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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Wey Seminar – The Future of Education?

Yesterday I attended a presentation by Wey Education (WEY). This is a small AIM-listed company in which I hold a very few shares. This is one of those “hot” AIM companies where the valuation discounts a lot of anticipated future growth in revenue and profits. Last year (year ending August 2017), revenue was £2.4 million (up 60%) and post-tax profits all of £17,000, albeit a big improvement on the previous year. Broker WH Ireland forecast growth this year partly because of a recent acquisition and from anticipated investment in marketing – they raised £5m in a placing for the acquisition of Academy 21 but will have lots of cash left over from that for other purposes.

I won’t say much more about the financials because the seminar of over 2 hours barely mentioned them but concentrated on operations, business model, marketing etc. I understand there were a lot of questions asked about the financials in the mornings AGM particularly on “related party transactions” from speaking to the Executive Chairman David Massie before the meeting started. He also mentioned some of the history of the company which seemed somewhat “fraught” with a legal suit against the former CEO that they won (see “exceptionals” in the accounts).

Wey focuses on on-line education and have four primary brands – InterHigh which provides iGCSEs and A-levels on a non-selective basis, Wey ecademy which sells similar courses but on a B2B basis to education providers, Infinity Education which is a selective premium fee paying online school now mainly focused on international markets and a new venture named Quoralexis which provides courses in English as a Foreign Language (EFL).

The business has been around a long time with the founders still involved, but it is not regulated as a “school” for technical reasons but it does qualify as an “examination centre”. Seventy percent of pupils are based in the UK and there are 5,000 pupils with about 1,000 “live” lessons per week. All the teachers are employees, although some are part time.

The above is taken from the first presentation session from David Massie. As he said “Education is the last great unreformed business” where the vast majority of provision is conventional classroom education. The latest innovation has been moving from blackboards to whiteboards! Comment: you only have to look at the national education budget to see that a very high proportion of the expense is in teachers’ salaries and their productivity has not changed since Victorian times.

Apart from that aspect there are a number of pupils who need on-line education. For example, offspring of ex-patriots in remote locations, those suffering from medical conditions, those subject to bullying at school, those wanting a better education than local schools can provide, or waiting for school places, and for several other reasons. Pupils can interact via speech, text or private messages with the teacher and the lessons are taught in real-time like a conventional school – they are not self-paced downloaded videos.

InterHigh is ramping up marketing expenditure, recruiting a finance director and after that probably an HR director. Marketing will include a series of video advertisements in Waterloo station. They see that as a location with high footfall of folks likely to have children and an income to cover the cost. No cost for that advertising was mentioned but I can imagine that as being expensive. I asked Jacque Daniell who looks after marketing later about whether they had tried direct mail (off or online), but it seems they only use that in promoting Wey Academy.

They do have some internet marketing – for example have a tie up with Mumsnet, but their level of search engine awareness is low. Type “online gcse courses” into Google and they are nowhere, with lots of competitors offering lower cost with different course provision models.

The InterHigh web site does not look great in marketing terms – lots of talk about “features” and what they offer, but no great focus on benefits, on the home page. However there are some good “customer stories” on other pages.

Comment: I do not think they have cracked the marketing model as yet to really get business ramping up quickly. I am not convinced that advertising to every man/woman and their dogs on train station platforms will be cost effective. There are surely lots of ways they could spend more on internet marketing which might be more cost effective because you can focus more specifically on the likely target markets.

Jacque spent a lot of time explaining their interest in AI (Artificial Intelligence). When I asked how that would be beneficial when it seemed to me that they had a good product and it just needed to be more actively marketed (i.e. AI might be a management and funds diversion), she said it would help to “engage” pupils. Presumably she meant recruit pupils because retention seemed to be of lesser interest (they have a high “drop-out” rate but that is probably to be expected from the kind of pupils they attract).

