Wey Education - Thoughts after August 2018 trading update

Tuesday, Aug 28 2018 by
28

Background and links

On 24/8/2018 Wey Education issued a detailed pre-close trading statement. Additionally their house broker WH Ireland issued a note, Graham Neary wrote a writeup and a private investor evening was held. The following day Executive Chairman David Massie did an interview:

(This follows much the same pattern as their previous substantial update in May:

)

Admission document

The following review was substantially written on the bank holiday weekend. It covers the events of last week and is based on the closing share price on 24/8/2018 of approximately 16p giving a market capitalisation of around £20m. It is written on the expectation the reader is familiar with Wey’s business and has read / listened to most of the above.

Trading Update

Timing

The timing of the update is noteworthy.

WEY’s year end is 31st August 2018. This is presumably to tie in with the academic year, however, unlike a traditional private school where the deadline for enrollment would have been before school holidays, WEY’s principal businesses will continue to take on new pupils right up to the start of term (10th September 2018) and beyond. Anecdotal evidence indicates there is a mini-surge going on in their InterHigh business around now for the following reasons:

  • Disorganised parents without a school place

  • Decisions being made following receipt of GCSE results last Thursday

  • Pricing generally incentivises starting at the beginning of term, but in particular they have a commitment-free half-term offer. The last opportunity to sign up for these and not miss a paid-for day of school was officially Friday, but certainly early next week at the latest.

Today’s announcement is 8 days before the year end and 11 days before the start of term.

The preliminary results are expected 29/10/2018 and so today’s announcement falls comfortably before the 2 months close period. I am not clear whether the timing of the preliminaries was set based on the timing of this update, or the timing of this update was to facilitate an aspiration to produce the preliminaries before then end of October. In either case, detailed, early reporting is very welcome and provides reassurance that the company are on top of their accounts.

Upbeat - really?

Thursday’s statement was widely viewed as upbeat, for example Graham Neary described it as “..a lot more positive”. But it didn’t initially read that way to me.

Turnover: The update leads with turnover exceeding expectations. Yet the broker’s new forecast remains unchanged at £4.1m and this figure reflects a 20% downgrade in May from their January 2018. Furthermore their core business growth continues to moderate at 20% vs 23% in May.

Underlying P&L: Market expectations are for £480k and the new range is £400-500 and so the outturn could easily be a slight miss. Perhaps more importantly the adjustment in H1 for “higher than trend marketing costs” was felt to be inappropriate by many investors and so some might take the view that hitting expectations is just a matter of declaring the right amount of costs to be exceptional. Graham Neary’s view is that “...it's not making any real profits”.

Cash: Although not spelled out, reported cash of £4m is significantly ahead of forecast of £3.5m. I view this as a double-edged sword: On the one hand it indicates good cash conversion and control of expenditure. On the other hand my first thought was that it might reflect an underspend due to a lack of progress in overseas projects.

Forecasts: My fears were reinforced when I read the title of the house broker’s note: “...moderating FY19E forecasts”. The detail is that they have cut FY2019 and FY2020 sales forecasts by 12% and 5%, naturally resulting in a proportionately higher drop in 2019 EPS of around a quarter.

Yes, really!

Forecasts: I have always been sceptical about the Nigerian and Chinese projects and in particular the rate of likely progress. Accordingly I had already dismissed the broker’s forecasts as somewhat fanciful and so the cuts came as no surprise to me. But what I found most reassuring was the discussion in the private investors evening about how much Nigerian / Chinese sales now contributes to the 2019 forecast. David Massie was not at liberty to discuss numbers, but made it clear that both would be small in the first year. This and the fact that FY2019 is getting ever closer gives me much greater confidence in the FY2019 forecasts than before. The FY2019 forecast also shows Wey as significantly cash-flow positive.

