Wey Education – Trading Update

The owner of InterHigh (online school for 8-18 year olds) and Academy21 (online education for state schools) today issued a trading update in which they report revenue for the year ending 31st August will be in excess of £8m, versus guidance at the H1 results of £7.9m. They also report that profitability will be ahead of expectations.

Revenue

While this is not a material beat, the timing of the update is very positive. The InterHigh school year finished at the beginning of July and the schools that Academy21 serve generally break up for their holidays today, making this the natural time to issue a statement. In contrast, the company has failed to issue timely updates on a number of occasions over the last year and the 2019 full year update did not come until 28th August despite having traded being very materially ahead of market expectations.

Although their revenue growth rate of 30% is very impressive, it is down from around 44% seen both from FY2018 to FY2019 and from H1 2018 to H1 2019. However, as I first highlighted in May, their Academy21 business has suffered somewhat from one-off Coronavirus impacts in H2, obscuring the underlying picture. As I said in the conclusion to my previous article, I don’t expect a further slowdown in growth and 30%pa should be achievable for several more years.

Profitability

Wey has been looking expensive on a forward P/E basis ever since February 2019 when forecasts were moved onto a firm footing based on a new strategy focusing on the strong InterHigh and Academy21 businesses founded by Jacqueline Daniell, rather than being based on moonshots to China and Nigeria. To see value investors needed to look beyond net profits to the growth rate of revenues and the high gross margins.

Today’s update on profitability may mark the day when this starts to change:

Group Profit Before Tax (after adjusting for share based payments and amortisation of acquired intangibles) is expected to exceed market expectations of £0.5m (2019:(£0.6m Loss))

In my last update I warned that unexpected costs could yet affect profitability. It is certain that their businesses encountered additional costs both in coping with coronavirus and from initiatives to take advantage of it, yet we know know they will still exceed market expectations. This is a reflection of both the strength of their franchise and their determination to break into profitability that bodes well for the future. And while “expected to exceed…£0.5m” is vague, this reflects their closeness to breakeven and their laudable decision to update the market once revenue was known rather than waiting a further six weeks until a more accurate estimate of profitability was available.

Outlook / Forecasts

With revenue forecasts beaten once again despite some one-off headwinds affecting Academy21 in H2, and with strong tailwinds for FY2021, the outlook is exceptionally strong. WH Ireland only revised their FY2021 forecasts in May and have not updated again them now, leaving them 22% ahead of the revised FY2020. I continue to believe this is significantly too low and stick with my earlier £11.4m forecast.

It is important that management are free to take advantage of opportunities that arise and these may result in additional costs, but they have demonstrated a desire to beat profitability as well revenue expectations. Therefore I forecast FY 2021 EPS of 1.2p.

The share price has been exceptionally volatile over the last 12-18 months and it has been quite possible for investors to lose as well as make money over the period. After today’s share price jump there may be a period of drift until the FY2020 results are issued in November. At this point initial InterHigh enrolments for 2020-1 will be known, the effect on Academy21 will be clearer and FY2021 becomes the current year for market guidance purposes. Therefore I see a strong possibility of a FY2021 upgrade which together with the introduction of FY2022 forecasts is likely to be well received by the market.

Note: You can see all my coverage of Wey Education here. A brief background of the company and recent events can be found here. An older but more detailed description can be found here. Mark Simpson and I will be hosting an interactive discussion of today’s update along with other smallcap news at 11am today here.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s