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Pearson - revenue still down, but the future looks brighter

George Salmon | 22 February 2019 | A A A
Pearson - revenue still down, but the future looks brighter

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Pearson plc Ordinary 25p

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Pearson has announced adjusted operating profit at the top end of guidance, at £546m.

Underlying revenue was down 1% to £4.1bn, but the group said it expects sales to stabilise this year and grow into 2020.

The group's announced a final dividend of 13p, an increase of 8%, and equates to a full year dividend of 18.5p.

The shares rose 3% in early trading.

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Our view

Digital is replacing paper the world over, and Pearson believes that will be the case in education too.

With this in mind, the group is transforming itself from staid publishing house to trailblazer in the emerging world of digital education content.

An online subscription model would bring attractive recurring revenues, no longer needing to produce a physical product reduces costs, and the requirement for customers to have a unique username and password restricts the second-hand market.

As part of the restructure, publishing assets like The Economist and Financial Times have been sold, and a chunk of Penguin Random House has followed them out the door.

While sharpening the group's focus on education, the sales also removed the safety net should market conditions turn. Unfortunately, that's exactly what happened. Unprecedented declines in the US higher education market forced the dividend to be slashed.

Net debt is currently under a third of cash profits, and earnings comfortably cover the payout. So to us, the rebased payment looks sustainable. But the prospective yield is a relatively lowly 2.6%. That means Pearson will need to meaningfully grow the dividend, not just maintain it. And to do that it needs to prove the shift to digital can pay off.

Recent updates have brought some positive news. The US remains a tough market, but we're getting significant growth in the digital sphere. Competition from free online alternatives is having less of an impact than the group had expected, and much less than sceptics had feared. All that means group revenues are set to enter positive territory by 2020.

Nonetheless, we'd hesitate to say the shift has been vindicated just yet. Not only does the group still need to prove it can establish itself in this new sector, it'll need to prove it can do so in a robustly profitable way.

The rewards could be great, but a few things need to go Pearson's way for it to emerge a leaner and more profitable organisation.

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Full year results

In North America - the group's biggest division - revenue fell 1% to £2.8bn. That comes as US Higher Education Courseware revenues fell 5%, more than offsetting growth in digital products. The group recently confirmed it's to sell its US K12 courseware business for $250m.

In the Core business - which includes the UK, Australia and Italy, underlying sales remained flat at £806m, but adjusted operating profit rose from £50m to £57m, boosted by cost savings.

It was a similar story in Growth geographies, where cost savings helped underlying profits nigh-on double to £59m despite sales rising just 1% to £539m. China was highlighted as a strong performer.

However, net debt decreased 66.9% to £143m. That came as proceeds from disposals more than offset a decline in operating cash flow from £669m £513m - which reflects lower dividends from Penguin Random House. Pearson sold a 22% stake in the company in 2017.

The group incurred £102m of restructuring costs, as it works through its efficiency programme. Cost savings for the year were £130m, and £330m of annual savings are expected by the end of 2019. That's ahead of the original £300m target.

In 2019, Pearson expects to report adjusted operating profit of between £590m and £640m, and adjusted earnings per share of 56.5p to 62.0p.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.