AIM-listed Best of the Best PLC has had a torrid time of late. Whilst the business served up excellent numbers in 2021, with revenue growth of 156%, a notable decline in customer engagement, as stated by BOTB’s William Hindmarch in their Preliminary Results for 2021, sent the shares reeling 27% down on the day with a further decline of 20% seen since. So, with this significant decline in BOTB’s shares, this article will aim to take a look at the prospects for the business and summarise my thoughts on the investment case for Best of the Best.
Before we start, I must confess I had been eyeing up and considering purchasing BOTB on recent weakness (prior to the update on the 16th of June) and so, out of a mix of pure chance and capital restrictions stopping me from investing, I write this after BOTB’s recent troubles as opposed to before them!
History and Business Overview
Best of the Best PLC is a dream car and lifestyle competition company that was listed on the AIM market in July 2006. It was founded in 1999 by William Hindmarch, who serves as its CEO. It became known for its display of luxury cars as competition prizes in retail spaces within airport terminals and shopping centres. Their first site was at Heathrow’s Terminal 4, before expanding into Gatwick, Stansted, Edinburgh, Manchester, Luton and Birmingham, with a site also at Westfield Shopping Centre in London. BOTB’s revenue was initially largely derived from ticket sales to passing airport passengers.
Over time, BOTB has shifted to an online-only presence. The progression to completely online was completed in July 2019. In terms of their physical presence, they still attend major car shows in the UK such as Goodwill Festival of Speed. Online, they now run weekly competitions, giving away cars, cash, luxury watches and motorbikes.
How BOTB Works
Even if you are aware of who BOTB are, I think there is much to learn about their customer journey, which has proved so successful in their path to becoming an online-only operator.
Car Selection, Source: BOTB website
Once BOTB has acquired you as a ‘punter’ to their online landing page (probably through their digital marketing campaigns), you will be greeted by an ever-growing list of dream vehicles that you can potentially win. You simply click on the car you would like and add it to your basket. Once the vehicle is added, players must play a "skill" game of ‘spot the ball’, where you attempt to get as close to the panel of expert judges' predictions to where the ball actually is. Players can use line drawing tools to help their predictions.
Spot the ball, Source: BOTB website
Once the entries have been completed and the results from the competition are revealed a winner is selected. BOTB surprises them in a very lewd fashion, turning up to their house with a briefcase full of cash, champagne and typically a loud and flashy motor. This footage is then plastered over BOTB’s social media and website, acting as attractive bait for future players.
BOTB Midweek Winner, Source: BOTB website
Finally, all players are notified by email of the winner of the competition with a ‘better luck next time’ style response. In this email, you are able to see how accurate your guess was versus the panel of judges. Depending on how accurate you were, there are levels of small winnings paid for those close to the judges' estimate.
The Twenties Trader’s result during BOTB research
BOTB reported its full year results on the 16th of June, and looking specifically at the 2021 period, its results were fantastic. To summarise them briefly:
Revenue grew 156% to £45.7m
Operating profits grew 250% to £14m
Gross and operating margins grew to 62% and 31% respectively
The company remained debt free (albeit having placed new share capital during the year)
This record year was very much attributed to BOTB being a winner during the coronavirus pandemic, where many people turned to online forms of entertainment and enjoyed a gamble to cut through the boredom of lockdown restrictions. BOTB had just finished converting its business model to a pure-play online model at the start of the pandemic, which was extremely lucky considering the business used to serve customers at airports across the UK.
However, as I have alluded to at the beginning of this article, all of the focus for investors has remained on the statement issued by the Chief Executive within the final results below:
“However, in contrast to the summer 2020 period, we have experienced somewhat of a reduction in customer engagement since the latest easing of lockdown restrictions on April 12, 2021, specifically relating to the understandably long-awaited re-opening of hospitality and non-essential retail. We are closely monitoring this, but with our flexible model, growth strategy and plans for the year ahead, we expect customer engagement to return to normal levels before too long.”
I am sure investors have poured over every word of this statement (seeing as it single-handedly destroyed the share price). Unfortunately, and likely purposefully, the statement is very vague. If there is one thing the market does not like, it is a negative yet vague statement! As investors reading this statement, we have no clear idea of the severity or the duration of reduced engagement. Whilst this causes significant volatility in the shares in the short term — as the market attempts to predict the severity of such an incident — it does create a significant opportunity for new buyers if the situation becomes better than expected.
