Wey Education – Interim Results Preview

I have written much about Wey Education in the past as it has consistently been one of my largest holdings. The article is intended to stand alone but you can find more background and detail in my earlier articles here.

Wey consists of two principal operating companies – InterHigh and Academy21 – both involved in the online education of children. The two units share teaching staff.

In their last trading update just ahead of the 28th February close to their H1, they reported:

Both InterHigh and Academy 21 have started the financial year with strong performance in advance of the Group’s expectations. In addition, our InterHigh business to business sales have been higher than anticipated.

Group turnover for the year to 31 August 2020 is expected to be significantly ahead of market forecasts and to be in excess of £7.5m, which would represent an increase of over 25% on the year ended 31 August 2019.

The company has been performing ahead of forecasts for some time now but has been reticent to issue updates until a very high degree of confidence has been gained. Therefore I believe the above guidance was conservative.

The company has been consistent in warning investors not to extrapolate significant profits from increased turnover due to increased investment in product and scalability. However gross margin is around 60% and so increasing gross profits can be expected.

Group Coronavirus Impact

Teachers work from home and are mostly permanent employees. My research indicates that teacher sickness levels have continued to be low and almost all have been able to juggle online teaching and any childcare responsibilities. The cost of covering staff is likely to have been minimal.

They use Adobe Connect for live teaching, entrusting Adobe to host it. Adobe let their cloud become overloaded during coronavirus-related product promotions causing difficulties in connecting. Wey then had to expend some resources putting in place alternative hosting. Typically only one lesson was lost before Adobe got mostly on top of the issue, with only limited disruption since and the contingency now in place.

The impact on head office functions is unclear, although admissions and finance appear to be operating normally.

InterHigh

InterHigh was the first online high school in the UK and now teaches children in Key Stages 2 to 5 (typically corresponding to ages 8 to 18).

Pupil numbers have grown from 390 in July 2014 to around 2000 now, a compound growth rate of well over 30%pa. In recent years numbers have benefited from the addition of Key Stage 2 and a large increase in the scope of the 6th form offering. Their numbers nonetheless remain only a tiny proportion of the addressable home market, and 23% of revenue is from abroad.

Competition is limited – probably their main competition comes from Wolsey Hall Oxford who offer courses without live teaching and from private tutoring services. The competition for live interactive teaching is limited to a handful of much smaller players, although competition is growing.

My central expectation is for H1 revenues up 26% YoY to £2.1m. In past years most new students joined during H1, with joiners and leavers approximately balancing during H2. The majority of the revenue is nonetheless reported in the second half as they enjoy a full period’s revenue from the H1 joiners. Prior to the onset of coronavirus I had expected similar YoY growth in H2 giving a full-year revenue of £4.7m, with upside potential from increased marketing including the recent introduction of free “taster sessions”.

Coronavirus Impact

Clearly with schools closed in the UK and many other countries there is scope for them to pick up additional business at this time. However this is not as straightforward as it may seem.

InterHigh teach IGCSEs (International GCSEs) and International A Levels rather than the GCSEs and standard A Levels taught at UK state schools. Though there are historical factors, the primary reason for this is the abundance of exam centres for private candidates in both the UK and overseas. State schools tend to teach GCSEs over 3 years whereas InterHigh teach IGCSEs over 2 and International A Level students all (normally) sit an AS (half A-level) after the first year. Switching schools during a course is never straightforward, but the differences in qualifications and delivery make switching from a state school to InterHigh (and potentially back again) particularly problematic.

A Levels, GCSEs and IGCSE exams have been abandoned in the UK and at foreign exam centres with teacher assessments based on work up to the school closure date determining the grade received. This leaves little motivation for pupils in exam years to continue studying. Incidentally however, InterHigh are being allowed to provide assessments to exam boards, putting their customers at a clear advantage over purely home schooled children.

Teaching in almost all state schools is now limited to the issuance of homework, a situation that has been widely accepted by parents many of whom are at home able to supervise. The lack of live teaching has been fully normalised leaving little motivation to pay for it elsewhere. Furthermore it is speculated that schools will reopen at the beginning of June for younger pupils with others following.

Entry to InterHigh usually involves the payment of a £500 deposit and relatively complex rules over notice periods. They have responded to the closure of schools with a “Summer Term offer” which charges the standard rate but without these complexities. My research indicates that there has been significant take-up of this, especially in non-exam years, but there has been no increase to admissions man hours, leading to delays in enrolment of around a week.

