Stock Pitch - Wey Education (LON:WEY)

12th Oct '20 by Edward Croft

29 comments 5984 reads

Wey Education (LON:WEY) was pitched to the Stockopedia Staff Investment Club on the 18th August and shares were purchased a day later at 24.45p. The shares were sold on 7th April at 46p after a recommended takeover bid. An 88% return.

TLDR;

Wey Education (LON:WEY) - a micro cap growth share benefiting from the accelerated shift to online education due to coronavirus and technology trends.

Bull Points: covid beneficiary, significant cost advantage vs physical schools, clear growth opportunity in a fragmented segment of a large market.
Bear Points: "it's just a school", no clear technology advantage, recent director sales, marketing execution risk, illiquid micro-cap, premium valuation.

Profile

About the Stock: Wey Education is listed in the Consumer Defensive sector, providing online education both in a B2C and B2B fashion. It trades at 26p per share, with an exchange market size (EMS) of 15k - it's very illiquid. This is a Micro Cap with a £36m market cap and is 'highly speculative' according to the RiskRatings. The StockRank is 77 - it's not cheap, but is profitable, growing and has a good Quality Rank of 84 and a strong Momentum Rank of 91.
Opportunity Type: In our Styles framework, this is a Highly Speculative, Micro Cap, High Flyer. It's a essentially a strong growth, low PEG share.

Business & Model

Company History: Wey Education was founded in 2004. It provides 100% online education across 2 business units: InterHigh School and Academy21. The company states that it has been "providing a positive alternative to physical schooling since 2005." It has educated 12,762 learners since it was founded, and has 144 employees.
Business Segments:
- Interhigh - this is the UK's largest online independent, fee paying school which the company says will have more than 2400 students by year end 2020.
  - It provides fully synchronous, class based, online Primary, Secondary and Sixth Form Education and thus competes with physical schools rather than the on demand educational sector.
  - Interhigh claims 73% Exam Pass Rates (A-C) for GCSEs. The Gov.uk website shows the new Grading system 1-9 for GCSEs and it's not clear if a C is Grade 5 of Grade 4. But for Maths & English at an 80% pass rate A-C :…

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catalogue

16th Oct '20

Hi Ed, I am not an accountant so digging into accounts is what I do as my final check. Stockopedia is invaluable because of articles like this. However, if you want to find out how a company is doing ask their competitor. Who are their competitors and how are they doing? Turn that around and ask who would benefit from buying them if they are so good Rm (LON:RM.) but who else?

rogerphilp

What would worry me here is the effect of a vaccine. If that pushes us all in the direction of health safety and feeling secure, why have the kids at home? For the next 3 months no worries. After that, not so sure.

navtis

Interesting but a couple of thoughts. I'm with #rogerphilp on this; they're having a reasonable run for obvious reasons, but when it gets (if it ever does) back to 'normal', what's their USP? That apart, you obviously don't think it's worth much (14 rank?), don't even take a stab at a figure and a momentum rank of 95 is baffling; it's not quite worth what it was in June. Where's the upside?

Edward Croft

20th Oct '20

There's a very interesting "results preview" piece written by LeoInvestor (who is a subscriber) on his blog - about Wey Education (LON:WEY) - you can read up here - https://leoinvestoruk.home.blo...

This is a quote - my eyes nearly popped at the 3,000 figure for Interhigh - I'd be very surprised if the student numbers are that high - but we shall see.

" 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."

Last year they reported around November 11th - so it's not far away. Those will be figures till the year end in August. I noted in my piece that the Interhigh web traffic numbers for September were very strong indeed.

10th Nov '20

Wey Education (LON:WEY) has reported full year results. Sales up 38% to £8.4m and adj. profits before tax up 102% to £652k. It’s a strong beat vs forecasts... though not as much as I’d have liked. Cash has grown half a million too.