Shift From Airport to Online
In recent years, BOTB has made a fundamental change in strategy. Pivoting away from its physical presence in UK airports, it reduced the number of physical stalls to 7 in key locations by 2018, only 3 in 2019 with zero remaining in 2020. From a starting point of 26 operating locations across UK airports, this has had a significant impact on reducing operating costs, improving margins and focusing efforts on the highly scalable online model.
BOTB results, Source: Twenties Trader
Firstly, taking a look at margins, you can see from the chart above that BOTB’s margin profile has improved considerably since the reduction and completion of the exit from physical airport stalls in 2019/2020. Gross margins have remained around the 60% mark. However, operating margins (which factor in operating costs) have dramatically improved, as the company reduces spend on expensive airport terminal floor space, staff, equipment and maintenance to man BOTB’s physical stands.
The focus on BOTB’s online model also has a major attributing impact on growth potential, as the website can be infinitely scaled and more competitions, larger prizes and new target markets can be addressed to increase potential — all without increasing the cost base significantly. Seeing as the brand and its customer awareness has been built through years of direct marketing across the UK’s airports, I would imagine the business now has enough awareness to stand alone without them.
Engagement is Key
Whilst this shift to online has improved profitability and the scope for growth at BOTB, the business is heavily reliant on online customer engagement — which is why the market has been so concerned with the latest update. Without slick talking sales reps to tempt you into purchasing tickets at a regional airport, BOTB is reliant on the sticky nature of its competitions, the willingness of its customers and its multi-channel marketing approach to attracting and retaining customers.
In BOTB’s favour, I think their website and customer journey is one of the best I have ever seen. Customers are prompted to purchase at each point along the journey; the ‘spot the ball’ game adds a unique aspect and the follow-up process in communicating results and showcasing winners’ stories only adds to the desire to continue playing.
However, there are potential flaws in the BOTB model. By engaging players in a skill-based game, I worry BOTB risks user drop off or high churn rate once players realise that their ‘skills’ in spotting a ball really do not significantly improve their chances of winning all that much. This linked article explains very well that even if a guess is within the second closest ring on the target (pretty hard to do) there are still almost 250,000 locations to choose from. Once players realise that it is still a game of pure chance (enhanced by skill) I wonder if they resort back to playing the lottery instead.
Another issue is BOTB’s reliance on spammy email marketing to keep customers within the ecosystem. Since signing up to BOTB on the 3rd of May (and playing two games) I have received 39 marketing emails, which even by today's standards I view as excessive. I do understand the need to use email marketing (as we do here at The Twenties Trader) and I am sure other highly successful internet businesses such as Boohoo send out frequent email marketing campaigns. However, let’s be cognizant that BOTB’s competitions are a form of gambling, and whilst not currently regulated by the gambling commission, should BOTB’s skill base games fall under regulatory scrutiny, I would expect this form of aggressive promotion to cease.
As alluded to above, a potential risk I can see with BOTB is the likelihood of eventual regulation by the gambling commission. This may not be catastrophic for the business, as many gambling businesses operate profitably, however, certain loopholes BOTB avoids by being unregulated due to its ‘skill’ competition format could close. Currently, lotteries in the UK are not allowed to act as ‘for profit’ organisations. By definition, BOTB avoids this with its skill-based nature. However, we cannot guarantee that BOTB will be defined as outside the scope of a lottery game forever, thus we cannot be sure of the timing or the extent to which BOTB could be regulated. As BOTB grows scale the risk of regulation will loom large in my opinion and could cause further problems for the share price.
BOTB stopping The Twenties Trader from excessive gambling
Thankfully BOTB looks as though it is behaving quite responsibly already, which certainly reduces the risk of flying close to the sun when it comes to attracting regulators. A brief scan of Google News shows no signs of disaster, no ‘lost all my money’ stories, and an experiment to purchase 1000 tickets to win a midweek Porsche 911 ended pretty abruptly, with the refusal to take any more of my money past 75 tickets. This is certainly a benefit to BOTB’s model, compared to many gambling companies that are underpinned by ‘high roller’ spend. BOTB’s revenues are likely sourced from a large customer base contributing small individual amounts.
BOTB does have competition in the form of other car giveaway companies such as Dream Car Giveaway or Bounty Competitions, but a look at competitors’ websites will show you that BOTB is miles apart from its smaller scale rivals in terms of both customer awareness and online abilities.
Looking away from commercial risks, there are also a couple of risks to shareholders embedded in the capital structure of the company, namely the tight share ownership of founders William Hindmarch & Co who have been gradually reducing their stake in the business to make way for more institutional share ownership. This has been done in the past through equity sales and also placings, such as the 26% of share capital placing that was done earlier this year in April. Whilst this isn’t necessarily a bad sign for the company, it can cause volatility, and the issue of additional share capital will cause dilution for shareholders.
