Wey Education – Results Preview

Full-year results time is rapidly approaching at Wey Education, the highly successful B2B and B2C education company delivering live online lessons to 8-21 year olds. Their 2018 and 2019 results were issued on 29th October and 11th November respectively, both Mondays, leaving 9th November probably the most likely date.

Expectations

The critical figures were already detailed in the latest Trading Statement which was delivered promptly as the vast majority of their teaching finished for the year back in July.

Trading has continued to be very positive since the publication of the group’s interim announcement in May and is in excess of expectations.  Group turnover is expected to be in excess of £8m for the financial year ending on August 31, 2020, an anticipated growth of in excess of 30% from the previous year.

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)).

This particular definition of Adjusted Group Profit Before Tax has not been used by the company before and the claimed £0.6m loss for 2019 appears nowhere in published results. 2019 was a messy year with exceptional restructuring costs and losses from ongoing operations. Adjusting these out PBT was in fact +£0.3m on the basis given.

For a company with gross margins of over 60% that has increased revenue by over £2m, an increase in profitability of merely £0.2m appears strange. However, Wey has repeatedly made it clear that admin costs would rise as they bolstered the board with Directors of Education and of Marketing, and due to increased spend on both their offering and marketing.

WH Ireland interpreted the last trading update as indicating £8.1m revenue and an adjusted EPS of 0.4p. Incidentally, as Wey are not a serial acquirer and because the goodwill value of InterHigh and Academy21 businesses have most certainly not decreased since acquisition, adjusting out amortisation of intangibles should not be controversial.

Things to watch

Wey don’t break down figures between their principal InterHigh and Academy21 divisions, leaving investors waiting for the subsidiary accounts to be published, but they often give some indication of relative strength. At H1 they indicated both had grown equally. If Academy21 suffered in H2 from their main end-customer (UK schools) being closed then to make up the numbers InterHigh must have continued its fairly spectacular growth from H1. This would be a positive because 2020/21 revenues will partly depend on InterHigh pupils continuing from 2019/20 whereas Academy21 is more easily able to bounce back.

As I said earlier, the timing of the last update was good as it came as soon as the vast majority of revenues were known. However this year they received funding to create an online summer school and this was delivered to an unknown number of students at around £400 / time. Conceivably this could account for another £100k of turnover leading to a small revenue beat. They are also likely to have benefited from an exceptional level of exam fees as some local centres refused to process InterHigh’s grade assessments.

Share-based compensation is likely to be much higher than in recent years due to the strength of the share price. These costs are real and significant, but it is reasonable to adjust them out for year-on-year comparisons.

There may be news on Wey’s “Teaching Online” qualification and/or progress of the B2B side of InterHigh, consisting of sales to private schools, sports academies and the like.

There is an outside chance of some management change as the CEO (and founder of the operating businesses) appears to have been taking a back seat at recent shareholder meetings.

This may also be the moment that the estate of the late executive chairman David Massie choose to divest some of their 15% stake, hopefully to a supportive institution.

FY 2021 Outlook

InterHigh

Judging by the level of staff recruitment, website activity and updated figures on home schooling, all indications are that InterHigh student numbers are exceptionally strong, with this article putting current numbers at 3,000, versus 1,700 disclosed in an open day in late January and my estimate of under 1500 this time last year.

However there are reasons to be cautious. Pupil numbers normally build throughout the first term before the flow becomes broadly evenly matched between joiners and leavers, but there is no guarantee the same pattern will continue this year. The COVID-19 health crisis may have driven parents to InterHigh out of desperation and these pupils may not stay as they have in the past. The new flexible Rolling Contracts available will also attract more temporary students, although pricing reflects this and in exam years the year-long commitment remains. An increase in fees of 10% (for a yearly contract) gives further confidence.

Accordingly I see InterHigh currently trading an exceptional 80% ahead of last year, with risk evenly balanced between the upside and downside.

Academy21

As an entirely B2B division, public visibility of Academy21 is much lower. And as Academy21’s revenue run-rate builds throughout the year there is also less management visibility than there is for InterHigh at this stage.

There has been no commentary on the effect of state school closures, but it is difficult to imagine that they avoided shrinking in H2 2020, leaving them with a smaller proportion of total revenues, but with easier comparatives. With FY 2019 growth at 35%, I see no reason why Academy21 cannot achieve 25%pa growth over H1 2020 and 25%pa over the two years since H2 2019, potentially equating to FY 2020 being up 50% yoy.

These estimates could easily be beaten if schools and local authorities raise their game concerning children absent for COVID-19 related reasons and take advantage of Academy21’s services which are likely to be more cost-effective than repeating lessons online within a school. It is also quite likely that Academy21 has raised their prices in line with InterHigh’s.

Overall

Clearly the FY 2021 outlook is partly dependent on the relative performance of InterHigh and Academy21, something that is currently unknown to the market and may not be disclosed with the results, but after performing some sensitivity analysis I am happy to make projections at this early stage.

For FY 2021 I had been previously forecasting £11.4m, 15% ahead of the broker forecast of £9.9m, but I now raise this to £13m, over 30% ahead. This would lead to EPS of twice consensus on admin costs significantly higher than WH Ireland’s model implies. Given the remaining uncertainties a reasonable course for Wey would be to raise the revenue guidance to £12m, leaving the central case within the 10% materiality threshold and hopefully leaving the way open for a further upgrade during the year.

However, while there are signs of this improving, the company has a patchy record of issuing timely market guidance and so a FY 2021 upgrade cannot be guaranteed and little can be read into any absence.

Longer term outlook

While COVID-19 will continue to dominate this academic and financial year, there are many underlying trends in place likely to support the long term growth of Wey’s businesses:

  • Increased social acceptability and awareness of online education for children, increasing the chances of parents considering it if state (or private) provision becomes unsuitable.
  • A step-change in the level of home schooling that is likely to feed into InterHigh’s numbers over a period of years.
  • InterHigh stands to benefit significantly from free publicity around the introduction of online school regulation, its presence on the GIAS database, and the perceived legitimacy of having a DfE number. While this has been further delayed, rollout seems certain during the current academic year.
  • Continuance of the trend for centralised, prescriptive approaches to state education leading to less flexibility and more children being failed by the system.
  • Continuance of the trend of increasing behavioural issues.

The main negative factor is that some recent positive trends related to coronavirus may partally reverse in 2021/2 before long term trends re-establish themselves.

Conclusion

A significant upgrade in the guidance for FY 2021 is likely to accompany these results, followed by at least one further upgrade during the year. Despite the share price having already attained multi-year highs, theses upgrades and the breakthrough into significant profitability seems likely to support the valuation further.

While I see a fair valuation in excess of 60p on quite conservative assumptions, there are now a diverse range of potential sellers, including those that bought at similar levels in late November 2017 who are now in profit for the first time, those who bought at under 10p / were given options / inherited the shares who may now need to diversify their portfolio, and short term traders brought in by publicity on Stockopedia and elsewhere. Near-term share price movements are as hard to predict as ever.

Disclosure: Wey Education is currently a top 5 holding of mine.

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