Best of the Best Profit Warning: Shares in spot the ball specialist Best of the Best (LON:BOTB) were down almost 50% today as a very harsh profit warning gave new forecasts of profit which were 62% off a few months before. The share price had already been adversely affected earlier in the year which now seemed like a profit warning in disguise. But this latest bad news caused an even sharper fall this time around:
This share has really been feast or famine so far this calendar year. Prior to the pandemic, this was still available cheaply at 400p. A bumper year of trade led to bid rumours swirling around for the company, which sent the share price over £30. Since then, it’s been downhill. There have been some director sales at £24, cashing out c.£60m amidst the first profit warning, which warned of ‘somewhat of a reduction in customer engagement’. This was in the middle of June, which takes us to today’s warning.
Best of the Best are a well-known share among private investor circles and until today would have provided most people with a healthy source of profit. They may even be familiar to those who have not heard of them. The company ran competitions for cars using the tested ‘spot the ball’ game. Initially these were in airport waiting areas, with the car physically parked for all to see. However, in the last few years all locations have been gotten rid of and competitions have migrated fully online. This has not stopped the business from going from strength to strength, as turnover and profits have increased.
What did the Best of the Best profit warning say?
This comes out as a trading update today. There is much more detail given than the previous ambiguous ‘somewhat’:
- Existing customers (prior to May 2020) are generating revenues 6% lower than during the final 15 weeks of the year 30 April 2021. This group is worth c.50% of total.
- New customers (signed between May 2020 and April 2021) are in line with forecasts – this group is 40%.
- Cost of acquiring new customers has increased drastically – up to 60%; thus very new customer revenues (signed in the last 15 weeks) are 50% lower.
Translated into final results:
In combination, these factors have resulted in a c.15% reduction in average weekly sales for the first 15 weeks of the new financial year, compared to the final 15 weeks of the prior financial year ended 30 April 2021. It is worth noting that the summer months are typically a low point and there is a seasonal lull in customer engagement and revenue generation, which we expect to improve over the coming months.
Personally I am not convinced on the summer months argument. Football starts again this weekend and now there will be many more things to bet on. The bad news really hits home with the next part:
With our substantially fixed cost model, this will have a disproportionate impact on margins, profitability and earnings for the financial year ending 30 April 2022. Whilst still substantially higher than the pre-COVID comparative and the results delivered in FY 2020, these are now anticipated to be c.57% lower than what was reported for FY 2021. The new guidance the Board is providing today for the year ending 30 April 2022 is c.62% below current market forecasts with a commensurate impact on the following financial year. However, should revenue trends improve, it can be expected that the reverse would occur and margins and profitability would increase materially due to the nature of the business model and the operational gearing.
Although three items are listed (margins, profitability, earnings) are listed, the percentage does not refer to which measure. But the c.62% is a massive number which renders that discussion academic. A look at Research Tree shows that adjusted PBT falls to £6.0m from £14.1m this year – a huge fall. With no real reassurance on visibility, no wonder the share price has tanked.
Best of the Best: The Business
Remarkably the wheels have fallen off very quickly for BOTB. It was only in June where they reported their bumper results, and also declared a special dividend of 50p a share. The reason for this was clear. With no physical locations to operate, there was very little in the way of capex. Even on the software side, the website running this hardly needed to be state-of-the-art and also saw low costs. Cash was building up on the balance sheet; and thus a return to shareholders seemed the most likely option.
Here is a shot of their staffing costs. As we can see the numbers of staff have dropped sharply, as the closed physical locations meant no longer having to employ people there:
Management remuneration also is modest with the directors basic salary at £160,000 a year. However, we may argue that they have already received their big payout with their share sale.
Other factors to like about the business other than low capex requirements is that it is totally debt free. There are no borrowings or long-term liabilities. It also grows ‘organically’; there are no takeovers, and no goodwill on the balance sheet. There is a very high level of profit conversion to cashflow.
