This morning Wey Education issued their long-awaited annual results. For the benefit of those not entirely familiar with the company, I think it is worth quoting their own description of their principal operations:
InterHigh (www.interhigh.co.uk), InterHigh founded in 2005, has a 15-year track-record of delivering online schooling for both UK based and international fee-paying pupils. Interhigh caters for pupils from age 8 to 25 years old, offering a wide range of academic and enrichment courses, IGCSE, AS and A-Level subjects as well as vocational qualifications. It is a complete school with full academic, health and wellbeing and social programmes ensuring that all students who join the school study successfully for their future career choices. InterHigh is also available for partner schools and academies, both UK and international, to deliver supplementary academic programmes.
Academy 21 (www.academy21.co.uk) Academy21 was founded in 2011 and is a specialist in providing Alternative Provision online. It delivers services designed to help schools, local authorities and other public bodies such as children’s homes meet the challenge of delivering short, medium- and long-term provision for pupils with complex behavioural, medical and mental health issues. It provides a balance of academic challenge and educational engagement through quality teaching and learning with flexible study programmes – responding directly to the challenges schools and local authorities face in securing high quality, cost effective alternative education provision.
The chairman says:
The Directors believe that Wey provides a unique, synchronous experience for our ever-increasing number of learners.
Or to put it another way: they are one of the few online education providers offering live lessons and a comprehensive school experience rather than just tutoring or correspondence courses over the internet.
The main news here is that turnover was significantly ahead of the “in excess of £8m” guided in the last trading update issued at the end of the school year. Revenue recognition is rarely entirely straightforward and so some margin for error was doubtless built into the guidance, leading WH Ireland to forecast £8.1m at the time, but the result of £8.36m suggests that Wey had continued to be very conservative in their outlook.
As an example of this conservatism, it appears the July guidance didn’t include any potential revenue from their summer school which was developed partly with funding from the quango Innovate UK. Hopes of state funding for places were perhaps already fading, but parent take-up might reasonably have been expected to be higher had it not been for negative government signalling.
Wey’s adjusted profit before tax metric came in at £652k versus £0.6m forecasted by WH Ireland following July guidance of “expected to exceed…£0.5m“. However this is a company on the tipping point of profitability with high sensitivity to small changes in revenue and costs, and so I don’t assign much importance to small variations either way.
What is important to me is gross margin and, as they point out, this has risen from 59.5% to 60.3%. Digging further, margin fell from 61.5% in H2 2019 to 58.8% in H2 2020, but some coronavirus-related operational inefficiencies, including impacts on the Academy 21 sales, were surely to be expected. Advertised fee increases of 15% at InterHigh are likely to be reflected in Academy 21’s rates too and bode well for FY 2021, despite further investment in the offering.
Underlying administrative expenses were in line with my expectations which had been guided by repeated company statements about investment in the board, marketing and technology. Year-on-year the rise is 33%, down from 35% the previous year and below growth in revenue and particularly gross profits.
Accounts are clean with no exceptional costs or significant capitalised expenditure and cash conversion remains outstanding.
InterHigh / Academy 21 breakdown
As in previous years, no breakdown between the different operating divisions is given, although they do say:
At the start of the academic year, new pupil enrolment numbers benefitted from the summer radio campaigns with the more recently established [InterHigh] junior school performing well. Student numbers generally rose through the autumn period and throughout the new year. From the beginning of the UK lockdown, student numbers enrolled in Alternative Provision [Academy 21] started to decline as Local Authorities and state school customers sought to look at utilising the provision they were now having to provide themselves while their schools were closed. However, the total student numbers across the operating businesses continued to climb throughout the year.
Their interim report stated that both InterHigh and Academy21 had grown at the same rate and therefore I believe InterHigh experienced very approximately 50% YoY growth in H2 while Academy21 fell by 10%, giving a 2:1 revenue ratio in favour of InterHigh over the full year.
The split is important to investors as each side has different revenue profiles and factors driving performance.
FY 2021 Outlook
No easily identifiable guidance is given in today’s update, however it is possible to read between the lines:
- They say “The outlook for Wey Education is unequivocally optimistic“, citing changes in behaviour from the pandemic.
- Increased investment in and focus on marketing is noted on a number of occasions, from which they are presumably expecting a return.
- Stronger InterHigh performance in H2 versus Academy21 is a benefit for the current year because InterHigh’s revenues have a greater recurring nature.