Twenties Trader Financial Calculations: Source BOTB annual reports
The financial metrics for BOTB are where the investment case really becomes compelling. Firstly, looking at revenue growth, even before the turbocharging nature of the pandemic kicked in, BOTB’s revenues were still growing an average of 14% between 2016-2019. Growth rates of 156% in 2020 show the ability of the business to utilise a favourable environment. However, these rates of growth are far from sustainable. BOTB is also a very profitable business, with its simplicity and strong market position lending itself to high gross margins of 60%, and as my bar graph alluded to earlier on in the article, operating margins have been increased through the switch to online only and have typically settled at a very desirable 25-30%. The stand out feature of BOTB for me is its debt free balance sheet and capital light operating model, allowing for insane levels of return on capital. In 2021, BOTB’s capital employed (the amount of balance sheet capital used within one year) amounted to £9m. To return £14m in operating profit from this position is a significant achievement.
BOTB Summary and Valuation
Ultimately, the BOTB story boils down to the fact that it is a company that has reaped the incredible rewards of lockdown fuelled online gambling, but also how the company has transformed into a very savvy 'online only' business, with some of the best user experience and customer journey attributes I have ever seen. The business is fast growing (even in normal times) and highly profitable, which aids the investment case. However, this business has significant tail risk. Regulatory pressure could occur at any moment, and this could cause significant damage to the share price.
With the above in context, the main questions I have as a potential investor looking at the share price today would be how much are revenues going to be impacted by this decline in engagement, and how will the company’s bottom line be affected?
In order to understand this impact a little closer, I have modelled two specific cases — a bear and a bull case — based on the extent to which revenues are impacted due to the decline in engagement. It’s worth noting that these are two complete estimates (much like broker forecasts) and they assume BOTB’s level of profitability remain roughly the same as current levels of trading.
In my assumed bear case, which could be an outcome if BOTB’s decline in user engagement turns out to be very severe, BOTB would face a decline in revenues of 34% in 2022. This would still bring BOTB’s revenues in at £30m (a significantly higher level than 2020), but it assumes a significant drop off in players due to the ability to do other activities. In this case, BOTB will spend more on advertising and customer retention, thus gross margins slip to 53% and operating margins slip to 21.7% respectively. An operating profit (in BOTB’s case profit before tax) of £6.5m is delivered. I would expect BOTB to bounce back pretty strongly the year after on easier comparables, followed by a more moderate increase in growth in 2023 and 2024. Margins steadily improve in the following years and operating profit returns to 2021 levels by 2025. Whilst this scenario would not look pretty for the share price — especially in 2022 — I think that the price today pretty fairly values a scenario like this happening, pricing the business on roughly 13x PBT in 2023. Whilst this scenario is only an estimation, I think it goes a long way to show that even in a significantly bearish scenario, BOTB’s profitability can bail itself out of trouble in the long run (should there be no regulatory pressure). Thus, if you have a long term view on BOTB, I think a buy at 1700p today probably works itself out over time, even if the shares suffer in the short term.
A much more bullish scenario like the version above would ensue if the decline in engagement with BOTB’s car competitions turns out to be not as bad as we fear. In this scenario, a small decline of 12% in 2022 is experienced due to less engagement, offset by more aggressive marketing and increased customer acquisition cost. This creates a slip in both gross and operating margins, delivering operating profit of £9m. However, this more bullish scenario also sees a quicker recovery, due to the lower revenue loss in 2022, and BOTB regains its pre-pandemic growth rate of low double digits thereafter. Margins naturally improve and BOTB produces higher profits in 2024 than in its vintage 2021 year. In the long run, if BOTB’s trajectory proves somewhat like this bullish scenario (or even better), the price you pay today would look very cheap indeed.
I personally think BOTB’s eventual scenario would land somewhere between this bull and bear case. But the risks in this stock are high. Sometimes fortune favours the brave, and even in a scenario where BOTB loses significant momentum in 2022, there are still lots of things to like about the business, and holding on to the shares would likely prove profitable in the long run. I have no immediate plans to buy BOTB, but if I were to, I would be splitting my purchases at least into two, with one transaction now and one potentially after we know more about the severity of the decline in user engagement. Any holding I would potentially own in BOTB would be kept to a maximum of 5% portfolio weighting, due to the possible risk of regulation.
At the time of writing, The Twenties Trader did not own shares in BOTB PLC.