Wey Education – Present and Future

Welcome to my series covering Wey Education. My articles on the subject consist of:

• Wey Education – History This covers the company’s history, which is hopefully useful for context, but not strictly necessary to follow the other articles.
• The article you are reading now, which contains the core of my analysis.
• InterHigh – Market and Competitors. This goes into a lot of detail which I have kept out of this article in order to retain focused.

Summary of business

Wey Education provide online education services to school-age children in the UK and overseas. They principally operate in two divisions – B2C in the form of InterHigh with the consumer being parents, and B2B in the form of Academy21 with the customer being local authorities and schools. Both divisions were originally co-founded by the current CEO, Jacqueline Daniell. They are also involved in a new Teaching Online qualification.

InterHigh

InterHigh is an online upper primary and secondary school (ages 8 to 18) founded in 2005. Although the customer experience is pretty much as you might imagine for an online school, from government perspective they merely provide education services to parents of home-educated children.

Comparable figures for either turnover or student numbers at InterHigh are difficult to come by, and available figures suggest some lumpiness, but since being part of Wey Education the number of students appears to have grown from 434 to around 1600 over 4 years (39% annualised). Over the last 3 years numbers are up from 647 to 1600 (36%pa). Crunching the numbers it appears that turnover is gone from £1.5m FY2016 to (my projection of) £3.5m FY2019 (32%pa).

Near term prospects

Some of this growth may be due to one-off factors such as the expansion into upper-primary and an enlargement of the curriculum especially in the 6th form. The latest results and available figures suggest a significant slowdown to approximately 20%pa growth in the last 18 months. A more convincing marketing strategy is now in place and so growth may improve in the near term.

Market Size

In my separate analysis I concluded that the size of the potential market they could grow into in the longer term is virtually unlimited relative to their current size.

Competitive Position

Although InterHigh are by a very significant margin the largest UK-based online school they do have competition. Their most credible competitor is probably NetSchool with around 100 pupils.

InterHigh’s size gives them a significant competitive advantage over smaller schools both in terms of both cost and teaching quality. This, along with their experience and reputation from being the very first provider creates a considerable barrier for new entrants.

They capitalise on this cost advantage by splitting lessons into “Lead” lessons and “Follow” lessons. The Lead lessons have large numbers of students, but in practice this does not affect delivery as topics chosen are suitable for this kind of delivery and there is a second teacher on hand to answer questions. The Follow lessons are for more interactive teaching in much smaller groups. Employing teachers on full time professional contracts also helps them reduce costs.

In terms of teaching effectiveness InterHigh have the advantage of being able to set pupils by ability, having sufficient pupils for good interaction and being able to employ more specialist subject teachers. They should also be able to provide superior internal management, support and training.

I’ve summarised these advantages here taking Net School as a comparison and using like-for-like teaching hours and costs:

(all figures are estimates)	InterHigh	Net School	Net School Note
Total pupils	1600	110
Year 10 pupils	200	12
Number taking Maths	180	8	Smaller proportion since customers pay per subject
Number in top ability group	80	8	Cannot group by ability
Typical Lead lesson size (with absences)	75	7	Cannot teach multiple groups together
Typical Follow lesson size	15	7
Number of active pupils in follow lesson	10	4-5	Teaching affected by lack of questions and poor discussions.
Contact time cost for 2 hours per pupil	£20 x (4 + 10) / 180 = £1.56	£20 x (1 + 1) / 8 = £5.00	InterHigh have 2 teachers in lead across 2 groups = 4, plus 10 groups for follow.

Note that Net School in fact give slightly longer to teaching Maths than InterHigh and charge around twice as much.

Quoralexis

This brand offers EFL (English as a Foreign Language) education online. As a B2C business it falls within the InterHigh division. Wey have previously stated that their competitive advantage in this crowded market comes from their pool of professional and full-time UK-based teachers.

I remain sceptical of their prospects and at this time I don’t believe turnover is material to the group.

Academy21

Academy21 was founded in 2011 to provide alternative online education provision for schools and local authorities. This consists mostly of online delivery for pupils who have been or would otherwise might be excluded from schools, and for those that are medically unable to go to school.

In contrast to InterHigh they teach GCSE (rather than the IGCSE expected in the private sector) and currently cover a smaller number of subjects.

The acquisitions and divisional mergers outlined in the History article complicate the situation considerably, but crunching the numbers I estimate that Academy21’s core revenues grew from £1.0m in FY 2017 to an annualised £1.5m in FY 2018 and up a third from £0.65m H1 2018 to £0.9m H1 2019. However a similar business that has now been merged with Academy21 appears to have been growing even more quickly resulting in combined revenues of around £1m in H1 and a likely figure of at least £2m for FY 2019 – double the broadly comparable level two years before.

As with InterHigh, there may have been one-off improvements to the business in the recent past, but nonetheless it is clear there is currently higher momentum here. On the other hand, as a B2B business it is more likely to suffer lumpy revenues and with the public sector as a customer is subject to the whims of government policy for good or bad.

