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Pearson - finishing the year as expected

Emilie Stevens, Equity Analyst | 21 February 2020 | A A A
Pearson - finishing the year as expected

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Pearson plc Ordinary 25p

Sell: 458.40 | Buy: 458.90 | Change -2.00 (-0.43%)
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Pearson's underlying revenues for the year came in flat at £3.9bn, as sales growth in Core and Growth markets offset declines in North America Courseware.

Underlying operating profits rose 6% to £581m, largely thanks to cost savings.

The group announced a final dividend of 13.5, taking the full year dividend to 19.5p, up from 18.5p last year.

Following the sale of its final stake in Penguin, the group commenced a £350m buyback programme, of which they've completed £79m so far.

The shares fell 3.6% in early trading.

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Our view

The imminent exit of Penguin Random House, CEO John Fallon and CFO Coram Williams, marks the start of a new chapter in Pearson's simplification story.

Pearson's focus is now firmly on the education market, but the transition towards e-learning and digital materials isn't easy. Physical courseware remains a significant contributor to revenues and profits. Unfortunately demand for physical books has declined even quicker than expected, and that's left Pearson exposed to some unfavourable sales trends.

While the pivot to Digital is gathering pace it's not yet enough to offset the declines in physical courseware, particularly in the key North American region. Convincing customers to fork out for digital products is a challenge, and digital revenues are likely to be lower margin too. The battle for students is competitive, and Pearson's losing ground to traditional rivals as well as new free-to-use online content.

It's no surprise then that the overhaul is also focusing on costs. So far cost savings remain on track, boosting profits, but they can only go so far. Once that towel's been wrung dry Pearson will need digital revenues to start flowing.

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.

For now, the shares change hands for 12.2 times expected earnings, below the longer term average. There's a prospective yield of 3.4% too, but given the challenges ahead and change of CEO it's always possible that cash is redirected elsewhere.

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Full year results (constant currencies)

North American revenue and profits both fell 3%, to £2.5bn and £361m respectively. That reflects a 12% revenue decline in Courseware - with print revenues falling by nearly a third, Assessment revenues also fell slightly but School services posted growth of 6%.

In the Core business, which includes the UK, Australia and Italy, revenues rose 5% to £838m. This together with cost savings, meant operating profits finished the year 58% higher at £92m. Like in the US, Courseware revenues declined but Assessment and Services saw growth - driven by higher prices and enrolment levels.

Growth markets saw revenues rise 4% to £497m thanks to good growth in China, Brazil and the Middle East offsetting declines in South Africa. This together with cost savings meant profits rose 24% to £63m.

Cash generated by the business fell over the year, and along with £111m of restructuring costs that saw free cash flow more than halve to £213m.

This decline, together with dividend payments and higher investment spending, saw underlying net debt rise to just over £1bn, up from £809m last year.

Next year Pearson expects single digit revenue growth in all businesses except North American courseware. Operating profits are expected to fall to £410 - 490m, with Penguin no longer part of the portfolio.

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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.