Background
It has been an exciting and eventful calendar year so far for Wey Education, the online education company.
In January the evidence mounted that their InterHigh private school business had smashed their previous year’s record enrolment figures and that numbers continued to build, putting them well ahead of not just the previous year but also broker guidance. And no wonder – InterHigh pioneered the full online school experience and have used their experience and scale to progressively enhance their offering over many years, for example by increasing live teaching hours and improving teaching quality.
In contrast their competitors are generally much smaller, often providing a more limited set of subjects, and/or run little more than the type of correspondence courses that have been around since the 19th century. Meanwhile, the UK state sector continued its recent trend of being ever more prescriptive and inflexible to individual needs, forcing increasing numbers of children out of the system.
In February, just before the end of the H1, the company deemed that they now had enough visibility to report that trading at both InterHigh and Academy21 was ahead of previous expectations. WH Ireland reported that both units were trading 25% ahead of last year, putting the company as a whole 12% ahead of previous revenue forecasts, but InterHigh considerably behind where my earlier research had indicated.
Wey’s Academy21 unit provides services to UK schools and local authorities to meet their obligations to educate children that have been excluded due to bad behaviour or cannot attend due to medical needs, as well where the authorities have accepted that the one-size-fits-all state system has failed the individual. Like InterHigh, this business has been growing strongly recently, but is normally H2 weighted as problems mount for children during the school year, thus limiting early revenue visibility.
In March the covid-19 pandemic became the dominant theme for investors, with stocks selling off indiscriminately and Wey Education falling to lows of under 14p. Investors however quickly found their feet and realised that Wey is well positioned to benefit from any interruption in face-to-face teaching.
With all schools suddenly closing many parents got their first experience of home education. While for some this was a positive experience, it soon became apparent that (with some exceptions), state schools had no plans to put together a detailed package of remote education, let alone offer the kind of live online teaching that is at the core of InterHigh’s offering. Most parents / children received no support beyond limited issuance of homework (which often went unmarked) and pointers to third-party videos.
In May Wey prepared their H1 results and discovered that rather than the 25% ahead reported at the period end, they had actually been 43% ahead, precipitating a further FY upgrade. Despite their customers being closed there was no commentary on the recent performance of Academy21 beyond noting verbally that there would be less of an H2 weighting at a plc level this year.
In June speculation increased over plans to deal with the virtual complete loss of several months education for all but the children of the most diligent and committed parents (and, of course, children at InterHigh who were completely unaffected). There was talk of reducing the content of future exams, running summer schools and of funds to pay for enhanced teaching of some kind.
Through their InterHigh unit, Wey set up a package of measures that parents could purchase to help children catch up, including a summer school. It was clear that they were hopeful that local authorities and schools would also be potential customers of their services to help children catch up, though perhaps they were not as optimistic as some of the shareholders.
For more background you can see all of my Wey Education articles here, including coverage of the recently announced regulation of online “schools”.
Outlook – Academy21
I have previously commented in detail on the headwinds that Academy21 will have been suffering with schools closed. Given the lack of commentary with the H1 results it is possible my concerns were overdone but with Wey I would have been consistently far better served by obstinately sticking with the conclusions of my research regardless of company outlook statements. Furthermore, at the time of May’s statement I don’t think many imagined that schools would still remain almost entirely closed.
Unfortunately for everybody concerned I see little immediate opportunity for Academy21 to benefit from any of the £1bn education package that was recently announced. Clearly since the funding does not start until the new academic year it cannot directly pay for any summer schools, online or otherwise. Furthermore it was repeatedly emphasised that, although schools were free to spend it how they wished, the intention was that they spend it on tuition of pupils in small groups and that such tutoring is the only proven way to improve attainment of pupils attending school.
Academy21 do not provide tutoring services, and for good reason. This is a market that is already very well served with no barriers to entry and little opportunity to add value through investment or technology. Tutoring is the epitome of a people business and any attempt to compete in this area risks Academy21 becoming a glorified staffing agency.
However I do see some opportunities for Academy21 in 2020/1. Their existing business will continue to grow, possibly aided by some especially vulnerable children that continue to shield from coronavirus. The penny may eventually drop that tutoring in small groups is a very ineffective use of resources where the same missed lessons need to be taught to every state-educated child in the country. And schools may struggle to find enough tutors (as well as supply teachers to cover those shielding) to spend the money, forcing them into the hands of more effective solutions like Academy21.
