Best of the Best PLC (BOTB.LON)
A nanocap compounder
Best of the Best PLC, known as BOTB, is a competition business that operates “weekly competitions to win luxury cars and other prizes online” through a Spot the Ball game. The company is headquartered in the mean streets of Fulham, London, United Kingdom and trades on the London Stock Exchange under the ticker BOTB. Per the company’s most recent interim sixth month report from 10/31/21 (their fiscal years end on April 30th), revenues stood at £19.21 million, down from £22.09 million during the same period in 2020. Profit before tax came in at £3.04 million during the interim period ended 10/31/21 which was down from £6.80 million over the same period in 2020. The company has awarded £40+ million in prizes since inception in 1999.
Why BOTB Might Not Be For You
The results of their Spot the Ball game are subjective – The company offers a Spot the Ball game (which I will explain later) in which contestants try to accurately place where the center of a soccer ball would be in a random picture. The results of where the ball would be located is determined by a panel of judges who work for BOTB. Trust in the results of the judges panel on the location of the ball is critical to BOTB staying in business. Any lack of confidence in the decision-making process or indications of rigging the game would be detrimental to the business. I discuss this further in the “What is Spot the Ball?” and “Building and Maintaining Trust” sections of this writeup.
Nanocap stock – The market capitalization of the company as of the writing of this stock is approximately ~£40 million with an average three-month volume of 20,000 shares a day per TIKR.
Stock has taken a beating – The stock has been crushed over the last year. The stock traded consistently above £30/share from March – May of 2021 but is down ~85% since those highs as the temporary boost in business provided by COVID wore off and recent increases in marketing costs have hurt current profitability.
BOTB History
To quote William Hindmarch, the CEO, on the business’ website, “I started BOTB in 1999, but my motivation for the business was born much earlier. Quite simply, I have always loved cars! From a young age it was my desire to be around - and ultimately own - a lovely car that made me start BOTB. The idea was simple - to give people a great chance to win the car of their dreams for a small amount of money. 22 years on, I’m proud to say that this dream has been realized for hundreds of people who are now driving cars that they merely dreamt of when they were little boys or girls!” The company originally leased spaces in airports and malls throughout the United Kingdom to market its prizes and sell tickets. At its peak, BOTB leased 26 airport and shopping locations including one location each in Ireland and Norway plus a franchise agreement in India. Per the company’s website, its last physical location was the in the Birmingham Airport which it exited in July of 2019. BOTB’s competitions have been solely online ever since.
Management
William Hindmarch, the CEO referenced above, was and still is the driving force behind BOTB. He started the company in 1999 and took it public in 2006. He owned just over 32% of the stock jointly with his wife as of the most recent annual report from April 30, 2021. This also makes him the single largest shareholder of the business. Rupert Garton is the number two behind Mr. Hindmarch. He is listed as the Commercial Director and has fulfilled his role in this capacity since 2006. He has also been on the Board of Directors over the same period. He owned just under 9.5% of the stock as of the most recent annual report from April 30, 2021, making him the second largest individual shareholder. Per the most recent annual report, Mr. Hindmarch received £266,903 in total compensation while Mr. Garton received £266,645 in total compensation. In some years previously, Mr. Garton has received more in total compensation than Mr. Hindmarch. I’m not sure how or why this happened, but it was a bit odd to see.
