Wey Education AGM non-statement

Background

You can read about a summary of Wey Education here, and all of my coverage here.

My first purchase of Wey was in November 2017 when I was attracted by their InterHigh business for the reasons described in the links above. While not happy with many of the plc’s activities, as the valuation came down to more reasonable levels during 2018 I continued to add and it soon became my largest holding. It has remained my largest holding pretty much ever since.

I have been delighted by the current focus on the InterHigh (IH) and Academy 21 (A21) businesses and the success this has already brought them. As my largest holding I follow Wey and its markets very closely and have a detailed model of its business allowing me to forecast revenue to a good degree of accuracy. In contrast their house broker has very limited ability to forecast as they do not receive regular detailed updates from company and do not have the resources or mandate to investigate independently. For example, WH Ireland’s FY (to end August) 2020 forecasts have not been updated since February 2019.

During Spring / Summer 2019 my forecasts were conservatively showing revenue 15% ahead of forecasts and on 2nd July I wrote this piece speculating that a trading statement may be imminent due to the proximity of the end of IH and A21’s school terms which would mark almost complete FY revenue visibility. When this did not arrive I cut my forecasts back to a 10% revenue beat which implied a slowdown in their underlying growth rates and led me to hold off adding further. After the period end they reported revenue over 20% ahead of forecasts.

I re-checked my reasoning for expecting an earlier update with various shareholders, nomads and other issuers and concluded that I was reasonable both in expecting a material variance from market expectations to be reported as soon as it was evident, and that 10% of revenues is the appropriate measure of materiality in this case.

No November Update

Given the full year 2019 results, availability of 2018 operating company accounts, company PR and various other research, by October 2019 my FY 2020 forecasts were once again indicating a likely revenue beat. Their broker had not updated forecasts since February 2019, saying in August:

More news in due course A more detailed account will enable us to look into the prospects for
2020 more scientifically… We expect to see this when the company reports its
full year results in November, if not before…

Taking into account the additional detail found in the full 2019 annual report and ongoing research and refinement to my model, by November I concluded that the revenue was likely to be in excess of 10% ahead of forecasts. However no trading update was forthcoming and the broker merely said:

…we are conservatively retaining our existing forecasts ahead of the new term starting in January.

No January / AGM update

The pattern of business at InterHigh is that most students join at the beginning of the school year, but numbers continue to grow during the first term before levelling off. Therefore by November the company should have a good idea of likely InterHigh revenues. On the other hand, the Academy 21 business starts at a lower level and continues to build throughout the year. While the number of local authorities signed up is a useful leading indicator, I can see that January would be the point at which Wey would gain visibility of whether Academy 21 is progressing according to historical patterns. Especially given that they no longer split out InterHigh and Academy 21 revenues, it is perhaps understandable that Wey would want to wait until January to update the market.

The obvious time to update in January would be the either a week or two into the new term, or as a pre-open AGM statement. While it is possible they will issue a trading statement during the AGM, it is widely considered bad practice to make material announcements during trading hours where this can be avoided. Last year they issued a trading statement on 4th February, but that was a profits / revenue warning at a time of exceptional change in a year when the AGM was delayed until late February.

Accordingly, last week I was optimistic of a 7am AGM statement today indicating that trading was tracking ahead of expectations and a WH Ireland note raising revenue forecasts by between 5 and 15%. My own conservative estimate was for a 15% beat, but it would be understandable if they merely updated to bring expectations to within 10% of current trading.

On Monday WH Ireland issued a note that contained no new information or commentary, but which dramatically reduced the chances of a substantive AGM statement – brokers do not normally plan to issue two notes on the same company in two days!

Sure enough, there was no AGM update this morning.

Next Update

The company have been consistently sparse with their policy on broker updates and investor communications since the tragic event that led to the current management taking charge. Given the company is under no obligation to issue a H1 trading update (the focus is on the full-year), I now expect the next announcement to be the H1 results in May. Shareholders should also be prepared for the likelihood that there will be no updates to forecasts until a trading statement at the very end of August.

Conclusion

Limited communication / information coming from an issuer or a their broker can present opportunities to investors, especially to those willing / able to do their own research, and I do have confidence in the current management and in particular Jacqueline (the original founder of both InterHigh and Academy 21) to run the business. However it must be recognised that their policy also creates risks and that companies like Wey will therefore naturally trade at a discount to their more communicative counterparts.

Furthermore, while I can be hopeful, and must be cognisant of a possible repeat of the situation in August 2019, I must now assume that the reason for the lack of an update is that my forecasts are overly optimistic.

Analysing my model, I think the most likely cause of this is that the very strong Academy 21 growth seen last year has not continued and that A21 has experienced a relatively weak H1 to date – indeed I have previously noted that there is much less runway for A21 than for InterHigh and I had already expected some YoY moderation in H2. Accordingly I now see Wey revenue of £3.3m in H1 and £7.4m in the FY 2020. FY 2021 now comes down to the broker forecast of £9m, which is particularly disappointing given the beat in FY 2019.

With revenue growth weaker than expected I previously expected, ongoing signs of investment in product at the cost of profitability, and no further news expected until May at the earliest, I have taken the decision to cut back my over-size position. However it remains firmly in my top 5 holdings.

I will be at the AGM this afternoon, but this is not a public meeting and I must respect the company’s concerns over what is published, as well as and always the confidentiality of any private conversations.