Wey Education Interims and Sainsbury’s Merger

I attended a presentation by Wey Education to private investors on their Interim Results yesterday evening. The Interim Results were issued in the morning, but the share price fell by 31% on the day even though the company reported turnover up by 44% and an adjusted profit before tax when it was a loss last year. The reasons are not difficult to deduce.

Wey Education is a small education company listed on AIM providing on-line education services. A previous extensive report on the company is present here: https://roliscon.blog/2018/01/11/wey-seminar-the-future-of-education/

An immediate issue I spotted in the morning’s announcement was this statement: “Adjusted profits were £145,000 (2017: £75,000) in line with our expectations for the first half. The figure represents profit before tax adjusted for share based payments (£18,000), amortisation of intangibles (£95,000), acquisition costs (£43,000) and the higher than trend expenditure on marketing and other matters flagged up at the time of the November placing to substantially boost group revenues and underlying profits over the next three years (£143,000).”

I made a note to query the adjustment for marketing costs, but I needn’t have bothered because Leon Boros raised the issue in the meeting before I got a question in. As I said though, it is surely unusual to “adjust” for marketing expenditure. Understanding adjusted financial figures can be difficult enough but marketing costs are surely just part of routine operating expenses. If they are particularly high because of management’s decision to spend more on marketing, even though the returns might come in months later in terms of higher revenue, then this is best handled simply by a note in the accounts.

Executive Chairman David Massie said this treatment was consistent with previous financial reports and he had been advised to do this by the Nomad (WH Ireland). I think he got some bad advice on that point. Profitability is of less concern to investors in such early stage companies than revenue growth and progress with business strategy.

Another possible negative was the prospective partnerships (including joint ventures) in China and Nigeria for which David clearly has high hopes. There was clearly skepticism among investors about the prospects for these ventures and the diversion from the key existing UK markets. David does have experience of doing business in overseas markets which may assist.

One slight hiccup on their internet marketing spend was a decision to change bankers from HSBC who apparently queried some of the payments from overseas. From my experience of dealing with HSBC as a business customer that was probably a sensible decision to take. Simply impossible to deal with sensibly and quickly.

One interesting point in the presentation was a description of their interest in AI which I was skeptical about if you read my previous report. It seems this is being funded by the EU which pleases me even if it still a management diversion. A demonstration of the wonders of IBM’s Watson as being implemented by Vodafone for answering customer queries fell flat as it did not provide sensible answers. My experience to date of voice response systems is consistently bad. Even the much-vaunted Google or Apple’s Siri can be very annoying in comparison with a human being, or a written query. Still requires further development to meet real users’ needs I think.

WH Ireland have revised their estimates for sales down for 2018 as a result but eps unchanged. Revenue now forecast to be £4.1 million and “adjusted” EPS of 0.39 but bear in mind the comments above. As others have said, the share price probably got ahead of what is a sensible valuation for this business. Even if David Massie has ambitions to grow it into a world leader, he has a way to go to demonstrate that this can be achieved. But he does seem to be building an organisation that might do so. One of those “wait and see” investment propositions it seems to me at this point in time.

Sainsbury’s Merger. On the opposite end of the financial scale, size wise, the proposed acquisition by Sainsbury (SBRY) of the ASDA UK stores from Walmart has had a very positive effect on the share price. The announcement on the 30th April caused the share price of SBRY to rise by 15% on the day. But it’s interesting to look at the share price trend in the week or so beforehand where it had risen after a long period in the doldrums. Was there a leak, as so often happens in these cases?

This merger would provide a supermarket duopoly in the UK with the merged entity and Tesco both holding about 30% market share. Would that be anti-competitive? In my experience in business undoubtedly so. Neither would be competing on price with the other and they would both end up with a cosy profit maximising strategy. For investors, if the merger is allowed to take place, it should be great news for investors.

But for Sainsbury’s customers like me, it’s going to be very bad news. I hope the Competition and Markets Authority block this deal.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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