At the end of May this year there were 1,016 companies listed on AIM, representing a range of industries, countries and sectors. With 118 constituents Mining is the largest sector on the junior market, followed by Software & Computer Services at 101, Support Services at 97 and then General Financial stocks at 96.
While companies can be grouped together into these wider sectors, they are all unique and have their own individual quirks and operational focuses. Within Travel & Leisure I have identified one stock which is arguably one of the most unique companies to grace AIM with its presence.
Making dreams come true
Best of the Best (LON:BOTB) was brought to market almost 10 years ago by a youthful William Hindmarsh, founder of the business and its long-term Chief Executive. As of today the company at its core does pretty much what it used to back in 2006, running competitions where punters can win luxury cars such as Porsches and Jaguars, via both retail locations and online.
At present the company, under the BOTB brand, runs a weekly competition where players can choose to win one of around 180 different cars currently on offer. It costs between £3 and £19 to enter depending on the car chosen. The firm earns additional income via offering other prizes such as cash and fuel.
The competitions are not lottery based as you might expect but operate via a skill based “spot the ball” competition. For those not familiar with this old newspaper based game, when buying a ticket punters have to mark a cross on a picture of a football game of where they think the centre of the (invisible) ball is. Whoever is closest to the ball, according to the opinion of a panel of judges, wins the car they chose when buying their ticket.
An important point here is that players are in effect testing their skill against the judges and not against where the ball actually is. This is due to strict UK gaming law definitions by which the company is bound to operate. Now in the 21st century, high definition photography enables winners to be selected down to the nearest pixel.
In order to encourage repeat play, credits are given back to players who put their mark close to the ball but who are not spot on. Extra publicity is created by the company putting up a video of each week’s winner, surprised “Challenge Anneka” style by one of the company’s employees or even William Hindmarsh himself. Not only does this help in the marketing stakes it also helps to create a good corporate image.
Driving growth
A decade ago Best of the Best was primarily focussed on selling tickets to its competitions via sites in airports. The company would display a supercar in the airports’ retail location and tempt punters in. In the early days tickets were priced highly, costing around £60 for the chance to win cars such as an Aston Martin.
Currently the company has seven UK airport sites (and one in Westfield shopping centre in Shepherds Bush, London) but the majority of trade is now done through the firm’s website, which made up over 70% of sales in the last financial year. The ticket price has also significantly reduced in price in order to appeal to a wider audience and enable the business to be scaled up more quickly. The business model means that cash is collected very quickly – revenue is recognised when the weekly competitions are completed.
As a test base towards potential international expansion the company has an Indian franchise trading under the BOTB brand from Hyderabad airport, with a further site in Delhi under negotiation.
Numbers – a bumpy ride but clear road ahead
Since joining AIM Best of the Best’s record has been inconsistent, with revenues falling substantially in 2011 after airport operator BAA terminated its contracts at several airport sites which represented a substantial proportion of revenues. Then in 2012 a small loss was posted, particularly following the loss of BAA’s sites at Heathrow. Trading has been better in the past four financial years however, with numbers for 2016 showing a record set of figures.
In the year to April 2016 revenues grew by 12.6% to £10.1 million, with pre-tax profits up by 10.9% at £1.06 million. Notably, online revenues soared by 40.6% to £7.06 million, driven by investment into digital marketing and TV advertising. The business remained highly cash generative, with cash flow from operations strong at £1.68 million. Net cash stood at £1.2 million at the period end and the dividend was increased by 8% to 1.3p per share. Best of the Best has consistently maintained a solid cash position during its history and has even paid out two special dividends – 14.5p in December 2014 and 19.5p in March 2016.
There is also the possibility of a further cash boost.
In 2009 main market listed Sportech (SPO), which currently runs a football pools business, submitted a claim to HMRC regarding a VAT repayment claim on its “Spot The Ball” game which it ran from 1979 to 1996. In 2013 the First-tier Tribunal’s Tax Chamber found in Sportech’s favour. Then following an appeal by HMRC the Court of Appeal ruled unanimously in favour of Sportech.
We are now at the stage where HMRC is applying to the Supreme Court for permission to appeal the claim, which currently stands at £97 million. In reaction to Sportech’s claim BOTB has submitted its own claim to recover overpaid VAT amounting to £2.2 million. But given Sportech’s experience it could be many years before the matter is brought to a conclusion.
Worth entering?
In doing research for this analysis I signed up to the company’s website and bought one ticket for the weekly competition, choosing the Corvette Stingray as my prize and, for an additional £1.25, the opportunity to win £10,000 in cash and a year’s free fuel. As I can’t drive the cash will come in much more useful than the Stingray. But assuming I don’t win (which is more than likely) there could be an opportunity to make money in the company’s shares.
At the current price of 189p Best of the Best is capitalised at £19.1 million. That puts the shares on a rather hefty looking historic multiple of 20 times earnings. But with a highly profitable, scalable and growing internet platform the valuation could well be justified. BOTB has crafted out a strong position for itself in a niche industry and with a move towards lower ticket prices has appeal towards a mass market.
On the downside the shares are highly illiquid, with a free float of just 25%, and William Hindmarsh has a controlling stake, with 50.3% of the company. He comes across as highly credible and passionate about the business but one thing I would say is that the company could be a little bit more aggressive regarding accelerating growth. This is one situation where I would like to see the dividend scrapped and the money (c.£130,000 last year) invested into marketing.
For investors who like a thrill Best of the Best is worth a punt.