Market size

The following details are for England only. Exclusions may be temporary (a maximum of 45 days in a year) or permanent (they must find another school, if possible). In both cases education must be arranged by the 6th day of the exclusion.

Fixed period exclusions are very common, up from 339,360 to 381,865 in 2016/17, but only 2% (around 7600) around lasted more than a week. Detailed figures are not available, but it appears that multiple exclusions (up to the 45 day limit) are more common than long ones and so I will assume 7 school days (after the first week) is average. It is also difficult to guess at the cost of such short-term provision, so I will assume £80 a day. I therefore calculate £80 x 7 x 7600 = £4m market size.

Permanent exclusions increased from 6685 in 2016/17 to 7720 in 2016/17. Many of these pupils will be quickly found an alternative school while others may never do and will accumulate year on year. Assuming an average of 2 months with costs of £60 a day 1 month, then £60 x 40 x 7720 = £18m.

Academy21’s website gives figures of them helping around 800 pupils a year with teaching starting at £8.20 / hour. Assuming average costs of £15 / hour and historical turnover of £1.5m, that gives an average of 125 hours each, or 31 days.

Much of the provision is however to schools attempting to avoid exclusion or to pupils who can’t or won’t go to school and this is harder to quantify beyond saying that numbers and funding levels are likely to be increasing.

Overall I have struggled to quantify the size of the market. Perhaps the best measure of potential growth is that they currently only work with 60 local authority areas out of around 350.

Competitors

As I understand it, their main competitors are in-house staff and one-one teaching providers / tutor agencies providing services to schools. For example My Tutor claims to work with over 300 schools.

New Teaching Online Qualification

You can read about this at the Directors Talk website, for example here.

This is a potentially very interesting development for several reasons:

Firstly it demonstrates an increasing interest from government and industry in the online education of children in general. This may point to greater opportunities within Academy21; it may lead to greater regulation which would improve Wey’s competitive position further; and it may provide further publicity and credibility to the concept.

Next, the fact that it was Wey Education specifically that consulted on, created, obtained ATHE accreditation and Ofqual approval for this qualification demonstrates and reinforces their unique standing within the sector.

As the qualification can be used externally including in schools, further education and higher education it is a potentially significant revenue generator by itself.

Ultimately it may be one step on the road to widespread adoption of online teaching in the state sector, and perhaps the original state funded e-academy concept that Wey investigated before buying InterHigh. While this would introduce competition for Wey, it would also dramatically increase their receptive market and provide other revenue streams from their expertise.

Projections

Wey’s house broker WH Ireland forecasts £5m turnover for FY 2019 followed by two years of 34% growth.

To me, the £5m forecasts looks low given H1 revenues of £2.7m, the 50-50 split seen at InterHigh in years of normal growth and the strong momentum at Academy21.

However the the 34% ongoing growth rate appears to be factoring in the benefits of increased InterHigh advertising and/or assuming super-normal growth at Academy21 continues. Unfortunately such counting of chickens would be consistent with WH Ireland / Wey’s previous forecasting methodology which has contributed to such disappointment over the last few years.

My turnover projections based on current trends are as follows:

	FY 2019	FY 2020	FY 2021	FY 2022	FY 2023	FY 2024
WH Ireland total	5000	6700	9000
My total	5450	6800	8450	10450	12700	15100
InterHigh	3400	4100	4950	5950	7000	8200
IH YoY	19%	21%	21%	20%	18%	17%
Academy21	2050	2700	3500	4500	5700	6900
A21 YoY	34%	32%	30%	29%	27%	21%

As such I see Wey’s FY 2019 turnover significantly beating forecasts (if they are not raised earlier), but feel a significant raise to FY 2020 forecasts would risk disappointment further down the line.

Longer term there seems no reason to expect growth to tail off significantly and, given the operational gearing, there is potential for significant and fast-growing profits from FY2021. On top of this there is the possibility of a step change in the growth of InterHigh if improved marketing hits the mark.

At WH Ireland’s predicted FY2021 EPS of 0.82p and 3p of likely free cash, an enterprise forward PE of 25 would value them at 23.5p in October next year. However my revenue predictions point to an EPS closer to half that.

In the longer term things look much more assured give the size of their market and the moat they have against potential competition. Running a few models it is easy enough to show future share valuations that discount back to 20p+ today while WH Ireland claims 34p in their DCF model.

Conclusion

I can make an argument for a current valuation anywhere between about 8p and 20p. Risks are principally in the 2020 and 2021 forecasts – their operations are unlikely to be affected by any economic downturn and long term the compound growth demonstrated by InterHigh in particular should make this a reasonable long term investment around current levels (11-12p).

Personally speaking this is already my largest individual share position and so I am cautious of buying more, yet I see considerable strategic value and so nor am I inclined to sell in any size unless either there is a significant change to the prospects for the company (not something I ever felt over the rollercoaster of the past 2 years) or the share price gets wildly ahead of itself, maybe over 25p over the next 6 months.