- Deposits held against student accounts were up £652k and money billed or received in advance is up £382k. Although these are liabilities, they are balanced by higher than expected cash and Wey point out that “This demonstrates the healthy position in which the group commences the 2020/21 financial year.“
- The chairman says “At the time of writing over 3,000 students receive an education from Wey“
- Teachers – they say “A significant tranche of 42 teachers have joined for the new academic year ahead“
Deposits and Advance Payments
The breakdown of Other Current Liabilities is not normally provided until the full Annual Report, but today’s preliminaries very usefully provide enough information to construct the most important parts:
I understand that Academy21 do not take advance payments or deposits, but for InterHigh, all other things being equal, it would be reasonable to expect “revenue received in advance” to scale in proportion to upcoming annual revenues (or at least to the first month of the following period with a degree of subsequent recurrence). Unfortunately in 2019-20 InterHigh introduced a modest discount for upfront payments, skewing the numbers and this was withdrawn for 2020-21 skewing them back. An 84% rise under these circumstances is very promising.
Refundable deposits should also be a good advance guide to InterHigh’s upcoming revenues, but again this is subject to distortion:
- Deposits per pupil have varied, for example for 2017-18 they were just £200 for UK parents whereas they are now £500 (overseas have remained broadly the same). Although I believe they have been £500 for a couple of years, deposits may be been carried across at lower levels in some cases.
- The new “rolling contract” did not feature a deposit as of June 2020. These are only available in non-exam years, the fees page now implies there is a deposit and it is unclear when/if this changed.
Any change in patterns of enrolment (that is, enrolling earlier or later, staying for more or less time) will also affect the extent to which early advance payments and deposits feed into the overall result, but the evidence here is that InterHigh revenues started 2020-21 1.8x-2x ahead of last year.
Mystery over pupil numbers
Wey has previously been rather coy about the number of students they educate. To a degree this is understandable because the number of hours per week varies, pupils leave and join during the year, and the mix / pattern will vary in ways that are not entirely predictable. Nonetheless this is a key metric for forecasting full-year results and it is the basis of Wey’s current target of becoming the size of a Multi Academy Trust.
In InterHigh’s case the numbers are well over the level where the true figure acts as a selling point – their website has claimed around 1500 since at least December 2019 whereas a figure of 2000 was given in an open day in March 2020. This source explicitly says they had around 3000 in September, although this was part of a bio where editors had misspaced InterHigh and might also have conflated it with the whole of Wey.
In the results issued in November 2019, Wey said:
The Board’s aim, in its short to medium term plan, is for the combined Wey business to become the largest secondary school in the UK by number of students.
The latest data available at the time showed the largest secondary school had 1738 pupils, implying that they had meaningfully fewer at the time.
Similarly Academy21 has advertised “1000+ pupils supported each year” pretty much ever since they updated their website in 2019. With many of Academy21’s pupils short-term (including temporary exclusions) and building as the year progresses, that 1000 would equate to only a fraction of that near the beginning of the academic year.
Despite the lack of definitive comparables, there is every indication that total pupil numbers of “over 3,000” are currently running at 1.8-2x that of this time last year.
Staff and Teachers
Based on the information provided and making reasonable assumptions (in italics), including for teacher attrition, there appears to have been a large increase in the number of teachers despite increasing productivity as lecture-style classes and less common tutorial options grow larger:
The teachers at YE 2020 (estimated above, actuals will be published in the Annual Report) reflects to some degree a higher number recruited than normal in H2, required as enrolments were higher than usual and enabled as closed schools provided more opportunities for teachers to move jobs within the school year.
We know that pupil numbers have at least kept up with teacher numbers since recruitment is described as “ongoing”.
With Wey achieving 38% revenue growth from FY 2019 to FY 2020 on teachers leading into those periods up from 71 to 75, growth from 75 to an estimated 127 followed by as many again immediately afterwards bodes very well indeed.
The house broker is WH Ireland. They have issued a very modest 6% revenue upgrade while cutting profit forecasts, nixing immediate hopes of a dividend and not offering any FY 2022 forecasts. The full report can be read with a Research Tree subscription.
The company says “Wey Education has the diligence, business plans and sustainability of the sector to deliver an increased breadth of offering beyond its UK time zone and secondary education” and “Our cash position is very strong and gives us a firm basis for future investment considerations in new materials and technology.“, while WH Ireland talk about reserves potentially supporting “M&A in the season ahead“. An acquisition that consumed cash and distracted management from their core growth markets would be a major risk for shareholders.
