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Pearson - Remaining stake in Penguin sold and CEO to retire

Sophie Lund-Yates | 18 December 2019 | A A A
Pearson - Remaining stake in Penguin sold and CEO to retire

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Pearson plc Ordinary 25p

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Pearson's agreed to sell its remaining 25% stake in Penguin Random House to Bertelsmann, generating net proceeds of around £530m. Still subject to regulatory consent, the disposal is expected to complete in the first half of 2020.

The group also announced plans to return £350m to shareholders through a share buyback early next year.

CEO John Fallon has said he will retire next year, once a successor has been appointed.

The shares rose 4.7% following the announcement.

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Our view

Waving goodbye to both Penguin and CEO John Fallon marks a new chapter in Pearson's simplification story. It's been packing away the textbooks and shifting focus to e-learning and digital resources for some time, but recent announcements suggest the transition has picked up some pace.

The transformation was never going to be an overnight story though, and physical courseware, like books and journals, remain a significant contributor to revenues and profits. 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.

The pivot to Digital is gathering pace but it's not yet enough to offset the declines in physical courseware, particularly in the key North American region. The battle for students is also competitive, and Pearson's losing ground to traditional rivals as well as to new free-to-use online content.

With digital revenues likely to be lower margin, the overhaul is also focussing on costs. So far cost savings remain on track, but they can only go so far to help and once that towel's been wrung dry, Pearson will need to digital revenues to start gushing.

A potential bright spot is that, in the past, economic downturns have tended to lead to spikes in demand for courseware. The recently unemployed look to upskill themselves, and university student numbers boom. With global economic conditions looking fragile Pearson will be hoping we see a similar trend this time round - although an increasing focus on vocational over academic qualifications might temper that trend this time round.

For now, the shares change hands for 11.6 times expected earnings, notably below the longer term average. There's a prospective yield of 3.2%.

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Third quarter trading update (26 September 2019)

Sales over the first nine months are set to be flat year-on-year, as increases in Core and Growth geographies failed to offset a decline in North American Higher Education Courseware (university textbooks).

Full year underlying operating profit is expected to come in at close to £590m, the lower end of guidance, with adjusted earnings per share towards the bottom of the expectations.

North American sales look set to decline 3% in the first three quarters, weighed down by a 10% drop in Higher Education Courseware. The accelerated decline in print materials, delivery issues in a new product and falling digital registrations all contributed to a "significantly weaker" than expected third quarter - its key selling season. US Higher Education Courseware is now expected to see sales fall by 8-12% for the year as a whole compared to previous guidance of 0 - 5 %.

Outside the US, Core geographies are expect to see underlying sales growth of 5% in the first nine months , while Growth regions are deliver 3% sales growth, attributed largely to China and South Africa.

Pearson's simplification plans remain on track and the group expects to still deliver annualised cost savings in excess of £330m by the end of the year. Net debt is expected to be broadly in line with last year's value of £143m.

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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 disclosure for more information.