The rest of the statement I find universally positive:

Academy 21: This is increasingly looking like an excellent acquisition. I will feel more comfortable once it has been with WEY for an entire educational cycle (year), but so far everything is positive, both in the update and in the investor evening.

Nigeria: Carefully limiting risk, operations expected to commence in Autumn. While you could argue that the Nigerian market isn’t big enough (at a monetary level) to justify the management distraction at this stage, the wider opportunity is the a foothold in continental Africa plus its diaspora. It was confirmed in the investor meeting that an RNS will be issued when contracts are signed.

China: Again, limiting risk and first sales expected in September. I see this as higher risk still and remain very sceptical. David Massie has been consistently challenged at the investor evenings over the risks of operating in China. Ultimately I do accept that he is in a far better position than me to judge the risk/rewards and while China could “make” Wey Education, it cannot “break” it. An RNS will be issued when contracts are signed.

HR Strategy: This had me spooked (remember what happened to Provident Financial when it changed staff contracts?), however talking to Jacqueline Daniell at the investor evening I can see that this very much makes sense and is low risk due to the way it is being managed.

AI: The term “AI” seems to have lost most of its meaning amongst the hype, but my understanding is that Wey’s intention is to use what were previously called “Expert Systems” to increase teaching productivity - I can confidently say this is fully achievable with today’s technology and enough investment. It should also be possible to use an archive of pupil questions and teacher answers along with “Machine Learning” to considerably reduce the investment required. Here Wey may have a unique and valuable archive of such questions and answers, possibly approaching something that might be described as “Big Data”, a current buzzword.

Prospects and Valuation

I think Wey should be treated as two parts for valuation purposes: A core, fairly predictable UK business and some speculative overseas projects. Other businesses don’t appear to be material at this stage.

Core UK business

These have been growing at over 20%pa but there is some concern about the trend which appears to be dropping with internal targets being missed recently. According to the update this is “expected to accelerate again in 2018/19” but no reason for this is given.

Within this are B2B (mostly Academy 21) and B2C (mostly InterHigh). Pupil numbers on a FTE or proportion of year basis have not been given, let alone broken down, but the update states “2,000 different students at different times during the year”. However, https://interhigh.co.uk/about-interhigh/ currently claims 1,300.

Interhigh

As InterHigh is not a registered school, its pupils will generally be recorded as home-educated. Given this and that it provides complete flexibility regarding when and where students study, it could be argued that their market is that of home educated pupils. On the other hand, given that they charge fees and parents (of older children at least) can be working while the education is happening, then it could be argued that their market is that of privately schooled children. Finally it could be argued that their market that of all school children with parents able to pay the fees, which given the modest level of fees is clearly enormous.

According to this report: this report (and older ones), the home schooling market is reportedly growing around 12% a year with current numbers likely to be around 55k. This gives them a market share of approximately 2.5%. Given the growing market and relatively low penetration, there appear to be little constraints on continued 20%pa growth in the next 10 years+ on this basis.

According to this old report, around half a million children are privately educated. On this basis there is negligible penetration and again no apparent constraints on continued growth.

Given the above, that there is effectively no competition and that (unlike a physical school) there is no apparent scaling issues with InterHigh, there is no fundamental reason to expect growth to slow.

Academy 21

Academy 21 takes referrals from local authorities. I appreciate this is by no means the whole story, but I will therefore use the Special Educational Needs (SEN) and Education, Health and Care (EHC) plan numbers.

According to this data, and perhaps surprisingly, these don’t appear to be growing long term but are nonetheless at a very high level of 1m and 0.25m respectively.

Again, there appears to be no constraints preventing continued 20% growth, although competition may be more of an issue.

Overall

I know of no reason why the core UK business should not continue growing at 20% for the foreseeable future. Indeed my feeling is that there is latent potential here and that it could grow significantly faster than that. Potentially drivers for this would be: some kind of critical mass network effect, more / better marketing, increased flexibility of offering etc.

