UK growth stock Best of the Best (LON: BOTB) has been one of the market’s star performers in recent times. Those who snapped up shares in the competition operator during the ‘coronavirus crash’ of March 2020 would have seen a gain of around 800% just one year later!
Today however, the shares have crashed well over 20% in value, at the time of writing. What’s going on?
Profits soar at this UK growth stock
It’s surely not down to the full-year numbers. Supported by multiple UK lockdowns, BOTB’s competitions clearly provided a welcome distraction to what was going on in the world. As a result, revenue jumped over 150% to £45.68m in the 12 months to the end of April. Pre-tax profit hit a staggering £14.06m. In the previous financial year, this figure was £4.19m.
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Sure, the pandemic couldn’t have been predicted. However, these figures do serve to endorse BOTB’s earlier decision to move completely online. Running competitions via apps allows the money saved from not operating in sites such as airports to be funneled into marketing and player recruitment instead.
In addition to the above, a final dividend of 5p per share was announced by BOTB. This is a 66% hike on that returned in 2020. A lovely special dividend of 50p per share was also confirmed.
So why has BOTB crashed?
It looks to be down to comments made by CEO William Hindmarch. In his statement, BOTB’s leader reflected that the company had seen “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.”
In other words, people are doing more of what they couldn’t and less of what they could.
This all makes perfect sense, especially given the great weather we’ve seen in the UK recently. The question is, has BOTB’s purple patch come to an end, or is this a wonderful opportunity for me to get involved?
To buy or not to buy
Right now, I’m torn. On the one hand, there’s a lot to like about Best of the Best. The company consistently generates great returns on the money it invests and operating margins have soared in recent years. On top of this, BOTB is financially sound with zero debt. Investors also need to remember that no company’s valuation rises in a straight line, particularly one with less than half of its shares available for purchase on the market.
On the other hand, I’m not entirely convinced by management’s assumption that levels of customer engagement will “return to normal levels before too long.” No concrete reason is given for this belief, other than by appealing to the company’s “flexible business model, growth strategy and plans for the year ahead.“
The problem is that having an inherently great business counts for little if customers don’t continue using it. If the UK really does fully unlock on 19 July, one wonders whether things could get worse before they get better.
Bottom line
Based purely on BOTB’s numbers, today’s fall looks massively overdone and I suspect some sellers may end up regretting their decision in time. Then again, I also think that the murky outlook means shares will remain volatile for a while to come.
As such, this UK growth stock remains on my watchlist for now.
