Best of the Best (BOTB): Lockdown growth faltering?

Feel I ought to revisit Best of the Best (BOTB) following today’s 2021 results and the shares falling 25% to £20.

I wrote about BOTB for SharePad in March and was quite bullish. I cooled a bit when the directors subsequently sold 36% of their shares after the FSP and learnt Facebook ad costs had risen 30%:

I went very cold after looking at the regulatory situation and discovering the spot-the-ball business model was dependent entirely on a sub-paragraph of the Gambling Act 2005.

Anyway, the results outlook today was a tad wobbly:

“We are excited about the opportunities that the year ahead holds for BOTB, with a recovering economy and hopefully a return to normality. 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 look forward to updating shareholders in due course.”

I did say in my SharePad article:

“True, these sums assume BOTB can sustain ticket sales as and when lockdown restrictions are eased… and when customers have less time and money to play spot-the-ball online.”

The sums related to a correlation (perhaps) between BOTB’s Facebook followers and revenue:

"Between 2016 and 2020, revenue per Facebook follower was remarkably consistent at around the £66 mark (green line, right axis):

BOTB spreadsheet facebook h1 2021

But the latest interims implied revenue per Facebook follower had more than doubled to an annualised £138."

Updating that chart for the latest 2021 results gives a revenue per Facebook follower of £126 for the second half:

BOTB spreadsheet facebook fy 2021

If we translate BOTB’s “somewhat of a reduction in customer engagement” to mean a 25% reduction from H2, then maybe revenue per Facebook follower comes to £126*0.75 = £94.

BOTB’s c400k Facebook followers would then imply revenue of £38m and, sustaining the 31% operating margin and applying tax at 19% would give earnings of about £9.6m or c100p per share.

BOTB says “we expect customer engagement to return to normal levels before too long”… but what exactly are normal levels?

Arguably the 2021 year saw abnormally high levels of engagement, and “normal” levels were experienced during 2020 and before. Are current engagement levels actually below those seen before the pandemic?

Also, I am not quite sure whether a 31% margin is appropriate for guessing current-year earnings. Facebook marketing costs have risen and I am not sure BOTB can tone down the prize pots while trying to revive player interest.

Thoughts welcome.

Maynard

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a great post Maynard. You’d expect a fuly online digital business to be able to quantify the magnitude of the above, right… a cycnic may say this minor detail was available but ommitted…?

Thanks riccie.

Yes, BOTB will know what the drop-off has been, but I guess management thinks the reduction is temporary and believes the shortfall can be recovered during the rest of the year. Therefore, no need to divulge more detailed (and potentially worrying) information to the market just yet.

House broker Finncap says this:

"The outlook statement highlights “somewhat of a softening” in customer engagement compared to the summer of 2020. This coincided precisely with the 12 April easing of lockdown restrictions and the reopening of hospitality and non-essential retail and is possibly the initial signs of the easing of the “COVID tailwind” that the group has to a degree probably benefited from.

Most businesses that may have seen business boosted to some extent by the pandemic are able to gauge the extent of the boost by referring back to pre-pandemic data. However, that is simply not possible for BOTB given the change in strategy, the transition of the business model online, the vastly different financial returns more recently and the increase in the number of competitions from 1 to 3 over the period. We suspect that the extent of the COVID tailwind may not be fully quantifiable for a further 9-12 months.

However, there are clearly a number of initiatives open to management to offset any “softening” if the trend is sustained.

Management are monitoring the data closely; at this early stage of the financial year, our forecasts remain unchanged."

(Finncap’s notes can be downloaded for free from the group’s research portal)

Not sure what to make of Finncap leaving its forecasts unchanged. The estimates imply c15% growth for 2022 and 2023:

I will be amazed if BOTB meets the 2022 projections, but that could happen of course.

Alternatively, the lower customer engagement may persist for some time and Finncap eventually has to lower its projections. I do wonder whether the broker ought to have a stab at revisiting its estimates now, rather than just waiting for BOTB’s next announcement.

Maynard

Hi

I hold a smallish amount and I am not selling - the post lockdown slow was foreseeable.

I am holding on because:

It is a scalable business on an international level, with scale being the major barrier to entry. An internet platform disruptor, maybe?

I am unaware of taxes preventing other businesses from operating. We would be in a sorry state if that were true - nothing would get done! (Back taxes may be a huge problem, I guess, if they were found to be liable and could lead to dilution?).

There are lots of newbie investor’s selling because the stock has been the subject of press attention. When they panic and sell it pushes the price downwards dramatically on a small cap. Better to look at how the business is operating, which is showing good progress imo.

I don’t really pay attention to director sales - From experience they are usually red herrings and can happen for a number of reasons, but you may be right to be concerned about this.

Prizes can be ‘managed’ to keep the gp constant imo. This can help with as advertising channel costs.
Being an extremely high roce/roe busines, if costs increase, growth can fund this in any case.

