Price: 16.5 GBX (6/23/2011)
Best of the Best (BofB) is a company specializing in luxury car competitions. They display cars in airports and online and then raffle the car off. The company offers games people can play where the user pays a small fee to enter in a chance to win a car. Eventually someone wins the car after the cost of the car and a built in profit margin are achieved by player entries. The company guarantees one winner a month, offers free worldwide shipping, as well as free insurance for the first year. A sample of the cars currently offered as prizes, Aston Martin Virage Volante, Lamborghini LP560-4, Audi R8 + £20,000, Ferrari 458 Italia, Porsche GT3 RS 4.0, Mercedes Benz SLS AMG, and £100,000 cash.
In some ways the business reminds me of Quibids which is an internet bidding company in the US. The theory is that the consumer will be enticed by the thought of taking home a Ferrari for £50 or £100 and is willing to commit that amount of money to try and win. Spread across thousands of people it can be a very profitable business.
The actual nature of the games is a user is shown a picture, the one I tried was of soccer players. In the picture the ball was removed and I was instructed to pick where I thought it would be. If I clicked multiple times it was considered multiple entries. The coordinates of my clicks were my ticket, and if one of my coordinates was the exact coordinate of where the removed ball actually was I'd be a winner. Apparently under UK gaming law this is considered a game of skill. If it truly is a game of skill I'd expect to see a skilled winner appear more than once, in my quick browse of the results that doesn't appear to be the case. Skill or not the company is in compliance and is legal in the UK.
Business Breakdown
Up until the last interim statement BofB made 2/3 of its revenue displaying cars and offering games in airports around the UK. BofB earned 1/3 of its revenue from the online division which it has expanded recently.
The business has had strong results and remained profitable and cash flow positive for the past five years. The question you're probably asking right now is why is the company trading so low? The cause of the cheapness for Best of the Best's shares is very simple, in October 2010 BAA airports discontinued business with BofB stating they would like to reclaim the space previously used for car displays and games at the airports for additional seating. BAA runs a number of British airports including London Heathrow, London Stansted, Glasgow, Edinburgh, Aberdeen, and Southampton airport.
This is significant for the company, two thirds of its revenue is derived from airport displays and a large section of the high traffic airport market was just shut down. Management has stated that they are working to increase online market share as well as expand offerings at current airports. It's unknown if this will work or not and the company next reports results in August 2011.
Valuation
The company is trading at a discount to net current assets giving it a bit of a margin of safety as it retools. Here is the asset breakdown.
The company is sitting on a nice pile of cash, almost no receivables and inventories. I would presume the inventories consist of the cars about to be given to winners. The asset makeup is desirable and very liquid. In the case of BofB I would say that the inventory doesn't need a discount. Even at a fire sale liquidation they would probably be able to get close to book value for the luxury cars they hold.
The big question is how will the discontinued airports affect the income statement? I went ahead and created a small pro-forma income statement based on the latest financials with three difference scenarios. I estimate a 25%, 50% and 100% loss from the airport operations.
In all three cases the company is moved from a profit to a loss of varying degrees. Interestingly cash conversion was an astonishing 7x net income the previous period which was helped by increased depreciation. If the company can even convert at 2x they could post positive cash flow for a 25% decline, and a small dip into cash for a 50% decline.
Bottom Line
Best of the Best is trading at a nice discount to NCAV and has a history of sizable profitability in the past. The company has hit a sizable bump in the road and it's very uncertain if they will be able to increase the online business or gain new outlets. One thing on the investor's side is that 64% of the company is held by two directors which gives them motivation to turn operations around. In addition to management's strong motivation an investor has a sizable margin of safety to await the turn around.
I'm not making any investments at this time but I'm going to keep the company on my radar and wait for the next results in August.
Talk to Nate about Best of the Best
Disclosure: No position
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