Our expert takes a close look at the online competitions company in the wake of its steep share price fall.
Is it worth buying into Best of the Best (LSE:BOTB), a promoter of online competitions, after its stock has plunged nearly 80%?
That entertains an adage: 90% fallers simply do not come back. Potentially however, a £35.23 high last May reflected exceptional profits while people were furloughed or just sat at home at a loose end. Also, a bubble element in the fastest-rising stocks.
Following my points last Friday regarding online clothes retailer Boohoo (LSE:BOO), the key question here appears similar: to what extent might competition encroach online, where businesses may enjoy fewer barriers to entry?
Also - and classically the case with small caps - is there a sustainable business here, – or might £65 million Best of the Best prove a “flash in the pan” that captured attention for a short while then you might struggle to recall it in a few years’ time?
Seasoned operators tend to trade small-cap hype including its aftermath (on the short side) but are wary towards AIM stocks in particular, being flaky.
Respectable performance by 2019 despite early obscurity
The company runs weekly competitions, mainly to win luxury cars, also “lifestyle” options such as holidays, motorbikes and cash. It first came to my attention 15 years or so ago, by way of a top-end sports car positioned in a Gatwick airport shopping area.
Around a bleary 5am, killing time ahead of ski-trip flights, I never noticed anyone taking any interest at all. So, when Best of the Best floated in 2006 and in subsequent years, I was unconvinced to take notice.
Yet in fairness and before Covid boosted online gambling, the company achieved a £3.8 million net profit on £14.8 million revenue for its year to 30 April 2019 – pretty good for the proverbial AIM stock.
The profits uplift shown in the table reflected a transition online from airports, hence more flexibility and efficiency, also this business’s operational gearing on a modest 14% increase in revenue. £4.2 million cash was generated from operations although a 2.0p per share dividend pay-out versus 41.1p free cash flow per share implied the board was cautious.
A special dividend of 4.5p was additionally paid in July 2018 however this can typify businesses with variable cash flows. Splitting payouts into ordinary/special enables boards to maintain an impression of consistent dividend growth – with an occasional bonus – instead of a bumpy trend relative to the extent of pay-out you might think the business is capable of making.
In due respect, the stock rose from around 300p in spring 2018 over 400p by end-February 2020 - on progress in fundamentals, before the exceptional benefit of gambling during the pandemic.
Capitalising on people stuck at home during Covid
It settled back to 375p that April then soared near £17 in August – spurred by an “ahead of expectations” trading update in March that was followed by a similar one in May.
Annual results to 30 April 2020 then revealed normalised net profit doubling to £3.5 million on revenue up 20% at £17.8 million; also £5.2 million cash and no debt.
Additional to a 3.0p ordinary dividend, there was a 20.0p special dividend although against a stock price over £10 it meant a yield only of 2% or so.
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The spring 2020 lockdown appeared to boost gambling activity also furlough schemes guaranteed enough people’s finances – such that a majority did not have to worry about making ends meet.
Consequently, interim results to 31 October 2020 saw revenue nearly triple to £22.1 million with net profit up nearly four-fold to £5.5 million. Cash soared to £11.2 million.
Management credited such progress to “our successful move to a pure online model together with our increased confidence in marketing investment as we look to accelerate growth”. Yet it might have been wiser to explain a good part of this momentum as reflecting exceptional revenue.
Then a jolt to the narrative now behaviour has changed
Last June’s prelims to 30 April 2021 cited a 227% jump in net profit to £11.5 million on revenue up 157% to £45.7 million. Additional to a 5.0p ordinary dividend there was a 50.0p special dividend and management was “excited about opportunities in the year ahead”.
There was a glitch however: “in contrast to the summer 2020 period, we have experienced somewhat of a reduction in customer engagement since the easing of lockdown restrictions on 12 April 2021” – i.e. lockdowns had provided an exceptional boost.
The stock fell from around £22 to £14 but given its previous high rating and extent of hot money involved, its de-rating had further to go.
Friday 13 August proved apposite to declare a profits warning shocker: a 60% hit to earnings albeit following just a 15% reduction in weekly sales for the first 15 weeks of the new financial year.
The shift to a pure online business has proved a mixed blessing given a 60% recent hike in the cost of acquiring new customers (to replace transient gamblers) hence new customer revenues have fallen 40% and dampened total revenue by 9%.
Moreover, there has been a dose of reality as to how operational gearing works on the downside.
The stock is down to 685p (on a circa 30p spread this morning) where if forecasts are fair - for around £5 million net profit in the current financial year and £6 million next – it trades on 13x earnings reducing below 11x.
That actually looks pretty fair and if inheriting Best of the Best stock right now I would incline to hang on to see how management copes.
The snag as I see it is a plethora of such online competitions – for houses in particular – where flashy cars may be past their prime appeal. This together with a disgruntled edgy majority now holding the stock could mean selling into any rises which checks upside.
Such a combination of weak “technical” position with uncertain fundamentals implies a cautious stance with fresh money. Yet if management can thrive on change, this cautious period could herald a buying opportunity.
Best of the Best - financial summary
Year end 30 Apr
|Turnover (£ million)||10.1||10.8||12.9||14.8||17.8||45.7|
|Operating margin (%)||10.5||14.0||12.4||31.6||23.6||30.8|
|Operating profit (£m)||1.1||1.5||1.6||4.7||4.2||14.1|
|Net profit (£m)||0.9||1.4||1.4||3.8||3.5||11.5|
|Reported EPS (p)||9.7||13.7||13.3||38.5||37.4||122|
|Normalised EPS (p)||9.2||13.7||13.0||16.3||37.4||122|
|Earnings per share growth (%)||8.0||48.7||-5.2||25.4||129||225|
|Price/earnings multiple (x)||5.6|
|Return on capital (%)||66.5||80.8||103||365||127||157|
|Operating cashflow/share (p)||15.6||21.0||17.8||42.5||45.2||133|
|Free cashflow/share (p)||10.8||19.7||17.3||41.1||44.2||132|
|Dividend per share (p)||1.3||1.4||1.5||2.0||3.0||5.0|
|Covered by earnings (x)||7.5||9.8||8.9||19.3||12.5||24.4|
|Net debt (£m)||-1.2||-2.1||-2.3||-2.5||-5.2||-11.8|
|Net assets/share (p)||15.7||18.5||15.3||13.7||35.2||95.2|
Source: historic company REFS and company accounts
Long and short trading tactics, summarised
On the long or buy side: management needs to show itself adept with novel gambling offerings, to overcome its substantially fixed cost business model whose hurdle has just risen.
They said: “We are hopeful that the cost of acquiring new players will normalise before too long and our flexible model means we are able to adjust to a higher cost of newer player acquisition if necessary.”
Also, new partnerships and additional competitions are being launched such as “One ticket, four prizes” and revenue is still around 2.5x higher than the same period two years ago, pre-Covid.
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On the short or sell side: more competition online means the company has to keep originating successfully otherwise the stock will not overcome selling.
Sentiment will never be as strong as during the 2020 upswing, nor the rating now the truth is plain - how earnings are fundamentally volatile, amid a shifting cost/revenue equation.
The situation is unpredictable; traders will have to monitor popular response to new competition launches, and company updates. Hold.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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