If we look at the latest Stockopedia figures (before profit warning, so 2022 and 2023 are not going to be accurate)
We can see that revenues and profits have grown rapidly; but the bulk of that growth came between 2020 and 2021. Comparing that to the staff figure numbers above, this was done without employing anyone else – an impressive feat for most companies. But this is the type of business which doesn’t automatically rely on hard work. Something can ‘go viral’; alternatively a business may decide to up their marketing budget. Thus getting 100,000 hits on a website doesn’t require any more work than getting 1000 – you could simply pay more to advertise. Alternatively you may get lucky and someone shares your page for you.
On these points it seems that it was more of the latter. BOTB spent more in an absolute sense on administration charges (which include advertising). However, this has fallen steadily over the years, and the 2020 ratio of 31.10% was the lowest it has been. By contrast as recently as 2017, the company was spending 50.27% of revenues on admin costs. The pandemic may offer some explanation; advertising costs would have fallen away in 2020, but now are recovering (as the latest trading update alludes to).
Not referenced at all in any update is the heightening competition in this sector. A new player to the space is Omaze: they are spending a lot of money advertising houses, but their US operation also has car competitions much the same as BOTB here. There are also several ‘me-too’ competitors now. These offer much the same as BOTB, and often at more favourable terms (for instance, having capped number of tickets on their auctions).
This I feel is the real reason for the increase in advertising revenues. Advertising on social networks and contextual ads such as Adsense rely on bids – the highest bid wins. In the recent months I have gotten the feeling that Omaze have been very aggressive into making a play for this space. With other UK-based car competitions adding to the demand as well, it may be hard to see these costs coming down anytime soon. Yet only a couple of years ago this must have been a real different space, with BOTB virtually the only reputable site of its kind.
Without the ad networks there are few options for BOTB. Print or TV ads may not have the same effect; both lacking the ‘impulse’ element that a paid-for-click ad involves. The partnership with newspapers can deliver targeted articles, but at a cost: typically around half of revenues may have to be given away. The last option is engagement with existing users – this is something that the company boasts of. Yet a look at their social networks doesn’t corroborate this. Despite over 400,000 people following their Facebook page (and 20,000 on Twitter) their articles and tweets get relatively few replies.
Is the Best of the Best profit warning a buying opportunity?
The share price is at 25% of its previous highs. So it is a valid question to ask: when will this become good value? For me, valuation becomes rather difficult. In my view, the update was not that impressive. There are a few terms which grated such as ‘We are hopeful that the cost of acquiring new players will normalise before too long’ – this implies to me they do not know if they will or won’t. In the same sentence they spoke of the benefit of the ‘flexible’ model; yet in the previous paragraph it was the ‘substantially fixed cost model’ which meant that a modest drop in revenues produced a disproportionately large fall in profits!
The competitive landscape in 2021 for the company is also much different than it was a year ago. There are now several companies offering the same thing, and some of these are on fairer terms to the customer. Brand equity is not so large, in that a punter may play where the good prizes are and not be loyal to any particular site.
My view is that 2020 was a spectacular year with the convergence of several trends (people being at home, low advertising costs, low competition, general post-covid recovery); as well as the mooted takeover driving the share price way ahead of itself. None of these are likely to repeat themselves in the future. Certainly the large number of these businesses illustrate that there are very low barriers to entry.
Previously it was priced as a growth stock, but growth seems out of the window for now. But that doesn’t imply it is a bad business – even on its slimmed down figures this is still generating profits and cash; just that it’ll be in line with historic figures rather than the most recent ones.
It may be interesting to see what the directors Rupert Garton and William Hindmarch do. Having sold out a large portion of their stakes at £24, will they now view the current share price as undervalued and buy back in? That would reassure the market somewhat.
At the current price, I am still not particularly sold. The possibility of more bad news in the next trading update appears quite strong to me. The regulation risk also appears high: a change in classification could really alter the business adversely. I feel a recovery to prior levels seems quite unlikely, although fundamentally the business isn’t in a bad place. 3/5.