7:59 cut – WEY

Wey Education (WEY) – FY 2019 Results

I have covered Wey Education extensively over the last year and it is a top-2 holding for me.

Turnover was in line with August’s update at £6.0m (and very close to rounding to £6.1), adjusted PBT was £322k vs expectations of £90k. There are however very considerable exceptional costs:

• £312k to discontinue the overseas operations (plus around £70k of non-recurring losses)
• £436k of termination and restructuring costs

In producing an adjusted EPS they also strip out amortisation of acquired intangibles and equity share based awards. The former seems reasonable in their case because there is no expectation that they will continue to acquire business, but to be consistent I would exclude such intangibles from the balance sheet – which remains strong nonetheless. I would not exclude equity remuneration except for making year-on-year comparisons. My adjusted EPS therefore comes out at 0.16p, putting them on a P/E of 60.

“Other” liabilities have jumped from £0.7m to £1.9m, resulting in cash far in excess of last year’s £4.2m and the £4.0m that was forecast by WH Ireland. These liabilities represent customer pre-payments at InterHigh and so this appears to bode exceptionally well for FY 2020. InterHigh did start offer a discount for up-front versus monthly fees payment this year, however the discount is below most customer’s cost of capital.

[Edit: I initially stated that the deadline for pre-payment fell after their year end, but upon double checking I see the term start date was 2/9/2019 and they were saying payments should clear two weeks in advance]

They confirm that admin expenses have jumped due to increased advertising / marketing and the implication is that a further jump in FY 2020 can be expected as higher H2 spend is annualised, but then increases will slow. It is disappointing that Wey have not provided any direct indication of the success or otherwise of this spend and of the InterHigh summer radio advertising campaign or new intake size in particular.

In last year’s update we were provided with the tiny nugget that InterHigh growth was 20%, this year we have nothing about the growth split, although overall underlying growth is given at 36%.

While gross margins are up due to the teaching model used in FY 2019, I believe that further adjustments to the model (or their decision to “invest in the future both by adding to the teaching budget…”) as WH Ireland put it, mean that this may fall back in FY 2020.

[Edit: Many investors will be disappointed by the lack of detail in today’s statement, but 37% underlying growth, increasing adjusted profits and the promise of slowing admin cost rises in FY 2021 make for a strong outlook. The rise in cash / apparent customer deposits may be a particular cause of excitement.]