Thread by @stocks102

THREAD: Long Best of The Best #BOTB (market cap: £286m; share price: £29)

Shares in BOTB can hit £100 in the next 12 months, in my view. Below are three reasons why.

But first, some background on BOTB.

From 1999, BOTB operated in airports. It had those stands with a luxury

car rotating in the middle. You could win the car by buying a ticket and entering a ‘spot the ball’ competition whilst waiting to board your plane.

Then BOTB gradually stopped operating in airports and started operating online. By 2019, it was 100% online.

Only then did

BOTB ramp up marketing spend. Mainly on Facebook and Instagram. ROIC here is just 2 months (as I learnt during a recent call with BOTB management). This means that, if BOTB spends, say, £30 on Facebook ads to acquire a new player, the new player would then spend enough to make

BOTB £30 in gross profits within 2 months. Suddenly BOTB had a way to grow sales very fast – by paying for more Facebook ads.

Now for the 3 reasons the shares can hit £100.

Point 1. BOTB has two sustainable competitive advantages.

Firstly, people trust BOTB to actually

deliver the car to the competition winner. Go to the ‘Winners’ tab at the top of BOTB’s website to see videos of past winners receiving their cars. You can’t fake those tears of joy. And consider the 4.4 / 5 stars rating on Trustpilot. People trust the BOTB brand. This is not

true of all the brands in this area (a point made by Paul Scott @paulypilot on the 8th of March @MelloEventsUK discussion on BOTB).

Secondly, there is a network effect. BOTB seems to be the biggest company of its kind in the UK. And every year it cements this position, by

reinvesting its profits in 3 ways. By increasing its marketing spend. By making the prizes bigger. And by reducing ticket prices. These three things attract more people to play. BOTB then uses these extra revenues to drive down ticket prices further still, to make the prizes

ever bigger, and to spend more on advertising. Which all attracts more people to play. A virtuous circle.

Point 2. Not many fund managers know about BOTB yet.

Up until March, there was just one fund management company on the share register. Then in March the directors of

BOTB sold down from c 75% to c 50%. Slater Investments bought much of this stock. Liquidity should now improve – as should awareness of the stock’s qualities. Andy Brough of Schroders has been managing UK mid-cap money for decades. Yet on 10th March 2021 he tweeted of BOTB:

“I had never heard of it until this evening”. There is only one broker (finnCap).

Point 3. Everyone thinks, wrongly, that it is Covid – and lockdowns - driving sales

But the real reason sales are set to triple in the 12 months to April 2021 is that the advertising budget

roughly tripled over that time period (I learnt this too on the call with management). Covid is a red herring. Also, unlike Covid, you can keep on increasing advertising to drive sales: this is not a one-off.

Why couldn’t BOTB double their advertising budget again next year?

If they did, sales should double too.

Lastly, a word on valuation.

finnCap have 125.2p of eps for the year to April 2021. But BOTB has been beating finnCap’s forecasts by some margin for years. The recent blog on BOTB by @MaynardPaton has, in my view, a more accurate

prediction of 144p of eps.

Of course, investors look forward. So, what can BOTB do in the year to April 2022? finnCap have 143.1p of eps. But if advertising spend and sales do almost double, then, with the operational gearing inherent in the model, around 300p of eps is

feasible.

How can such a beat of finnCap’s forecasts be possible? Well, consider this. Until two months ago, finnCap was predicting 69.8p of eps for the year to April 2021 – a number they upped by 79% to 125.2p in February 2021 alone (in response to interim results). Such is

the pace, and scale, of recent upgrades.

What is the right P/E rating? BOTB is essentially a marketing business now. (Almost all else is outsourced, such as app development, and even the prizes themselves – BOTB just hooks up the winner with their local car dealership.)

BOTB’s operating margins are over 25% and ROCE is over 100%. This is a very capital light business where FCF exceeds PAT in most years.

And there is lots of growth ahead for BOTB. The TAM in the UK alone is significant. Consider that BOTB has just 350k Facebook followers

(although I estimate active players number just over 1m). Compare this to the 6m people in the UK who watched Top Gear at its peak. BOTB could also expand abroad.

History teaches that investors pay a P/E of 35x or more for businesses with these qualities and growth

possibilities. As a capital-light, fast-growing company, Fevertree is a comparable. And a P/E of 35x on 300p of eps would mean a share price of over £100. BOTB traditionally delivers its pre-close update (for the year ending April) in the first week of May, i.e. next week,

and I expect a ‘trading ahead’ statement then.

/ends