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Pearson - shift to digital gets results as profits rise

George Salmon | 26 July 2019 | A A A
Pearson - shift to digital gets results as profits rise

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Pearson plc Ordinary 25p

Sell: 608.20 | Buy: 608.60 | Change -23.40 (-3.69%)
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Ignoring the impact of exchange rates and disposals, adjusted operating profits increased 30% to £144m. That reflects strong sales growth and the impact of cost savings.

The interim dividend of 6p is 9.1% ahead of the previous year.

The shares rose 6.6% following the announcement.

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Our view

Digital innovation has been changing the way we live for a generation and the latest sphere in line for a tech-savvy overhaul is education.

For that reason, Pearson's packing away the textbooks and shifting focus to e-learning and digital resources. That kind of transformation doesn't happen overnight though. Pearson's rid itself of key publishing assets and is pumping millions into restructuring costs, but the turnaround isn't complete yet.

Physical courseware, like books and journals, are still a key part of the business. The problem is, there have been stark declines in demand for these materials in recent years, and that's left Pearson exposed to some unfavourable sales trends.

But there are now some shoots of progress. Digital online learning programmes are starting to contribute to growth, particularly in the key North American region. That's feeding through into slow, but positive overall revenue growth, even as textbook demand continues to fall. A cost saving plan is seeing profits rise ahead of revenue too.

Cost saving can only go so far though. Once that towel's been wrung dry, Pearson will be left relying on its digital products to continue plugging the hole left by courseware declines. Momentum in online graduate courses in the US looks a touch weaker and the regulation around online courses hasn't settled down yet. We'll be monitoring developments.

For now, the shares change hands for 14.7 times expected earnings, which is a touch above the longer term average. There's a prospective yield of 2.26%.

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Half Year Results

In North America, sales declined 7%, but on an underlying basis, which ignores disposals and currency movements, improved 1% to £1.2bn. That reflects growth in online learning programmes, which offset the expected decline in textbook and courseware products. Operating profit was able to grow ahead of revenues, as costs savings from restructuring efforts helped this rise 13% to £79m.

In Core geographies, which includes the UK and Australia, underlying revenues improved 5% - feeding into a £19m underlying increase in operating profit, to £31m. Performance was mostly boosted by growth in online tools and a moderate improvement in courseware revenue.

Elsewhere, Growth regions saw underlying revenue improve 2% thanks to good performance in School Courseware in the Middle East. Operating profit was £9m, compared to £11m last year, as disposals earlier in the year outweighed underlying progress.

Net debt increased to £1.4bn from £775m, reflecting a change in accounting rules. Without this adjustment, net debt would actually have fallen to £726m thanks to an improved operating performance.

Restructuring costs totalled £64m.

Guidance for 2019 adjusted operating profit remains unchanged, and is expected to be between £590m to £640m. During the second half, further cost savings of £70m are expected.

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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.