The million dollar question, for me, is whether growth is sustainable over the next few years? You pay your money and take your choice!

Regards,

Ben

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Post-lockdown statements are now starting to emerge from conventional gaming operators. Seems as if BOTB is not alone in experiencing reductions in “customer engagement”.

Entain, which owns CasinoClub, Foxy Bingo and PartyCasino, has said its Q2 net revenue from gaming activities was up just 1% on Q2 2020:

Online gaming NGR up strongly by 47% compared to 2019, but only 1% versus a challenging prior year comparative

Entain’s Q1 had seen a 23% improvement. So a definite drop-off in performance during April, May and June.

888 meanwhile said its Q2 total revenue was up 10%. But it admitted to lower income from certain gaming activities:

Poker and Bingo revenues were lower than the prior year, reflecting exceptionally strong performance during the prior year period.

888 notably said:

Since 17 May, when UK retail and leisure venues reopened, average daily revenues in the UK have, as expected, been approximately 20% lower than the year-to-date period before that.

As far as I can tell, 888 operates purely online, so the cited 20% reduction relates to all of the group’s UK online operations.

Maynard

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So that is a positive for BOTB, in that they are performing ‘as well’ as others on customer engagement?

888 and Entain (GVC) are both amazing operators within their space, and have ridiculously high historical cagrs.

If I didn’t already hold BOTB I would probably buy some. Because I own some already, my brain stops me averaging down, no matter how hard I try to!

Regards,

Ben

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I guess so. I think the statements from ENT and 888 give some indication as to the engagement reduction perhaps experienced by BOTB, which can help with attempts at estimating near-term revenue/profit and judging the present share price. But averaging down is never an easy decision!

Maynard

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Excellent coverage and assessments in your various BOTB articles over recent months, Maynard.

Today’s profit warning resulting in 45% SP fall suggests you were spot on and your scepticism was well founded.

Snazzy

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Thanks Snazzy.

My primary worry with BOTB remains regulation. I just don’t like the situation as discussed here.

Looking back on the other issues, the director share dealing after the Formal Sales Process did not seem right. After all, the FSP had attracted all sorts of interested parties

“The Board is therefore highly confident in the Group’s prospects for the future and has concluded, following extensive talks with a range of parties from a number of sector verticals and private equity, that it is in shareholders’ best interests to focus on the continuing growth of the business under its existing strategy.

…and yet management decided to sell 36% of its shares into the market rather than sell that chunk to one of the interested parties. The implication is that all of the interested parties, having spent months in the data room, had found something that prevented them from investing.

Also, the directors sold shares representing 27% of the company, yet only Slater Investments popped up with a TR1 (a 9% holding). So the placing did not seem to attract widespread institutional support, which in hindsight could have been seen as strange for what many saw as a ‘quality’ company.

Today’s statement said:

“In line with many other businesses, the cost of acquiring new customers has significantly increased in recent months with the cost per thousand impressions (CPM) on social media platforms - which account for two-thirds of BOTB’s marketing spend, increasing by up to 60% compared to previous levels.”

I think the only surprise here was that this higher marketing expense was a surprise to some people. Facebook said Q1 ad prices were up 30% yr-on-yr at the end of April:

Another lesson here perhaps concerns brokers:

Sure enough, FinnCap today said:

We are cutting our EPS (Dil. Adj.) forecast by 63% to 53.3p from 142.7p for FY22E and by 61% to 64.1p from 165.2 for FY23E, assuming current trading levels persist for the rest of the year, and we are reducing our target price to 1400p (was 3100p).

Broker notes just seem to react to news rather than try and proactively judge what may happen. Ordinary shareholders must therefore take matters into their own hands to determine whether the omens are signalling bad news ahead.

Today’s RNS contained an interesting snippet on potential customer ‘churn’. Customers signed up before May 2020 represent 50% of revenue – which means customers signed up in the last 15 months represent the other 50%. True, revenue from the last 15 months has been bolstered by lockdown gambling, but BOTB does appear more dependent on customers recruited in the last 15 months than those recruited in any 15-month period before that.

Maynard

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Well done Maynard!

Maybe large director sells should be view with the same scepticism as IPOs, in that they time them to be in their best interests!!

Regards,

Ben

Hi Ben,

Maybe. I just thought the BOTB sells did not feel right given the FSP had attracted a range of interested parties beforehand. But some shares continue to power on despite director selling; the directors at Tristel for instance have been net sellers I think since the mid-00s flotation. So each situation may be different.

With BOTB, I feel being able to sense the bad news was much easier as a neutral non-holder than as a shareholder. I think if I had multi-bagged on BOTB, I would have developed a bias towards the management and given the executives the benefit of the doubt. I would like to think I would have sold a chunk alongside the directors, but I can’t be sure. In the past I have lost objectivity with (one-time) big winners (TAST) and I recognise the danger of becoming too complacent with multi-baggers such as TSTL, BVXP and TFW.

Maynard

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