Fortunately it is only relatively recently that Wey withdrew from attempts to establish a local presence in China and Nigeria making an overseas acquisition unlikely. What is probable is an expansion into UK-based provision into other time zones. According to a map on their website they have significant numbers of customers both in the Americas and Asia. It is notable that in the US the concentration is high on the East Coast where students can access live lessons with some discomfort but they have far fewer on the West Coast (even after adjusting for population) where this would be impractical. InterHigh now has the scale to profitably teach a second set of lessons from the UK in the evening which would support this market. Likewise more opportunities would be opened up in Asia by teaching earlier, either from the UK or elsewhere.
There are a couple of subscale niche UK competitors to InterHigh who may wish to exit the market following the introduction of regulation, though this would more likely involve a transfer of students for a minimal consideration than a traditional acquisition. Likewise there are other operators in Academy21’s space that may lack Wey’s scale.
Given that Interhigh already has a strong primary offering, the phrase “beyond…secondary education” suggests a possible move into Further or Adult Education. Again this is fraught with risks and investors must especially hope that this does not happen via acquisition. Though both InterHigh and Academy21 were acquisitions, they were both founded by the current proven CEO.
Another possibility is the purchase of a education technology company. Though considerable work has gone into successfully integrating various products that make up their learning platform, in principal it is a weakness that they don’t have their own technology. Their live teaching product is also looking dated and suffers from poor service from the supplier. But again, this is a risky endeavour and funding their own technology is a potential money-pit.
More positively, they say about Academy21:
We have no doubt that further opportunities are available to us in the business to business market where we sell directly to commercial organisations and school groups and I believe that the opportunity here has only been limited so far by our desire to focus on the delivery of our initial strategic goals.
InterHigh has previously made forays in the B2B market for sports academies and similar, but Academy21 may be a better fit for those wanting GCSE (rather than IGCSE) teaching in smaller groups.
In my results preview I identified several groups that were natural sellers of the shares. To these can now be added investors who bought into Wey as a “COVID-19 play” whose outlook has been changed by Pfizer’s vaccine PR statement and those disappointed by the company’s short-term guidance.
For me, today’s results were a useful beat and indicate they started FY 2021 at least as strongly as I expected. The higher admin costs guided via their broker that in turn led to a cut in profit forecasts still remain lower than I was expecting.
I maintain my £13.0m forecast for FY 2021 and now offer an EPS forecast of 1.5p. For H1 I am expecting £6.1m with EPS 0.6p. These are well ahead of consensus and so I expect two further upgrades during the year.
Risks have however risen with the failure to distribute profits and talk of M&A. Accordingly I have increased the discount rate used in my NPV calculation reducing valuation to 55p. I hope to revise this following Wednesday’s results presentation.
Mark Simpson and I will be discussing Wey in today’s (11th November 2020) @SmallCapsLive at 11am .
2 thoughts on “Wey – FY 2020 Results”
Thanks for this Leo
Looks very overpriced on a P/B basis = 5.3 x? If the cost of capital/discount rate is (say) 15%, the RoE ought to be 79.5%!
If we compare with (say) SLP that has a P/B of 1.72 x and a cost of capital/discount rate of 18% this means that SLP RoE ought to yield 31% and according to 2020 numbers that is bang on.
I`m using: Price/Book = RoE/Cost of Capital (Discount Rate) as the investment equation.
It is worse than that because there’s at least £4.2m of free cash so the return on equity genuinely employed is even higher.
There are two ways of looking at very high RoEs: 1) They signify a great company with a moat and/or a desirable capital-light business model or 2) Some of the assets are not accounted for. Really they both come down to the same thing, but (2) is the less conventional and probably more interesting because it is at least theoretically possible to quantify.
For Wey’s those hidden assets are in the Academy21 and Interhigh brands and goodwill. Given that the brand awareness and number of customers is much more than when these businesses were acquired it follows that these intangibles are worth significantly more than the book value, even assuming they didn’t get a bargain at the time. You could adjust the accounts by capitalising and amortising the customer acquisition costs and advertising spend to estimate true assets, true profitability and therefore true P/B, profitability and RoE, but in my opinion this is a dangerous road where it is easy to fool yourself with overoptimistic assumptions. This paper discusses the approach: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3442539. Many will argue that return on incremental capital is the more important measure in any case and therefore it is pleasing that Wey are actively talking about customer acquisition costs and lifetime value.
In contrast SLP is tangible asset heavy giving a higher accounted-for book value.
I prefer to use a DCF valuation model for Wey since growth rates and capital requirements are well established.