Rusty2

I wonder how a Covid vaccine will affect Wey Education (LON:WEY) forecasts, I note shares fell yesterday.

mojomogoz

I don't really get Wey Education (LON:WEY) and particularly why it is should hold a high valuation as there seem to be a number of significant weaknesses that will either muddy growth path or create high costs to growth. I'm probably wrong and just can't see it (not uncommon!). I acknowledge that its a stock with a sweet narrative...too sweet IMO as it enjoys a bit of hype-ish support in the PI world and it appeals to the self-made self-motivated (dare I say occasionally egotistical and liking to broadcast) geek sorts that like to believe they can outsmart the market...or at least out trade the other suckers ;)

Counterpoints:

Homeschooling is weird. No offence intended and there can be good individual reasons for it...but it ain't a broadly applicable and desirable thing and its highly unlikely to become so unless 1) UK becomes a failed state or 2) you believe that covid/other bugs will mean that we seek to hermetically seal ourselves off as family units. The latter is what I think of as covid unreality narratives...the world is awash with them right now....you'd think Wey were a slamdunk now, right?...did they really do that well FY2020? Shouldn't they really be much hotter? After all, we will probably normalise...
...what if homeschoolers feel so isolated/claustrophobic now they actually want to go to schools...what odds a negative revenue surprise in 2021?...I'm joshing around a bit with this point...but not totally
High bad credit allowances against receivables. This is likely to remain a long term structural issue and perhaps worsen...that said I don't quite understand why it arises if they customers prepay for the service? Where credit is used in any form for secondary school education and there is a high incidence of credit stress I guarantee govt/regulator will become highly interested unless forbearance and forgiveness are pretty instant and dominant
Connected to the above. There is much experience in US, where mass private tuition for the non-affluent is more developed, of credit woes (often for the student rather than the educational establishment)
competition from 'real' schools is growing and is going to keep strengthening. Successful schools (public and private) are exceptional local franchises with real durability and expandability of brand. Many of the Wey homeschoolers would prefer their kids to be in these exceptional educational places...
...and many of the parents who can't help their kids access this sort of place are relatively speaking without means and/or educational attainment
My kids go three different state schools over the covid crisis time. 2 have handled super well, one is a shambles. The 2 that handle well have integrated technology and remote learning into how they do things. This is clearly and absolutely competition against the Wey model and is more innovative and desirable...
...the rate of innovation in schools is quite high in recent years. Not all of them for sure but its quite dynamic.
No doubt extra curricular and online will become more significant part of the educational experience but this for adjunct tech rather than cuckoo tech
I was a maths teacher for a little bit a long time ago...and I've had some tangental indirect exposure to educationalists since in a variety of ways....its a natural shit-fest of an area unfortunately. You can say that Wey sidestep this however I reckon any profile for Wey in educational circles will bring plenty heat from concerned onlookers. How much do you believe Wey can work with the grain of the establishment? IMO its unlikely they can as they are straight out revolutionary competition.

Instinctively to me Wey feels like a wrongun...just as you have 'tech' doesn't mean you 'disrupt' (and we all hate schools in some way and/or know teachers we think are a-holes so we can be very ready to believe the disrupt bit). I think I could keep on going with the above but I'll stop now.

There will be a durable market for a service like Wey and it will have some growth. But why would Wey 'uber' or 'facebook' this market? Its not really suitable to a dominant educational delivery platform (there could be dominant enabling tech of course for some). Wey are likely to face very stiff competition from better brands. Eton online if they chose to commercialise and scale would be able to charge at least 2x as much as Wey and still outpace them....if you go weird in education and have money you're going to go brand.

Sell Wey...you might not see the sidewinder coming and at its current price a doubt re model will take the price down hard and their ain't a lot of liquidity for anything but the smallest PIs. A stock like Rm (LON:RM.) is harder to like for a variety of reasons (inc the superb homegrown CEO moving on) but is much better structurally places to monetise innovation and change in education

(There's a lot I don't know re Wey and the above is a quick view rather than very informed)

Good insights @mojomoguz and welcomed.

As I mentioned in the piece...

Bear Points: "it's just a school", no clear technology advantage, recent director sales, marketing execution risk, illiquid micro-cap, premium valuation.

WEY beat estimates, but not as much as holders would have wished for given the macro backdrop. As the valuation is at a premium, it's been marked down on very low volume.

I continue to hold. All stocks are speculative, DYOR etc.

It was a good note Ed....and I've just realised that any points were general rather than personal (I actually have Boros in mind as someone promoting it and I know the very nice and geekish Leo Investor is a fan).