Management and Director Compensation
Management compensation at BOTB is fairly straightforward. It is composed of benefits in kind, a base salary, bonuses, a pension plan and stock options and is determined by the “Remuneration Committee”. Per p. 13 of the 2021 Annual Report, “The Remuneration Committee, comprising of Michael Hindmarch (Chairman of the Committee) and David Firth, is responsible for making recommendations to the Board on the Group’s framework of executive remuneration and its cost. The Committee determines the contract terms, remuneration and other benefits for each of the Executive Directors. The Board itself determines the remuneration of the Non-Executive Directors.” Additionally, on p. 14 of the 2021 Annual Report, “No Director plays a part in any discussion about their own remuneration. Executive remuneration packages are prudently designed to attract, motivate and retain Directors of high calibre, who are needed to drive and maintain the Company’s and the Group’s position as a market leader and to reward them for enhancing value to the shareholder.” Regarding stock option grants, taken from p. 14 of the 2021 Annual Report, “Certain Directors may have options granted to them under the terms of the approved and unapproved share option schemes which are open to other qualifying employees. The reason for the schemes is to incentivise and retain the Directors and key personnel and enable them to benefit from the increased market capitalisation of the Company. The exercise of options under the scheme is based upon the satisfaction of conditions relating to the share price. The conditions vary from grant to grant.” Directors collectively have rights to 109,352 options as of the 2021 Annual Report. Finally, regarding Non-Executive Director Compensation, taken again from p. 14 of the 2021 Annual Report, “The fees of Non-Executive Directors are determined by the Board as a whole, having regard to the commitment of time required and the level of fees in similar companies. Non-Executive Directors are engaged on renewable fixed term contracts not exceeding one year.” That’s really all that I found about compensation at the company. It seems like the Remuneration Committee has a lot of sway in regard to their own and other directors’ compensation. I didn’t find any specific information about what metrics or hurdle rates the business uses to determine benefits in kind, bonuses or stock option grants. The company lists year over year sales and “marketing efficiency calculated using the twelve-month Lifetime Value per customer, against the Cost per Acquisition” as their Key Performance Indicators on p.5 of the 2021 Annual Report, but I’m not sure how or if they factor into management or Director compensation.
Board of Directors
The Board of Directors at BOTB has undergone little change since it went public. They’ve only had nine (9) different people on the Board of Directors since 2006. The Board of Directors is currently made up of William Hindmarch (the CEO), Rupert Garton (Commercial Director), Ben Hughes (Marketing Director), David Firth (Non-Executive Director and Chairman of the Audit Committee), and Daniel Burns (Non-Executive Director). A previous director, Michael Hindmarch, stepped down on 10/1/2021 and fulfilled his role in this capacity since the company went public. Given his last name, I’d bet he was related to the CEO, but I could not find anything to confirm or deny this. David Firth is the only “independent” member of the Board as Mr. Burns is also a director at a firm called Oakvale Capital which BOTB has on retainer for consultancy services. From the looks of it, the Board of Directors at BOTB is well entrenched and doesn’t look like they’ll be going anywhere anytime soon. That’s something you need to keep in mind and be aware of if you’re going to invest in this business.
What Exactly Does This Company Do?
BOTB offers three competitions. The two most popular are the Weekly Dream Car Competition and the Midweek Competition. Contestants enter these two competitions by playing Spot the Ball which is described below. The Weekly Dream Car Competition offers the player to win a vast array of supercars. Everything from Lamborghinis to Porsches, the Nissan R-34 Skyline and my beloved Mercedes AMG E-63 Estate are available as prize selections. Cash equivalents of the car’s value are also offered as prizes in case you can’t or don’t want to take possession of the car. You may also tack on a cash bonus prize on top of the original prize for an additional fee.
The gif below is an accurate description of how I would feel if I won the Mercedes AMG E-63 Estate.
A full list of cars available for the Weekly Dream Car Competition can be seen here: https://www.botb.com/prizes/cars#!/
The linked video breaks down how the Weekly Dream Car Competition works:
The Midweek Competition also offers cars as prize selections. There’s still a great selection of available choices even though they aren’t supercars. Available options that pull on my heartstrings are the Mitsubishi Evo 6 – Tommi Makinen Edition, the Subaru Impreza P1, the Ariel Atom 4 and the BMW E46 M3. Like the Weekly Dream Car Competition, cash equivalents of the car’s value are also offered as prizes in case you can’t or don’t want to take possession of the car. You may also tack on a cash bonus prize on top of the original prize for an additional fee.
A full list of cars available for the Midweek Competition can be seen here: https://www.botb.com/prizes/Midweek#!/
The linked video breaks down how the Midweek Competition works:
The third part of BOTB’s business is the Weekly Lifestyle Competition which features prizes such as watches, motorbikes, vacation packages, various consumer technology items and cash (my personal favorite). The Lifestyle Competition awards prizes through a set of multiple-choice questions. You can only be eligible to win if you answer all the questions correctly. Since there are often multiple contestants who correctly choose all the right answers, a winner is chosen at random by an independent third-party organization which verifies the results. BOTB makes money by charging a small ticket fee (sub £1) per set of multiple-choice questions. The results of this contest are also streamed live.
