Wey Education – full year update

I have extensively covered Wey Education in the past, including full background, my own revenue forecasts and in this morning’s 7:59 cut (which had to be cut even shorter than usual due to other commitments).

This article explores their recent FY 2019 trading update in depth and updates my personal forecasts.

I am aware of both a broker update from WH Ireland and likely coverage on today’s SCVP by Graham Neary. The following is written independently of both of these. I will add a section later commenting on the WH Ireland note.

FY 2019 revenue

The key takeaway for most shareholders will be that revenue of over £6.0m is over 20% ahead of previous company guidance given under the regulatory cover of their house broker WH Ireland’s February note. This is unreservedly excellent news and the first “beat” of any kind against previous guidance that I can remember for this company.

However it should be noted that the 43% revenue growth figure quoted is not like-for-like as the Academy 21 acquisition only contributed around 8 months to FY 2017. There is currently insufficient information available to accurately calculate the underlying figures, but I estimate the underlying figure with the Academy 21 is around 35% and InterHigh-only to be growing at around 25%.

FY 2019 profits

I have previously declined to forecast profits as a) they are close to breakeven and so any estimate would be wildly inaccurate in percentage terms and b) they have previously claimed some questionable exceptional items and it is difficult to predict what they may count as exceptional in future.

I believe that they consider current advertising costs to be non-exceptional, and although further clarity would have been appreciated, there is no indication that there are exceptional closure costs additional to those accounted for in H1.

Nonetheless, I will not make a FY 2019 earnings forecast beyond saying that they are likely to report a small profit on their preferred metric.

FY 2020 revenue

The following statement is concerning on the face of it:

This increased revenue has allowed the Group to increase its marketing spend in the current year to ensure as far as possible that revenue expectations for the year ended 31 August 2020 will be met. 

This could be taken to mean that without the unexpected revenue beat they would not have hit the August 2020 revenue guidance. In reality I think there are several things going on here.

The growth forecast between FY 2019 and FY 2020 in WH Ireland’s February 2019 note was higher than that then seen by either of the component businesses in recent years. It therefore did apparently include some degree of chicken counting over the effectiveness of advertising that had not yet even started. It is good to acknowledge that.

However, I already expected a FY 2019 revenue beat and thus was already comfortable about FY 2020. With today’s higher still 2019 revenue guidance and given the recurring elements to revenues across both InterHigh and Academy 21, previously forecast FY 2020 revenue looks pretty much in the bag.

Higher advertising off the back of higher revenues had long been expected / planned and I would interpret the above statement as saying that they are now as certain as they can possibly be that they will hit FY 2020 forecast revenue, rather than that without further incremental advertising funded by ahead-of-expectations FY 2019 revenue they would have missed it.

Either way, this seems a strong position to be in and my own forecasts are that they will now significantly beat the broker forecasts.

FY 2021 revenue

I was previously very sceptical about their ability to hit FY 2021 revenue forecasts because they built in a sustained high growth rate that was, in my view, dependent on significant success from unproven future advertising.

My new forecast is now broadly inline with broker forecasts, even without an uplift from increased advertising. There is a potential for the recently started radio advertising to quickly prove itself effective, in which case there is scope for a significant upgrade for FY 2021.

Future profitability

I continue to be sceptical about near-term profit forecasts. There is significant and increasing evidence that they are running the business both to directly pump up growth (via advertising) and to further raise teaching quality (which should lead to high longer-term growth and further improved competitive position) rather than to book significant profits over the next 1-2 years.

I have further work to do here, but my initial calculations show that at the current price Wey is looking cheap on a 2021 forecast EPS basis.

Caveats

The company has been a little reticent to engage with shareholders of late. I am monitoring the situation.

I believe that they should have known their FY 2019 revenue figures to a very high degree of certainty a full month ago. I have consulted with various contacts and I strongly believe that, considering all the circumstances, a diligent Nomad should have advised that the revenue beat of today’s scale needed to be reported to the market as soon as they became aware of it.

The company does not currently collect VAT for services provided to most consumers. I have looked into this in some detail and so far have concluded that there is clearly some justification for this position, that it is a complex area, and that after running through various scenarios I am reasonably comfortable with the situation.

Conclusion

I have updated my revenue forecasts that I maintain for my personal purposes. Remember, none of what I write is advice, it is my personal opinion only.

My forecasts are now as follows:


FY 2019FY 2020FY 2021FY 2022FY 2023
WH Ireland Feb 2019500067009000
Me June 20195450680084501045012700
My updated6050730089001070013000

The risk of a share-price damaging downgrade or miss for FY 2021 has significantly receded. The upside (not reflected above) has increased. This is my largest holding and while I added a small amount this morning I would be inclined to rebalance / top-slice on a significant rise.

Footnote

(This added after reading WH Ireland’s note this morning)

WH Ireland have not updated their future-year forecasts, instead preferring to wait for more detail in November’s results. By then the company should also have visibility of the effectiveness of their summer radio advertising campaign on new InterHigh intake.

Wey seem to have learnt their lesson from over-promising in the past, but are now taking things to extremes. Accordingly, and given my forecasts, I now expect to see multiple progressive FY 2020 upgrades throughout next year.

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