Taking into consideration broker’s forecasts and current growth rates, my estimate is for turnover of £8m (+/- £1m) for the core UK business for 2019.

Overseas Projects

Since no contracts have been signed and my scepticism in this area, I wouldn’t assign any significant value to this business today. Management time is a concern, but I am happy that the money being spent is prudent and at least proportionate to the potential rewards.

The situation regarding contracts could change imminently and my opinion here could change quickly and dramatically.

Valuation

FY2019 Sales

As discussed above, I have high confidence in around £8m (+/- £1m) of FY2019 sales.

The biggest company in the education market is Pearson. Their revenues have been flat recently and they are on an enterprise valuation of nearly 2x historic sales. In contrast Wey has revenues likely to grow 20%+ in the medium term and is on an enterprise valuation of just over 2x forecast sales. Both appear to have gross margins around 50% and so Wey appears to be far better value than Pearson.

In May 2018 Graham Neary indicated a valuation of 10x sales was too high. At the very least the situation has considerably improved.

FY2019 EBITDA / Adjusted PBT / Adjusted EPS

WH Ireland have produced a forecast for these, but I would like to gain a better understanding about what Wey consider to be reasonable adjustments going forward before using these for valuation purposes. The FY2018 preliminaries will help with this.

FY2019 Cashflow

WH Ireland are showing positive cashflow of £1.7m for 2019. Since there is no obvious large depreciation items, this seems a reasonable metric and gives a cashflow yield of over 8%, or 10% on an enterprise basis. This is before significant (or perhaps any) future profits from overseas projects and likely after some overseas costs.

FY2020 Figures

WH Ireland have some forecasts for 2020. These will rely on significant overseas sales and some profit. Accordingly I feel it is far too early to take notice of these, but 20% top-line is the minimum I would expect.

Short term drivers

I believe there is likely to be several pieces of good news over the next 2 months:

  • Announcement of contracts etc. fully signed in China, possibly with some revenue estimates - this seems very likely in September.

  • Announcement of contracts in signed in Nigeria. This feels much less certain, but still quite likely in late September or October.

  • Annual results in late October. Further upside to the current forecast revenues of £4.1m seems likely given that a) they have already said it is ahead of £4.1m but broker has not revised upwards and b) they have relatively recently missed expectations and so are likely to be taking a conservative approach.

Given that the share price looks to have bottomed out, the potential size of the opportunity both in the UK and overseas, the modest valuation, the small size of the company and the understandable historical excitability some of its investors, a near-term rerating looks quite possible. There is then a risk of stagnation over late autumn / winter period.

Risks

I think the main risks in holding at this level are lower than expected growth from the core business and the psychological impact of a volatile share price. On the latter, netcurtains was remarkably prescient when he said on Advfn (yes, really!) in March 2017 after buying at 4p:

It is potentially a very good long term investment as long as it does not rocket up and down on the way ruining it for people who get shaken out.

Conclusion

At 16p the shares seem cheap to me. I was buying over the summer and am buying again now.

Declaration: I hold. I have in the past sold some of my holding when the price got ahead of news (only to buy back later) and I will not hesitate to do so again. Additionally this is now a relatively large holding for me and by far my largest as a percentage of issued share capital so after a large rise I may feel the need to moderate my exposure regardless of progress.


Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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Wey Education plc is a holding company. The Company, through InterHigh Education Limited (InterHigh), operates online independent secondary school in the United Kingdom, offering The International General Certificate of Secondary Education (IGCSE), AS Levels and A Levels. The Company's subsidiaries include Wey ecademy Limited, Wey (Newco 1) Limited, Wey (Newco 2) Limited, Wey (Newco 3) Limited and Wey (Newco 4) Limited. more »

LSE Price
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Change
 
Mkt Cap (£m)
10.5
P/E (fwd)
6.0
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6 Posts on this Thread show/hide all

leoleo73 28th Aug '18 1 of 6
1

I have just tidied up the formatting of this post.