The linked video breaks down how the Weekly Lifestyle Competition works:
All the prizes for both competitions are sent to the winners free of charge and they are responsible for them going forward. BOTB takes no responsibility after the prizes have been delivered. The contest winner must take the prize as is. If you are a winner of the Dream Car or Midweek competition, then you cannot play again for a year after. I am not sure if you have to wait to play the Weekly Lifestyle Competition or not after winning.
What is Spot the Ball?
We don’t really have this game here in United States so I think it’s worth explaining so you can understand how it works given that it’s so important to BOTB’s business. Spot the Ball is a game that involves trying to “spot” where the center of a missing soccer ball would be in a randomly generated image. The image itself can be any picture that has at least one soccer player and a soccer ball in it. The ball is obviously missing due to it being edited out. People trying to “spot” the ball guess where middle of the ball would be. They do this by clicking on the location in the image where they think the center of the ball would be. A coordinate is provided to the contestant after clicking on the spot where they think the center of the ball would be. BOTB uses a panel of judges to determine where the center of the ball would be so there is a fair amount subjectivity at play. Each judge looks at the image, uses their best judgement and then they collectively determine where the center of the ball would be. The contestant whose coordinate placement is closest to where the judges collectively determine the center of the ball to be is the winner. BOTB streams their judge’s panel meetings on their YouTube channel to provide more trust and transparency to their contestants. BOTB makes money from these competitions by charging a small ticket fee (sub £1) per guess.
Building and Maintaining Trust
Trust is important to any business, but especially one which doesn’t have a physical product and involves playing a game with a fairly subjective outcome that awards high end prizes. BOTB is aware of this and address it in their Annual Reports. Taken from pp. 8-9 of the 2021 Annual Report:
“Building Trust
Responsibility for the overall leadership of the Group and setting the Group’s values and standards sits with the Board. BOTB is a customer facing and customer focused organisation, seeking to deliver an excellent experience to everyone we serve. Our business is based heavily on trust and customer feedback is actively sought using independent third parties, including Feefo and Trustpilot, as well as through social media forums such as Facebook, Twitter, YouTube and Instagram.
We strive to maintain the highest standards of probity, integrity and transparency in the operation of our competitions, in our financial affairs and whilst interacting with customers, staff, shareholders and other stakeholders. In line with our strategy, the Directors and senior management seek to provide an entrepreneurial culture for our employees, whilst encouraging the strongly ethical expansion of our competition offerings to new customers, both in the UK and internationally.
Senior management supports our team to learn continuously and offers opportunities for training, in order to grow both together and as individuals. We seek to improve ourselves, our processes and our business to deliver long-term shareholder value and a growing and contented customer base. We strive to support each other and to be good stewards of our assets, of our relationships with customers, staff, suppliers and ultimately of our Company’s reputation.
During the year, BOTB has undertaken a number of investor relations activities to support our shareholders. These include various investor roadshows in combination with the publishing of our bi-annual financial results. Investors are also actively encouraged to attend our AGM and our Board sees this as an important event in the annual calendar to meet with and talk to shareholders and other stakeholders. Hopefully the AGM in September will be a physical meeting now that COVID-19 restrictions are lifting. We will keep the arrangements for the AGM under review as guidance develops.
Throughout the year, the Board has continued to review governance and the Group’s corporate governance framework. We have again reviewed our governance against the QCA Code in May 2021 and will continue to do so annually as required by AIM Rule 26.
Michael Hindmarch Non-Executive Chairman 16 June 2021”
These are only words on paper, but the importance of isn’t trust discussed a lot in shareholder documents across the board so it’s nice to see that the CEO is aware of the how important it is to his business. I think BOTB deserves credit for being as transparent and proactive as they are about showing the results of their contests. Any lack in confidence in their judgement and award system would be detrimental to the business as a going concern.
Return On Invested Capital
BOTB’s return on invested capital (ROIC) is stellar. Below are two screencaps from TIKR showing BOTB’s ROIC since it went public. Do note that TIKR calculates ROIC as EBIT / (Total Equity + Total Liabilities + Deferred Tax Liability Current + Deferred Tax Liability Non-Current). The uptick in percentages after 2012 correlates almost perfectly with the increasing ratio of online sales to total sales for the company and its subsequent transition to being purely online.
