I have written much about Wey in this blog, all of which can be found here. The following is a potted history relevant to the H1 2020 results.
4/6/2019: As part of a series of articles, I concluded by projecting FY 2019 revenue of £5.45m compared to broker estimates of £5m.
2/7/2019: I reiterated that Wey were “fairly certain” to beat FY 2019 revenue forecasts, pointed out that due to the school year ending they would know their FY figures imminently and said: “According to my calculations this is likely to be on the borderline of the sort of revenue beat where an early update to the market might be considered.”.
28/8/2019: Wey report FY revenues anticipated to be above £6.0m. In my write up. I was unable to square this with the obligation to keep the market informed. I raised by FY 2020 forecasts to £7.3m versus broker guidance of £6.7m and said that the upside had increased.
Late 2019: In October and then Christmas I carried out significant further investigation / research which indicated that FY 2020 was tracking significantly ahead of my previous expectations. My notes over Christmas showed a “base case” (minimum) of £7.5m, with £8.0m very possible and £8.4m on more stretched, but still well supported assumptions. At this point the broker guidance remained £6.7m so this was a very significant beat.
Jan 2020: Ahead of the AGM I emailed the CEO (amongst other things) reminding them of their obligations to keep the market informed.
28/1/2020: When no AGM statement was forthcoming I wrote “I must now assume that the reason for the lack of an update is that my forecasts are overly optimistic.”, cutting my forecasts to £3.3m in H1 and £7.4m for the full year (still well ahead of broker forecasts of £6.7m) and selling a significant portion of my holding at 14.75p.
25/2/2020: The company issued a trading update (3 days before the end of H1), saying that full-year revenue was expected to be significantly ahead of market forecasts and to be in excess of £7.5m (25% ahead of the previous year). Although I felt some beat was clear back in October, I tried to see it from their point of view. The WH Ireland note said “organic growth of 25% was achieved across the InterHigh online school and in Academy 21” thoroughly disabusing me of my belief they had smashed H1 and underlining that the expected FY beat required continued growth in H2 which they cannot reasonably have had confidence in any earlier.
26/2/2020: The first UK schools started closing as a result of the coronavirus outbreak and I started adding to my position in Wey, albeit mostly above the prices where I had previously sold.
30/3/2020: With their customers’ schools all closed with teaching effectively halted, I started to have concerns over the Academy21 business and the strength of the share price. I progressively pruned back my holding.
5/5/2020: I wrote up my thoughts as part of my Interim Results preview. The least controversial part of this was supposed to be my estimates for H1 for turnover of £3.4m, slightly ahead of stated growth of 25%, although I did ponder for a few days over an apparent inconsistency:
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 [at Academy21] 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.
When the results arrived I was in for a shock, with turnover up 43% to £3.9m, much more in line with my research and projections from October than the 25% given in February. It is simply not possible to square this with the lack of an update around the AGM when such strong growth would already have been very evident, let alone the statement and brokers note in February.
They confirm strong growth and gross margins across both InterHigh and Academy21. While the Teaching Online qualification is mentioned as an operational and staff development matter, there is no suggestion of any material financial contribution.
I had earlier (before the February update) expected Academy21 growth to moderate relative to InterHigh. In these results we learn that they did not previously have national sales coverage and so rectifying this is allowing them to continue to grow ahead of underlying (or coronavirus-related) demand.
Profitability was nominal, but far in excess of half the FY guidance, as I expected. They use an adjusted profits measure that excludes amortisation of acquired intangibles which (as commented previously) is I think is perfectly reasonable in their case. However they also exclude equity-based share awards and quote adjusted EPS on an undiluted share count.
No concrete outlook statement is given and they pointedly make no direct reference to coronavirus. The closest they get is is to say:
Recent global challenges have ensured that online education is a subject more in the public eye than ever before. Whilst there will be macro-economic factors in play for an extended period, more people are becoming aware that online education is a real possibility and that organisations cannot simply advise that materials are available online. We continue to focus on our IT Strategy of a single Wey platform with excellent usability and materials. Safe, compliant providers with high quality teaching will certainly benefit from the awareness created in these challenging times.
However on the same day their CEO gave an upbeat interview on Vox Markets. It is always nice to hear from Jacquine Daniell, founder / joint founder of both InterHigh and Academy21 talk about the company as all too often she takes a back seat to the current Chairman.
The interview can be found here, and below I highlight some key points:
03:30 Starts talking about H1. Both business growing at similar rates. Emphases revenue.
03:50 Academy21 has less of a “bell curve” of revenues. I think this implies less H2 weighting.
04:25 Talking about excess cash on balance sheet. On look out for acquisitions to add to customer base.
05:15 Operational progress: Talks about hiring directors of education and of marketing. Investment in technology. Reiterates 10,000s pupil target.
06:20 Talks about refinements to teaching approach.
08:00 Brief reference to competitors
08:39 Talking about increased interest in their services due to coronavirus
09:40 Long term effects of coronavirus
10:40 How school’s online teaching is not ideal
11:30 How Academy21 can help
13:00 Can you keep achieving this growth? Reiterates 10,000s target. Longer term plans.
