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Fancy a flutter

September 17, 2020

Best of the Best/ BOTB Buy @ 1760p  MV: £152m  Next figures: 30 January No of times recommended: 2  Price when first recommended: 1480p

Some of you may be familiar with Best of the Best as a business, which displayed aspirational cars at airports and sold tickets to win the car. They are allowed to do this because in order to win the car you have to play a game of skill called Spot the Ball based on two footballers gazing into the air. You mark the spot where the invisible ball  at which they are looking is located. The winner is the one closest to the spot chosen by a panel of experts. It is a simple business, founded by a car enthusiast, William Hindmarch, almost fresh out of university and for many years it seemed to be pottering along, largely unnoticed. Not any more! Well, it still keeps a low profile although it has appointed a new, larger city public relations firm but it is definitely not pottering.

Like the rest of us, Hindmarch and his team have been migrating their lives and the business on line. They have been doing this slowly but last year the last physical site was closed and they have since been able to focus exclusively on the online business.Shares often rise a lot when something new and important is happening. This is a massive something new, a complete transition of a high cost, limited market, operation to a skies-the-limit online business, effectively a BaaS (a betting as a service) platform.

The company is delighted with the transition which, inter alia, has led to doubled profits in the first year of operating almost entirely online.

“Having previously traded from up to twenty-six airport and shopping centre locations, the business has completed its evolution and now operates entirely online. Our marketing activity is exclusively focused on driving traffic, registrations and returning loyal customers to our website, I am pleased with the smooth and controlled way in which this transition has been executed, with no loss of overall revenue or unwelcome exceptional costs. With the transformation complete, the company now has a very effective platform from which it can continue to leverage its proprietary systems, software and the extensive and valuable database it has built, whilst further enhancing the products and experience it offers both new and existing players. The transformation to becoming a purely digital business has been very successful, giving us more flexibility and focus. The financial results for the year also clearly reflect the benefits of this transition with increased operating margins, improved capital efficiency and cost savings. Our competitions, pricing and product strategy are also now tailored exclusively for our growing and increasingly diversified online customer base, with our ‘Dream Car’ and ‘Lifestyle’ competitions recently enhanced by a new ‘Midweek Car’ competition.”

The move online has had a considerable effect on costs. At one time the group had over 70 employees; the most recent reported number was 21. The annual wage bill has dropped from £3.2m in 2016 to around £2m. This is not as much as employee numbers but no doubt skill and responsibility levels have been rising sharply. The employees will now be experts in software platform design, social media marketing and other high level skills.

A second big change has been in ticket pricing. Back in the day you could pay £22 for a single ticket to win a supercar on display at Heathrow. Now I have just bet around £3 for the chance to win a Lamborgini Urus worth a big chunk of £200,000 plus £80,000 in cash. If you want a chance to win a carbon fibre electric mountain bike worth some £7,000 you can bet just 35p for a single ticket or buy 10 tickets for £3.50. This plus the ease of placing a bet, as simple as making a purchase on Amazon, has led to a dramatic increase in the number of people placing bets (not a figure revealed by BOTB) and created an increasingly valuable database.

Third and equally important is the emphasis on sales and marketing. There are three principle items in the cost line at BOTB: the cost of sales (mostly prizes), which runs at around 40pc of revenue; the cost of wages, which in recent years has been around £2m and the cost of sales and marketing.

This last figure is discretionary and has been growing in recent years as the company has become more skilled at using a mixture of social media, influencers, traditional routes like TV and the local press and public relations to grow the number of people (a) betting on the platform and (b) betting regularly. This last, which is effectively the level of engagement with the platform, is an important determinant of sales and profits. It is a key element in determining the lifetime value of a customer and hence the amount that can be spent on recruiting each customer, the cost of acquisition. As long as the cost of customer acquisition is meaningfully less than the lifetime value it pays to keep accelerating spending and that is exactly what has been happening at BOTB in recent years and may happen on a much greater scale in future years.

“All marketing investment is strictly calibrated on the cost per acquisition of a new customer, versus their predicted lifetime value. This metric, which is tracked and analysed in considerable detail across the various channels, is the primary determinant for where and how we continue to grow our marketing budget in the year ahead. A further focus in this financial year will be on maximising customer retention and engagement and hence lifetime values. A new hire has been made specifically to assist with this project, including a full review of our customer retention initiatives.”

A fourth key development has been the increasing number of competitions. In 2010 there was one competition a month to win a dream car. We are now looking at three competitions a week (a 12-fold increase), the dream car, the lifestyle for smaller prices like motor bikes, luxury watches and TVs and since the last 30 April year end the mid week car competition for less exotic cars than the dream cars. On top of that many of the prizes come with chunky additional cash presents ranging from £10,000 to as much as £80,000 available with the latest dream car competition.

