula for non-manufacturing companies
CFA Research Challenge 2017
Athens University of Economics and Business
Accounting & Finance Department 30
Appendix 25 : Monte Carlo Simulation
We have implemented Monte Carlo Simulation on our DCF model in order to examine the volatility of the target price to our
major assumptions. We have picked 5 fundamental DCF variables related to our assumptions and we have matched them with
specific risks. For each one, we have defined the statistical distribution, the mean and the standard deviation.
Regarding distribution we have opted for normal with only exception the Country Risk Premium (CRP). We have used a PERT
distribution which is defined using 3 inputs: minimum, maximum and most likely. In our DCF model we have used the
Damodaran tables in order to match Projected Credit Ratings with CRP and as a result minimum and maximum values are
defined by the best and the worst credit rating respectively. So, we have created 2 different extreme scenarios regarding the
credit rating of Greece (negative and positive scenario) in order to examine the volatility of the CRP. Wherever we have applied
normal distribution we have set our DCF base values as mean.
1) Assumptions
Risk Category Variable Distribution Statistical Inputs
(ER1)Macroeconomic
Risk
Country Risk
Premium(CRP)-% PERT
Min:5.05%
Max: 14.02%
Most likely:[7.72%,12.63]
(OR1)VLT Investment
Risk
Lotteries’
Cannibalization-%
Normal
Distribution
Mean: [-10%,-1%]
Std. Dev.: 2%
Wager/VLT/day-€ Normal
Distribution
Mean:[€418,€640]
Std. Dev.: €200
(RR1)Regulatory
Framework Risk
Market Share Loss-
%
Normal
Distribution
Mean: -35%
Std. Dev.: 20%
Perpetual Growth
Rate-%
Normal
Distribution
Mean: 0%
Std. Dev.: 1%
Source: Team Estimates
2) Results
Statistics
Minimum 6.72
Maximum 16.17
Mean 10.21
Std Dev 1.12
Variance 1.2582506
Skewness 0.5491089
Kurtosis 3.7173377
Median 10.11
Mode 10.02
Left X 8.54
Left P 5%
Right X 12.22
Right P 95%
Diff X 3.68
Diff P 90%
Percentile
5% 8.54
10% 8.87
25% 9.44
50% 10.11
75% 10.87
90% 11.67
95% 12.22
All the above results have been calculated by performing 10,000 iterations with @Risk Software.
Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report.Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Greece, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
CFA Institute Research Challenge