Comment: As a former IT professional, I find the current focus on AI to be as over-hyped as it was back in the 1980s. I was involved in a natural language database inquiry project at the time, and that area has certainly moved ahead since – for example Google on my smartwatch gave a sensible answer to the verbal question “does a fruit fly like bananas” which can be one of those tricky questions for such systems. When I asked it “does time fly like an arrow” it correctly identified I was trying a well known semantic trick question. A bit of “ad-hoc” programming in there I suspect. But how will AI, which is a very broad field, really help the sales revenue or operations of Wey? I am not clear at all.

These are a couple of questions that were not answered in the seminar (and not enough time left for questions when the whole event was too long):

  • What are the main competitors? (mainly conventional schools I would guess).
  • What percentage of the on-line education market do they have?

I am also not clear why they are investing money in Quoralexis – EFL courses seem to be a very crowded area although David Massie said the current providers are “rubbish”. It would seem to be a diversion to me.

Incidentally when I am looking at early stage companies I like to check they have the basics right – like registering their brand names as trademarks. I could not find a UK registration for “Quoralexis”. Nor could I find anywhere on their web sites some basic legal terms/conditions of use, claims for trademarks, nor any site search function to help either.

In conclusion, this looks to be like a lot of AIM companies. The management tell a good story about the prospects for what they are offering, and the broker has great projections for future revenue and profits, but there is a lot still to prove I feel. The marketing seems somewhat amateurish and they need to spend a lot more on that to really drive awareness and take-up (they only spent £160k last year on marketing which is about 6% of revenue – not nearly enough). That does of course assume that the market is there to be developed to a decent size.

The current market cap is about £41 million. The “story” being promoted by David Massie sounds attractive but I’d like to see more evidence of success in getting a return on marketing expenditure and ramp up in sales before punting a large sum on this company. But that is of course only my personal opinion and no recommendation to trade in the shares of this company one way or another. Perhaps one to keep “under observation”.

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

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Abcam AGM, Cambridge Cognition, Ultra Electronics, Wey Education and IDOX

Yesterday I attended the Annual General Meeting of Abcam (ABC) in Cambridge as I often do as I have held the stock since 2006. Share price then (adjusted for consolidation) was about 50p and it’s now about 950p so I like most investors in the company, I am happy. Alex Lawson will be doing a full write-up of the meeting for ShareSoc so I will only cover a few points herein.

One shareholder expressed concern about the rising costs. The company is clearly making heavy investments in new infrastructure and more management. Although revenue was up 26.5% last year, earnings per share were only up 11.8% (unadjusted) and operating margin has been falling. Also Return on Capital Employed (ROCE) has been falling – only 12.3% last year when it used to be in the high teens.

Apart from opening a new building next year, they are implementing an Oracle Cloud software solution to replace their historic purpose-built legacy software systems. The total cost of that project is £44 million (see page 23 of the Annual Report) when profits last year were only £42 million post tax. In other words, all of last years profits could be taken to be consumed by this project. This project has been running for some time and I have asked questions about it in previous years. This year I asked: “is the project on schedule and on budget”. I did not get a straight answer. But it was said that initial cost estimates have expanded, and additional modules been added (for example warehouse management). It should “go live” in the current financial year. From those and other comments made, I got the impression that this is a typical IT project that is too ambitious and costs are escalating while delays have arisen. Those “big bang” IT projects rarely go according to plan, but management are often suckers for them.

Now it may be arguable that older systems need replacing (for example, the CEO mentioned it was impossible to bill in Swiss francs that at least one customer would prefer), and maintaining old code was clearly proving to be difficult. The massive investment in this area alone may be justified by the company’s ambitions to “double the 2016 scale by 2023 by investing in operating capabilities” as the CEO mentioned. The expectation is that growth will improve revenues and hence margins in due course.

One more way that costs have been rising is increased pay for management. CEO’s pay alone up from £614k to £1,378k in the last year (“single figure remuneration). In addition, I commented negatively on the fact that the LTIP target had been adjusted for the “scale and complexity of the transformational programme” of the new ERP system implementation, i.e. costs are much higher than expected so the LTIP target has been made easier to achieve!