Some of these innovations really started to kick in over the second half of the 2019-20 financial year, which has triggered an explosion in profits and the share price. The operational gearing of the business is extraordinary. Operational gearing for those not familiar with the expression is the effect on profits of extra sales revenue. In the case of BOTB in fiscal 2020 a £3m increase in sales increased profits by over £2m. The result was that a 20pc increase in total sales almost doubled profits before exceptional items.

The good times are continuing as has been made clear by the latest trading update at the agm.

“Trading for the year to date has been stronger than expected at the time of the company’s final results (as announced on 15 June 2020). The momentum that built through the previous financial year has been maintained, resulting in a strong performance for the first four months of the new financial year and is expected to continue. This leads the board now to expect both revenue and profits for the full year ended 30 April 2021 to be ahead of previous management expectations. As previously announced, the company launched a new additional ‘Midweek’ car competition in May, alongside it’s existing Dream Car and Lifestyle competitions. This, in combination with sustained investment in marketing and customer acquisition has delivered increased customer activity and a broader customer base. The company also continues to reap the benefits of it’s transformation to a wholly online operation.”

The forecast below for the year to 30 April 2021 was made before the latest update and is a punchy forecast, looking for sales to rise 57.3pc to £28m and operating profits to rise 86pc to £7.80m for earnings per share of 70p and a prospective PE ratio of 25.1. As we have seen above, BOTB has dramatic operational gearing, so a 57pc sales increase could send profits sky high. My personal guess is that profits could be nearer £10m and earnings per share more like 85p but those are just guesses because we don’t know how much BOTB is going to spend on sales and marketing.

As long as the cost of acquisition is well below lifetime values it would make sense to spend heavily and the group may decide to do that, effectively investing the profits it could otherwise have made to grow the scale of the business.

What is also apparent is that looked at purely as an online business, i.e., stripping out the physical business as though it had never been there, BOTB has been growing strongly for years. In 2011 online revenues were £1.53m out of total revenues of £4.74m, which were down dramatically on the previous year’s £7.30m because of a change of policy by Heathrow Airport. Since then the online sales number has grown as follows, 2012, £1.90m, 2013, £2.70m, 2014, £3.16m; 2015, £5.00m; 2016, £7.06m; 2017, £8.36m; 2018; £10.9m, 2019, £14.3m; 2020, £17.8m and 2021 (forecast), £28m. Over a similar period profits have grown from £0.12m to £4.20m with £7m forecast for fiscal 2021.

It is clear that buried within BOTB for almost a decade has been a bona fide and very successful online growth business, which has taken off in the last year.

But here is where it becomes complicated. First the shares are very tightly held. Family, management and two institutions hold 83.6pc of the shares with Hindmarch alone over 50pc. The shares are a narrow market with a ridiculous spread. On IG they are showing 1699p bid and 1911p offered. If you buy speak to somebody and make sure to deal well within those figures.

The second complication is that the company has embarked on a strategic review which may lead to the whole business being sold with, reportedly a number of interested parties from various verticals (industry sectors). I have no idea why they might want to sell the business when it is going so well but then who knows what considerations they are taking into account. A buyer might be able to spend even more aggressively on building the customer database and might already own relevant databases.

All I would say is that if I was William Hindmarch I would be looking for a very good price. Personally, I think the business could be worth say £50 a share, given the growth achieved, the success of the transition to a wholly online operation, the open-ended growth potential and the extraordinary operational leverage of the business. For instance they are still just getting to grips with the mobile opportunity. They could end up with daily competitions. They could grow the business internationally. There are loads of possibilities as the data base grows and the in-house team becomes more skilled at recruitment and building engagement. There is also the mobile opportunity.

“The vast majority of our website visits and over half of our revenue are now from mobile devices. As a result, we are becoming increasingly ‘mobile first’ in our approach to IT development, making incremental improvements to our platform and our user experience by constantly updating the interface. Our conversion rate on mobile devices, however, is still lower than on desktop and we see an opportunity to increase revenues by further improving the mobile interface. We have released major changes to improve the mobile registration, playing and payment experience, which in turn will assist both conversion and frequency of play. Native iOS and Android apps are also in the final stages of development and testing, to better capitalise on this shift to mobile devices and to further optimise conversion.”

Be careful if you decide to buy some. They really are a tight market. Today they have traded around 1,400 shares and the apparent sharp fall in the share price is mostly a movement in the spread, not a real price change.

The main argument against buying the shares is that profits have just doubled but the shares have quadrupled. They were cheap. They are now obviously less cheap. On the bullish side is the long term opportunity, if they are not acquired by somebody and the excellent prospect that 2020-21 is going to be another bumper year. By next June when the full year figures for fiscal 2021 are reported they could again be looking very good value and we have to say that William Hindmarch and his team are evidently good at what they do. it is not everybody who could have turned a business effectively raffling cars in airports to something valued at over £150m.

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