Overall it is clear that school closures will have helped InterHigh. At the very least, parents who were already considering online education have had nothing to lose educationally from a paid trial.

I am expecting around a 10% rise in addition to earlier expectations for H2, raising my H2 forecast from £2.6m to £2.8m giving £5.0m (rounded) for the full year. As stated earlier there is potential upside from increased marketing.

Some of InterHigh’s coronavirus refugees will return to their previous school next year, but some will continue at InterHigh. I believe that by far the most important factor here is that increased publicity about Internet schooling will noticeably raise the growth rate over the next few years.

The company has reported that it has assisted some pupils in Wuhan, the original source of the outbreak. I do not expect this to have any material impact.

Academy21

Academy21 provides services to schools and local authorities who are obliged to provide an education for pupils who can’t attend school for medical reasons, are too anxious / refuse to attend school or who have been excluded due to behaviour. Some pupils may be assisted for months / years, others only for a few days. As part of the service IT equipment is provided if required.

Many of Academy21’s pupil contracts are relatively short and business tends to build throughout the academic year (for example as more pupils are excluded from state schools) giving less visibility of FY growth at the end of H1 than for InterHigh.

I would like to raise a potential issue with the February broker’s note here. WH Ireland say that “organic growth of 25% was achieved InterHigh and Academy21”. Note the used of the word “was”, i.e. pertaining to H1. They also say that “revenues up 25% are growing equally strongly in both sides of the business”. Given the inherent lack of visibility and the conservative nature of Wey’s recent statements, I believe that either Academy21 must have been running ahead of 25% for them to be comfortable it would average 25% for the full year, or they were confident of an acceleration at InterHigh to cover any potential shortfall from Academy21, or the H1 split was more in favour InterHigh than stated.

My central expectation is for H1 is nonetheless revenues up 26% YoY to £1.3m. Before the effect of coronavirus I would expect the full year to be up by the same percentage, reaching £3.0m.

Coronavirus Impact

The main impact here is the closure of state schools. Broadly speaking Academy21’s contracts fall into longer and short-term categories.

• Medium/long term – For example, anxiety disorders, permanent exclusion, medical needs, teenage mums, pupils in care, school refusers. Such arrangements may contractually continue and a case may be made for continuity e.g. for pupils in care. However the new cases that usually build up throughout the year seem unlikely to occur. Even for pupils categorised as vulnerable for whom physical schools are still open, virtually no teaching is currently happening in the UK and therefore it is difficult to see why a school or local authority would pay for live teaching of these pupils which others are not receiving.
• Short term – notably temporary exclusions. At best the existing ones seem likely to quickly expire with no replacement pipeline.

Teaching currently seems likely to resume for some pupils in June, but this still leaves an absolute minimum of 11 teaching weeks lost out of 20 in H2. Given that some contracts are likely to continue I now expect H2 sales to be half of prior expectations, giving a FY 2020 total of £2.0m.

In FY 2021 I expect a some business from pupils whose medical conditions (such as cystic fibrosis) that put them at high risk from coronavirus and therefore need to continue to staying away from school. However I do not expect this to fully compensate for the loss of business momentum and therefore expect sales to be slightly lower than they would have been without coronavirus.

In the early stages of the UK outbreak Academy21 put together a package to help schools with self-isolating students and where schools had to close. Soon afterwards all schools closed and so I don’t expect this to have had a material impact.

Other Operations

Wey Education also offer an accredited Teaching Online qualification. It has been previously been stated that this could be a significant revenue earner in itself and it clearly stands to benefit from the current situation. However with state schools making no attempt to provide live teaching and Universities in potentially serious financial trouble I believe the impact will be negligible this year.

Conclusion

I expect revenue of £3.4m to be reported for H1. Gross margins of around 60% seem likely to be maintained and with most of the costs from additional board-level appointments and marketing coming through in H2, EPS is likely to be well in excess of half the 0.3p forecast for the full year.

For FY 2020 I now see £7.0m of sales, with potential upside from increased InterHigh marketing. As this is within 10% of current guidance this is consistent with no RNS update having been issued. Revenue mix will adversely affect gross margins and some coronavirus-related admin costs will have been incurred. Accordingly the full-year EPS may be adversely affected but I would not consider this material in the context of a company close to breakeven.

Some investors may be disappointed by the full-year outlook, but its defensive positioning will have been broadly demonstrated and in the longer term the coronavirus pandemic is clearly supportive to the company.

Note: If you would like to discuss this article then feel free to join me and Mark Simpson on Small Caps Live this Wednesday 6th May at 11am.