I calculate ROIC a little bit differently. I copied John Huber’s method posted here, but I calculate it two ways using NOPAT (calculated as Operating Income – Income Tax Expense) in one method and Net Income in the other. I first use NOPAT / (Total Equity + Total Debt - Goodwill). My second ROIC formula uses Net Income instead of NOPAT in the numerator. Using NOPAT as the numerator gives more of a pure calculation of what ROIC is while the Net Income should be reasonably close to the NOPAT calculation. Any large deviation would mean that there’s an exceptional income or expense item on the income statement that must be investigated further to see if it is truly an “exceptional”, one off event or if they seem to be more normal than that. BOTB did in fact have exceptional income and expense in the year ended 4/30/2019 which caused ROIC to skyrocket for that year. Per p. 2 of the 2019 Annual Report, this was related to “£4.5 million of exceptional income was also recognised as a result of the Company’s successful claim for overpaid VAT (Value Added Taxes) in prior years, offset by £2.0m of exceptional expenses related to retrospective taxation and professional fees.” I know that there are different and probably more precise ways to calculate ROIC, but the goal here is to get most of the way there using simple metrics and basic math.
You can see that my figures are a bit lower than TIKR’s due to differences in how ROIC is calculated. The main takeaway is that BOTB’s ROIC exceptional any way you calculate it. As a final note, the ROIC calculation in either case, TIKR’s or mine, is materially higher than what is listed because neither TIKR nor I subtract excess cash from invested capital. If one were to do that, BOTB’s ROIC would’ve been negative for several years indicating infinite returns on capital in those years which doesn’t make sense.
Return on Incremental Invested Capital
BOTB’s returns on incremental invested capital (ROIIC) since going public is also stellar. In the link above, John Huber describes a simple method to calculate return on incremental invested capital which I have also copied. Like my ROIC calculation, the point with this exercise isn’t to nail down ROIIC to a precise figure, but to get most of the way there with relatively simple calculations. Said another way and borrowing from Keynes, I’d like to be roughly right with calculating both ROIC and ROIIC for BOTB instead of precisely wrong. Below is a screencap of Mr. Huber’s ROIIC calculations for Chipotle from 2006-2015. The screencap is taken from the linked article in the previous section.
The goal of the ROIIC calculations is to arrive at the Value Compounding Rate of whichever company you’re analyzing. The Value Compounding Rate equation is as follows:
Value Compounding Rate = Reinvestment Rate X Return on Incremental Capital Investments
Reinvestment Rate = Incremental Capital Invested Over Specified Time Period / Cumulative Earnings Over the Same Specified Time Period
Return On Increment Capital Investments = Change in NOPAT or Net Income (Your Choice) Over a Specified Time Period / Incremental Capital Invested Over the Same Specified Time Period
The screencap below shows the corresponding figures and calculations for BOTB.
By using Mr. Huber’s method, which I think is roughly right, BOTB has been compounding value by 43-48% per year since it went public. Per TIKR, the stock price has compounded at 13.1% per year, indicating a huge spread between how the business is performing versus what the market is willing to pay for it.
Free Cash Flow
BOTB’s increase in Free Cash Flow (FCF), defined as Operating Cash Flow – Stock Based Compensation – CapEx, is shown in the screen cap below.
Like the company’s ROIC, free cash flow has ticked up considerably as the business transitioned to being purely online. FCF has CAGR’d at 36.9% since BOTB went public, but 2021 FCF is a bit of outlier considering how big of a boost in revenues the company received from people being home for most of 2020. FCF CARG’d at 27.18% from the time it went public through 4/30/2020. I think this is a more realistic number to gauge the businesses’ ability to grow FCF over the medium term. I’ll be generous and assume that a “normalized” 2021 FCF figure would’ve been half of that figure. Half of 27.18% is 13.59%. A 13.59% increase in 2020’s FCF of £4,230,987 is £4,805,978. BOTB’s current market cap is approximately £40,000,000 meaning it trades at an 8.32x “normalized”, but very conservatively calculated FCF multiple. The Enterprise Value to FCF multiple is even better. Per TIKR, its Enterprise Value is £31,660,000 meaning it trades at 6.58x multiple to FCF.