I also removed "b) the trading update was issued at a busy period for sales just before the FY end" under Short term drivers / Annual results upside. This is because the revenue recognition policy (from the last annual report) states:

Where a contract has only been partially completed at the balance sheet date turnover represents the fair value of the service provided to date based on the stage of completion of the contract activity at the balance sheet date.
Based on last year's report, these sales will be shown as "Recepts in advance" with an additional line for "Redundable deposits".
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leoleo73 28th Aug '18 2 of 6
4

I would like to take this opportunity to issue a mini-apology to "netcutains" who posts on advfn and who I had the pleasure of meeting at the investor evening. I'd only read his recent posts there and although polite I'm afraid I was rather "advfnist" towards him, assuming he was a short-term trader despite his protestations. I have now taken the time to read his earlier posts and realise he originally bought for many of the same reasons as myself.

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mrosbiston 28th Aug '18 3 of 6
4

thanks for the excellent write-up/analysis

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tripuram 29th Sep '18 4 of 6

thanks for the detailed analysis leoleo73.

I do hold and running at 50% loss as of now... I am not planning to throw my towel yet. I have listened to the interview and feels more optimistic about the future prospects for the company.

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brucepackard 6th Feb 5 of 6

Thanks for this post. I'm revisiting it in Feb 2019, and I think with the benefit of hindsight your analysis has been spot on.

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leoleo73 6th Feb 6 of 6

My estimates for FY2019 turnover were "way" off - the 4th February 2019 trading statement says turnover is "expected to be in excess of £5m", versus my estimate of £7-9m. Clearly something went wrong.

What should I have estimated for FY2019 on 28th August 2018?

I completely failed to show my reasoning for estimated FY2019 turnover, so here's an attempt based on information available at the time:

FY2018:
Between £4.1 and £4.3m (up to a 5% beat)
Includes the acquisition of Academy 21 which turned over in £1m in 2017. At a 20% growth rate that might have been £1.2m in 2018 and since it was only owned 8 out of 12 months, an estimate of the contribution might be have been £0.8m.

FY2019
Full year contribution from acquisition adds £0.4m giving £4.5m to £4.7m. A growth range of 15-30% gives £5.2m to £6.1m.

So it looks like I just adjusted down the brokers forecast to account for my guess of the "insignificant" overseas revenue rather than doing my own calculation. Lesson hopefully learned.

What should I have estimated for FY2019 after FY results?

FY2018:
£4.2m
Includes £1m contribution from Academy 21 in just 8 months - £1.5m annualised. This would be a 50% growth on 2017 and so it seems more likely that there is a seasonal effect. I'll assume instead that it would have been £1.2m annualised (20% growth). H1 figures show £0.25m for 2 months, so it seems that Academy 21 turnover is lower in the period 1st October to 31st December.

FY2019:
Full year contribution from acquisition adds £0.2m giving £4.4m. Underlying turnover was reported as growing at 29%, so I would have upped the growth range to 18-32% giving  £5.2m to £5.8m.

What does this mean now?

It appears that either the FY2019 turnover figure in the trading statement is particularly conservative, or underlying growth rates have fallen below 20%. Note that the trading statement does not present the "increase of over 24%" in turnover FY2018->2019 as an underlying figure, and it is not because FY2019 will have the benefit of four extra months from Academy 21.

It is difficult to infer too much from the cash movement of £4.2m at 31st August 2018 to £4.0m on 31st January 2019. Many 2018-19 academic year registration fees would have been included in the first figure, termly advance fee payments might well be ahead in the second figure, but monthly fee payments and payroll would be the same. There is some evidence of lower Academy 21 turnover in this part of the year, but they could have been collecting payments from the previous period. Looking optimistically, the cash figures are be compatible with adjusted EPS that is positive or even growing.

It will be interesting to see the forthcoming update from the house broker.

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