Despite claims from tutoring organisations to the contrary, the fact is that Academy21’s disruption-free online group lessons from experienced and organised teachers is both cost effective and proven to transform pupil outcomes. Academy21 should continue to grow for many years to come.
Outlook – InterHigh
The immediate outlook for InterHigh is much stronger, with tailwinds in H2 from parents who were previously considering home / online education taking the plunge, as well as potential summer school income.
The level of summer school income is however very uncertain. There has only been a soft launch so far via a facebook post, with nothing visible on their main website or twitter and no online advertising purchased. The concept is apparently not endorsed by the government and so perhaps few are likely to seek it out.
In 2020/21 the outlook for InterHigh is stronger still, with new flexible offerings, support from government regulation and annualised revenue from some of the coronavirus refugees that enjoyed their taste of a real online school.
It is a pity that so many parents have has such a bad experience of home / online education over the past few months. Wey’s new marketing director will have an interesting job communicating the advantages of properly planned and structured online education anchored with live lesson delivery.
Director Sales
Over the last few days their have been share sales from three directors, each selling half or more of their stakes. While it is true that taking into account pending share options the proportion sold is lower, these are significant sales made for investment rather than personal reasons, and not something you would expect if they envisaged the share price rising further.
[Edit 26/6: However I can see arguments for not holding your most volatile shares in a SIPP if you are anywhere near the lifetime limit – the risk / reward is less symmetric when you face a large tax bill on a rise. Much better use your ISA allowance for such things, or even perhaps even hold outside and take advantage of various capital gains reliefs]
The history of Barrie Whipp’s holding is particularly interesting. On the 15th November 2019, Paul Daniell, co-founder and husband of CEO Jacqueline Daniell, exercised options to buy 1,000,000 shares. Entirely unlike Mr Whipp’s, the Daniell’s shareholding is almost certainly a very significant proportion of their investments, and although I was sad to see the founders sell these newly issued shares just as prospects were looking so strong, I understood their reasons for doing so. In off-market transactions Mr Whipp bought 250,000 of these shares for himself and arranged the sale of another 750,000 to a carefully selected “supportive” shareholder.
Although the 10.75p price fairly reflected recent trades, being illiquid it may have been a good opportunity for other purchasers had the shares been offered around more widely, always remembering that the Daniell’s were unlikely to be under any pressure to sell. As the strong trading anchored by InterHigh’s September enrolment numbers was disclosed to the market the price rose rapidly, reaching 16p in early February well before coronavirus became a factor.
Regarding shareholdings, it is also important to note that the previous executive chairman’s estate continues to own 15.5% and they may also be considering “diversification”.
Conclusion
Likely weak trading at Academy21 will be offset by strong trading at InterHigh, but although the vast majority of FY 2020’s core revenue has now been received, Wey do not customarily issue a trading statement until late August regardless of where they are relative to expectations. Possible summer school revenues make an early statement even less likely this year.
Longer term I can see multiple drivers for continued high revenue growth over several years of around 30%pa, including increased pricing to maintain gross margins as they continue to improve their offerings. Profitability is harder to judge, but clearly there is significant operational gearing implicit in a company close to breakeven with fast-growing high-margin revenues.
Barrie Whipp is a smart guy. As founder he has done very well out of Crimson Tide and has put together a great product. Concerning Wey Education he clearly bought well and it would be naive to think he hasn’t just sold well. As previously lamented, Wey is not a company where investors can rely on RNS statements (or the lack of them) to judge trading performance, instead we must use other tools available to us.
Smaller scale traders would have done well so far to follow Barrie out on the day of the announcement, and indeed a further pull-back seems more than likely given that the share price is up nearly 350% in under 14 months. But larger investors, especially those who have to transact on-market with limited liquidity and significant spreads, along with longer term investors, might do well to hold on given the strong multi-year outlook.
Speaking for myself, I’ve sold a few but this remains a solid top 5 holding.
(Note: If you would like to discuss this article then place join me and Mark Simpson on Small Caps Live this Friday 26th June at 11am.)
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