At least Louise Patten (acting Chairman now after departure of Murray Hennesey for a proper job, and Chair of the Remuneration Committee) admitted later that LTIPs are often problematic but institutions like them. LTIPs at Abcam have rarely paid out, and management at many companies seem not to value them highly. There are better bonus scheme alternatives.

I also spoke briefly to a representative of Equiniti, the company’s registrar, about the difficulty of voting electronically. He is to look into it. Amusing to see the company slogan on his business card is “Our mission is making complex things simple”, exactly the opposite of my experience!

In the morning I also visited Cambridge Cognition (COG) who have offices in the village of Bottisham east of Cambridge. Although their offices are in what appear to be wooden huts, they are well furbished. The company specialises in cognitive health (brain function). Sixty per cent of its revenue comes from clinical trials for pharmaceutical companies, thirty per cent from research institutes and academia and ten per cent from healthcare and consulting.

On clinical trials they do about 15 deals a year so by their nature they are lumpy one-off deals. Total revenue was £6.8 million last year. Before last year revenue was flat but it grew last year and is forecast to grow this year.

A lot of pharma companies are actively researching alzheimers and other degenerative brain diseases, and developing products to assist – as the population ages such diseases are becoming more prevalent. Cambridge Cognition’s technology relies on historically well validated studies. The company provides a lot of consulting support in clinical trial sales.

Such deals include 30 to 40% of software which is billed and paid for on normal 30+ days terms, with the services paid for as provided. One issue that arose is that their accountants are likely to require them to change so as to allocate the software revenue over future periods due to IFRS 15 because they host the software. This is the same problem that Rolls-Royce have tripped up on, and it is also an issue at Ultra Electronics (ULE) according to a report in the FT yesterday. That company also issued a profit warning on Monday and the share price fell 19.5% on the day. I used to hold it but not of late. The FT writer suggested it was time to “exit”. Cambridge Cognition did suggest though that they would not need to restate last years accounts, and the change might actually smooth their revenue figures. IFRS 15 is an important correction to historic aggressive revenue recognition policies in some companies.

Otherwise Cambridge Cognition have some interesting technology – for example using smart watches to monitor brain function during the day, and using speech recognition to perform analysis. Whether these can be turned into profitable markets remains to be seen. One of the original ideas in the company was to provide their software on i-Pads for general practitioners to use in diagnosis but that never took off due to changes in purchasing arrangements in the NHS who of course are notoriously difficult to sell to (and budgets of late for technology seem to have been cut). If anyone wants more background on Cambridge Cognition you are welcome to contact me.

A few weeks ago I purchased a minute number of shares in Wey Education (WEY). Minute because although it looks an interesting business I thought the share price was way too high on any sensible fundamental view. This morning the company announced a share placing to make an acquistion. This will be at 22p which is a 33.3% discount to the price on the 14th November according to the company. Clearly advisors and institutions took the same view as me on the previous share price. Has the share price collapsed this morning as a result? It’s down but not by much so far. Wey Education does look like one to monitor (which is why I bought a few shares) but I think I’ll stand back from the speculation for the present while the market is so twitchy.

This looks like one of those hot technology stocks that are all the rage of late (the company provides education over the internet as an alternative to school attendance). But investors are clearly getting more nervous about many of those stocks in the last few days – it’s no longer “keep buying on momentum” as some share prices have fallen back from their peaks (Abcam is one example), so it’s now sell, sell, sell. And if a company indicates that the outcome for the year will not be as good as the optimistic broker forecasts suggest, as IDOX did mid-afternoon yesterday, then the share price gets hammered. Announcements mid-afternoon of this nature are never a good idea. Interesting to note that Richard Kellett-Clarke is to remain on the board after all as a non-executive. He was previously CEO. That might inspire more confidence in the business as these kinds of hiccups did not occur during his regime.

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

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