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Pearson - Further disposals possible

George Salmon | 24 February 2017 | A A A
Pearson - Further disposals possible

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Pearson plc Ordinary 25p

Sell: 589.20 | Buy: 589.80 | Change 12.80 (2.22%)
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A £2.5bn impairment, reflecting the difficulties in North America, dragged the group to a reported loss of £2.3bn. Adjusted operating profit is down 27% to £635m at constant exchange rates. The full year 2016 dividend is held at 52p this year, but as previously disclosed this will be rebased from 2017.

The group is set to make further disposals and redeem $550m of bonds early to strengthen its balance sheet. The shares rose 5% after the announcement.

Our View

Paper is being replaced by digital content the world over, and Pearson believes that will be the case in education too. With this in mind, the group is transforming itself to focus on online and interactive educational content.

To raise the cash required, the group is selling its main media assets. The Economist and Financial Times newspapers have already gone, and Penguin Random House is soon to follow. CEO John Fallon was confident that the proceeds from these sales would mean the group could cover the costs of the restructure and maintain the dividend before the group came out the other side a leaner and more profitable organisation.

This sounded like an excellent outcome for shareholders, but the sales removed the group's main safety net should it hit a wobble. In this context then, Pearson's admission that the dividend will be on the block following weak trading in North America is particularly galling.

Rather than the group failing to get to grips with online specifically, this drop is more reflective of demand for educational resources declining generally. Now all the group's eggs are well and truly in the educational basket, this isn't good news. Profit growth is now far from assured so the group's debt pile is looking more burdensome.

A longer term problem with the group's plan is that, while there is surely demand for online education resources, moving online means competing with the mass of free content available on the web. It seems that convincing a customer to continue paying for something they can get for free elsewhere is already proving difficult, and the group is slashing prices. If these lower prices entice budding scholars back, then it could be all change again, but for now things look bleak.

Full year results:

Underlying revenues in North America, which accounts for around two thirds of Pearson's revenue, fell 10%. Higher education courseware sales dropped 18%, including the effect of an inventory correction relating to previous years. Difficulties include lower enrolment rates and a growing rental market.

In Core markets, including the UK, Germany and Australia, revenues fell 7% at constant exchange rates. This was impacted by the group moving some divisions into the growth category and a decline in UK educational enrolment. Revenue growth remained flat in growth markets, which include South Africa and China.

Net debt increased to £1,092m (2015: £654m) reflecting the strengthening of the US Dollar relative to Sterling and restructuring costs.

Looking ahead, in 2017 the group expects to deliver operating profit of £570m to £630m, and adjusted earnings per share of 48.5p to 55.5p. While the group has previously announced it will dispose of Penguin Random House, this assumes continued ownership of for the rest of the year.

The possible disposals announced today include English language learning business Wall Street English (WSE) and the English test preparation business Global Education (GEDU).

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.