I must admit I thought the stock was up 10% today and see it now down 20%! That's very surprising

LeoInvestorUK

11th Nov '20

@mojomoguz, I think I can answer all of the above:

Weird? Certainly, but it has become much less so recently with maybe 5 years of progress in a matter of months. What now seems weird was closing schools in April and sending home worksheets in instead of providing online lessons. The next step-change will be the imminent inspection and accreditation of online schools which arguably takes them out of the homeschool market entirely, though this was never something that restricted them given their single percentage digit market share and 40% overseas customers.
Homeschoolers now more claustrophobic and keen to get out? Absolutely right - all their physical social activities such as Scouts and sports etc. are banned by law while those at physical schools are free to socialise pretty much as before both at school and on the way there and back. But after lockdown finishes they can return their advantageous position in this respect.
Receivables: They had built up debt largely due to inflexible contracts but in 2019 much of this was written off and is most unlikely to recur under new contracts. The 200% cash conversion speaks for itself.
Competition from "real" schools: Some are getting better, but some worse under increasing government control-freakery. Strong private (and public) schools expanding online should however be considered their number 1 threat and this has considerably increased over the last year. To mitigate this they have much more experience of online delivery, more scale and no legacy costs, meaning they are both better and cheaper.
They advertise on LBC specifically because it attracts the demographic that cannot afford to move to an expensive area or pay for a private school, but can afford to may for online education.
Their B2B offering allows schools to offer a hybrid model e.g. for less popular subject choices, better and more cheaply than they could do it themselves.
Wey do indeed have to tread a careful line between effective teaching and marketing and not pissing off the educational establishment, many of whom have an instinctive hatred of different education models. In the latest example, tonight Wey described how Academy21 lost out in H2 because customers realised their in-house lockdown offering was equally suitable for those with special needs. They did not say that "because they abandoned them like everybody else"! We also heard how they basically wrote the new accreditation rules using their contacts including the outgoing NED.

On your last points, they don't claim to have tech and I've never heard anybody say there needs to be an Uber in this market - yes you need scale to compete effectively, but they have this and beyond that there is a very limited network effect. Liquidity is much better than many shares I own, and certainly adequate for full time investors - that is, people who have a portfolio and don't day-trade.

I'll assume that's not intended as an insult, especially as you are more "geekish" than I :)

I wrote this today especially[1] for Stockopedia: https://www.stockopedia.com/co...

[1] until tomorrow.

15th Nov '20

Leo, I'm flattered to even by considered a geek...however I know that I fall short of such exulted status as I'm far too intellectually incoherent and lazy to attain such a status.

Whereas, you for me, are a top geek ;)

Ciao

Thanks for your riposte...clearly much more informed than my fly by night negatives.

I'll think a bit. I have struggled with valuation versus what I can understand as the security and extendability of their franchise. My hunch remains (based on shallow analysis and thinking!) that they will need to iterate their business significantly in future to achieve greater scale. For example, hybrid physical and online. That said, maybe they don't need to worry about that until sales are significantly higher...more £50m than £20m though as limitations of £20m would be sensed fairly soon in market.

The receivables point was clarifying and reassuring

13th Jan '21

Good to see... "Wey Education announces that trading in the first four months of its financial year has been significantly ahead of budget and market expectations."

I have owned Wey personally for some time... and it's up about 60% since the Club bought too. I know how much pain parents are feeling at the moment.. and I think independent school fees are far too high for online learning. Wey continues to be well placed to pick up business - but I have to admit the valuation is looking punchy. I am a holder at these levels not a buyer.

Paul Scott has some cautionary comments re. VAT handling in the SCVR.

CharMar

Very helpful scepticism, well argued and expressed. Thank you. Your views on Rm ( which I have held at times, would be greatly appreciated).

1st Apr '21

Takeover... recommended cash offer. +40% today, and an 87% return for the club in just over 7 months.

Stocks123456

Congratulations Edward. Is there a landing page for the Clubs investments? Thanks

dcon85

2nd Apr '21

Great result! Does the Investment Club have a policy for dealing with companies that are bid for?

We've a meeting on Tuesday to discuss this and new candidates. Our policy on sales is quite simple. We have 3 sell rules:

Automatic stop loss on purchase price (variable based on risk ratings)
Automatic sell on < 50 StockRank
Discretionary sale if a club member makes a case for the sale and puts it up for a vote.

7th Apr '21

The Club today sold its position in Wey Education (LON:WEY) at 46p - an 88% return over 233 days.

Stock Pitch - Wey Education (LON:WEY)

TLDR;

Profile

Business & Model

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About the Author

Edward Croft

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