Outlook
I’ll start with the less rosy portion of this section. My major concern is the increase in marketing and new player acquisition costs the company has had to deal with over the last year. This was addressed in the most recent Interim Report from 10/31/2021. Per the Chief Executive’s Statement on pp. 3-4, “As previously mentioned, the costs of acquiring new customers (CPA) during the period have increased significantly above pre-pandemic levels (see table below). This appears to have been driven by a number of market forces, including the trend that, upon exiting lockdown, most businesses across all sectors have sought to increase their online marketing budgets in order to drive market share and to speed up their transition away from traditional retail. This has, in our experience, enabled channels (e.g. Meta Group - Facebook & Instagram) to materially increase the cost of advertising impressions (CPM’s) on their platforms. Furthermore, as widely acknowledged during the same period and in line with many online focused companies, the changes introduced by Apple’s iOS14 operating system have undoubtedly reduced the accuracy of our targeting and thereby the efficiency of our marketing, albeit it is hard to precisely quantify the effects at this stage. Whilst a smaller overall contributor to new players, we continue to use a multitude of other channels beyond social media to acquire customers such as Influencers, TV and other more traditional forms of advertising. We are in early-stage discussions about working in partnership with larger media companies to diversify and broaden our acquisition channels, whilst we continue to explore possible overseas options and will report on both of these developments as they materialise. We recognise this to be an important area of focus in the year ahead and will be allocating resources accordingly.” The screencap below is taken directly from p. 3 of the 10/31/2021 Interim Report and shows the increases in the overall cost of acquiring new customers and cost increases from Meta Group specifically.
The uptick in costs to acquire new customers and decrease in forecasted 2022 revenues will undoubtedly hurt short term profitability. Per p.1 of the 10/31/2021 Interim Report, total revenues, profit before tax, earnings, net assets and cash balances are all down versus the same six-month period in 2020, but I ultimately feel this is transitory because the business still has a huge runway to grow. Per p. 4 of the same interim report the “Outlook” section states, “Emerging out of successive lockdowns and the Covid period, we have been faced with very tough comparatives, however, revenues are running at twice the level of that when we exited our last physical retail site and completed the transformation to a fully online business. We are confident that the business, now operating purely online, is positioned to grow above the traditional growth rates experienced when operations were focused on bricks and mortar retail.”
My other major concern is that there are low barriers to entry. There are other companies out there that have a similar or almost exact same business model as BOTB. The business doesn’t really have intellectual property so there’s risk in that regard and it’s possible that one of their competitors could develop a better way to play or market Spot the Ball or award prizes. With that being said, BOTB has done well since it went public in spite of their competition and continues to work on product development.
Now I’ll move on to the positives. From what I’ve learned, I’m confident in BOTB’s business going forward. I think it’ll be in business for quite some time given how unique their business model is both from a product and profitability perspective. There are additional things that BOTB has going for it. The business was and still is founder led and he is the largest individual shareholder even though he doesn’t own a majority of the stock anymore. The business is not regulated because their competitions are considered games of skill. The business only operates in one market and could easily expand throughout Europe and globally from there. I think BOTB would thrive in the United States. It might have to do Spot the Ball with gridiron football, baseball or basketball but you can see how either one could catch on here. Lastly, their car competitions start at 45 pence (basically cents if you’re American) per play and their lifestyle competition starts at just 25 pence per play. I don’t have data for this, but I’d be willing to bet that their customers wouldn’t really mind yearly increases in the cost per ticket which would give the business a fair amount of pricing power.
Conclusion
At the end of the day, BOTB is a unique business with incredibly high returns on invested and incremental capital all while trading at <9x “normalized”, but conservatively calculated FCF. On top of this the company pays a dividend and has the authority to purchase up to 10% of their shares per p.17 of the 4/30/2021 Annual Report. I think this is a classic example of a wonderful business at a fair price. For full disclosure, I do not own shares in the company because I don’t have any disposable income. If I did, I would buy the stock and if the price went down, I would buy more. If we were in an alternate universe and I could somehow afford to buy a sizable chunk or the entire company, I would. I think it’s that good. On a related note, the business entertained at least one buyout offer last year and I would expect plenty more calls from prospective acquirers. I can only hope that management continues to keep the company public so that I can buy shares at some point.
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