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Pearson - print still down, digital up

Emilie Stevens, Equity Analyst | 24 April 2020 | A A A
Pearson - print still down, digital up

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Pearson plc Ordinary 25p

Sell: 708.60 | Buy: 709.00 | Change 8.80 (1.25%)
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First quarter revenues were 5% lower than they were last year, in line with Pearson's expectations. While the group's been hit by the closure of schools and test centres in several key markets, there's been a significant uplift in use of digital products and services.

Pearson's Board proposed a final dividend for 2019 of 13.5p (2018: 13p), bringing the full year payment to 19.5p (2018: 18.5p), which is subject to shareholder approval at today's AGM.

The shares remained broadly flat on the news.

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Our view

The coronavirus outbreak creates something of a mixed picture for Pearson.

The imminent closure of schools and testing centres is bad news for profits this year and the effect on cash flow has led the group to suspend its share buyback programme and look to cut costs - although the final dividend for last year remains intact.

Fortunately Pearson has relatively modest level of debt - although with profits under pressure leverage looks set to increase significantly - and access to a reasonable amount of cash. Management will hope that helps it ride out the storm, while pent up demand for exams spills into its testing centres once the crisis has passed supporting a recovery in the second half.

Nonetheless there's no getting away from the fact that the short term will be painful and the longer lockdown the more damage is done.

However, a longer term shift to learning from home could see the pandemic do what Pearson's been trying to do for a while - get us learning online. It's been an uphill battle, but a widespread increase in uptake has the potential to transform the group's prospects.

It's still too early for cheers, as growth online is not yet enough to offset declines elsewhere in the business, and a lot of the new interest is being generated by freebies. But millions of new digital users are still millions of new digital users it didn't have in January. Whether they're prepared to fork out when the crisis is over is the key question. But it's promising to hear Pearson's seeing contact from those previously unconvinced - larger institutions have come knocking for digital solutions at scale.

Given the uncertainty in the market it's too early to make predictions about the groups prospects for the full year. Sustained lockdowns could see the impact leach into another academic year, which will impact on the group's highly seasonal sales, and the longer the lockdown lasts the closer the group will come to covenants.

However, education is one of the more plausible sectors to emerge from lockdown looking different, and if that's the case Pearson is well placed to benefit. For now there's been no mention of amending dividend plans - with analysts forecasting a prospective yield of 4.4%. But we'd suggest looking at this sceptically as no dividend is guaranteed, and that's particularly true in the current environment.

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Q1 Trading Update

North American Courseware sales fell 10%, reflecting the continued decline in print revenue, made slightly worse as lockdowns caused campus-based bookstores to close.

Global Assessment revenue declined 3%. That reflects the closure of Pearson VUE professional test centres and impact of school closures. Pearson says it the hit to operating profit for Pearson VUE closures is on average £20-30m per month. School Assessment revenue was slightly ahead of last year, boosted by early Spring testing. However, decisions to waive or postpone exams in light of COVID-19, is expected to hit operating profit by about £20m this year, and perhaps more.

International revenue declined 10% due to test centre and school closures across many markets including South Africa, Brazil and the UK. In the UK courseware suffered against a stronger prior year, while the impact of exam postponement is expected to be modest. Pearson's move to provide a range of free digital learning tools, services and resources is proving popular across the globe.

Global Online Learning revenue grew 6% with a strong performance in Virtual Schools and Online Program Management (digital solutions for higher educators) revenue also growing slightly. Virtual School growth was driven by good enrolment growth and new school openings. Pearson said they saw a surge in applications in March as people test out digital learnings for the first time. There's been a rise in interest from institutions wanting to discuss large scale digital schooling too.

To mitigate COVID-19 disruptions, Pearson have identified a few ways to reduce discretionary spending. Pearson aren't furloughing staff but are re-deploying people around the business where support is needed.

At the end of March Pearson had access to c£0.8bn liquidity, through committed facilities and cash balances. The group also received £530m in cash after quarter end having completed the sale of the remaining stake in Penguin Random House. Pearson have recently added new lines of credit to an existing facility. On 31 March, net debt was c.£1.4bn, up from c.£1.2bn last year.

Pearson are progressing with multiple strategic indicatives including continued investment into the Pearson Learning Platform and Global Online Learning to meet increased demand and accelerating the shift to digital in US Higher Education. As part of Pearson's strategic simplification programme, the group identified c.£50m of cost savings which will be realised in 2021.

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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.