14:00 Talks about improved conversions and overseas growth
14:20 Academy21 growth. Top 5 accounts increased 130% helped by improved account management, as well as new accounts.
15:25 Re-iterates have a strategy for accelerated growth now bearing fruit.
FY 2020 Forecasts
Plugging the H1 growth rate into my model which assumes modest incremental coronavirus benefits for InterHigh but a loss of half H2 Academy21’s revenue (compared to where H1 trends would have taken it) gives FY 2020 revenue of £7.9m.
However the only indication that Academy21’s growth could be affected by closure of schools in H2 is the implication of a less pronounced H2 weighting in the interview above. If you again assume a modest 10% benefit to InterHigh’s H2 from coronavirus, but that Academy21 will be flat half-on-half then that gives £8.5m of full-year revenue. Even a straight repeat of H1 produces £7.8m.
On the day of these interims WH Ireland upgraded from £7.5m to £7.9m for FY 2020 and from £9.0m to £9.9m for FY 2021. That’s a very material 18% increase for FY 2020 in less than three months.
It is now very clear that Wey cannot be relied on to update the market in a timely fashion even when revenue is running significantly ahead of market expectations. Time after time I would have been far better ignoring their guidance and “soft” trading updates, and especially the lack of them.
Perhaps their internal reporting is such that they don’t realise when they are beating expectations, but instead I believe they simply interpret their listing obligations differently from other companies. I also think they are motivated by a particularly strong desire to be conservative in order to be especially certain that they can meet/beat forecasts later. Many companies, especially on AIM, are idiosyncratic in their communications with the market and the trick is to become familiar with this and use it to your advantage.
I don’t doubt that they intend to beat the brokers guidance of £7.9m revenue and 0.3p adjusted EPS to some degree. However it is still possible that they could discover that Academy21 is materially affected by school closures and am disinclined to risk repeating the error of modifying what have been quite accurate independent forecasts to take into consideration company statements. There is also a risk that investors would not be made aware of any shortfall until results time.
Therefore I maintain my forecast based on my earlier model giving £7.9m revenue for the full year and repeat my warning that the forecast 0.3p EPS could still be affected by unexpected costs.
My preferred metric for this company is gross profit. Here I forecast a 36% increase to £4.9m which is a fantastic growth rate.
I have previously explained why I expect limited H2 2020 coronavirus-related gains for InterHigh. However 2021 is a different matter as parents appreciate that not only is online education now a genuine and socially acceptable option, but of the massive advantages the fully featured live lessons offered by InterHigh over the supervision-intensive homework they and their children have suffered from their ill-prepared schools over the last few months.
Clearly the benefits to InterHigh will depend on how much their marketing team take advantage of the situation, but I have always thought there were low-hanging fruit here and the effects of improved account management at Academy21 (see Vox Markets interview at 14:20) demonstrate what a more focused approach from the new marketing director might be able to achieve.
Another unknown is the extent to which schools reopen in September. It is looking increasingly likely that social distancing will remain in place resulting in a continued impact on learning. Some parents may be too frightened (rationally or otherwise) to send their children back to school.
As a minimum I see the strong momentum from 2020 carrying through aided by some coronavirus effect.
Teaching is being severely affected in the UK partly due to lack of preparation / organisation but also because of an unwillingness to disadvantage those without laptops etc. by attempting online teaching beyond the setting of homework. This situation is unsustainable.
As an absolute minimum there will be a group of pupils at high-risk from coronavirus who will be unable to return to school in September and Academy21 offer the ideal solution with live online teaching with all equipment provided.
It is looking increasingly likely that school capacity will be reduced next year due to social distancing requirements. In a less severe scenario this could involve staggered starts and a shortened school day with pupils expected to do more work at home. For students disadvantaged by this Academy21 again offers the ideal solution to level them up.
Some vulnerable staff will also need to stay at home causing staff shortages. Again here Academy21 could help by providing them a platform to teach, or covering smaller subject classes from their own staff for less than the cost of hiring a cover teacher.
For FY2021 it is easy to see both businesses growing revenues by 30%+. If Academy21 does turn out to be affected in H2 2020 then I do not see this lowering the baseline for FY 2021, but rather revenues fully returning to the trend line. Accordingly I see £11.4m revenue in 2021.
I currently see no reason for gross margins to change significantly, leading to a further 45% increase in gross profits to around £7m. With cash likely to be around £10m, the current market cap of £31m would start to look interesting to a wider range of investors.
I do not expect further significant increases in fixed admin costs, but the recent hires and increases in marketing costs will be annualised for the first time. EPS may approach 1p and given the levels of cash plus increasingly negative working capital a dividend looks possible.
Remember that, in contrast to the broker guidance for £9.9m revenues, my figures are my current best guess, not a conservative minimum designed to be easily beaten.
2022 and beyond
2022 is the year when blended learning (mixing with online with in-person) by schools and universities should start to become commonplace, not out of necessity, but because it provides better outcomes, a wider syllabus and lower costs. The normalisation of online education should continue to propel growth at Wey at levels higher than the 18-19% I previously forecast for many years to come.
A single digit forward PE (at current prices) looks possible around 2022-3.