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Pearson - underlying sales up 6%, guidance confirmed

Pearson's half year sales rose 4% on an underlying basis, to £1.9bn...

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Pearson's half year sales rose 4% on an underlying basis, to £1.9bn. Excluding businesses affected by disposals and restructuring, growth was 6%. Performance was driven by a 7% increase in the biggest division, Assessment & Qualifications, while English Language Learning rose by 44% and Workforce Skills by 9%. This offset expected declines in Virtual Learning because of a contract loss, and Higher Education sales also continued to fall.

The group's delivered around half of its planned £120m in cost efficiencies so far this year. Underlying operating profit rose 44% to £250m. Net debt rose from £557m at the start of the year to £911m at the end of June. This included money spent on acquisitions as well as dividend payments.

Pearson's full year guidance remains unchanged, this includes low to mid-single digit revenue growth and underlying operating profit around £568m.

An interim dividend of 7.0p was announced, a 6% increase.

The shares were broadly flat following the announcement.

View the latest Pearson share price and how to deal

Our view

Pearson's new lease of life continues, or that's at least what half year results would have us believe. The learning specialist is a very different company to a few short years ago. It's had a laser-like focus on reducing its reliance on physical teaching and learning materials, which are in decline.

The transition to digital is well underway and margins are following suit. Wider improvements have been achieved by some well-suited acquisitions, as well as organic growth through its own efforts. These include, focusing on direct-to-consumer business and slimming the group's physical footprint.

The successful pivot to digital allows more revenue to drop straight through to profit and crucially, cash flow. This gives Pearson room to pay dividends and return more to shareholders via share buybacks.

Cash flow is being partially hampered by restructuring costs at the moment - while this isn't something we're concerned about right now, it will be important to monitor the efforts to make sure the goal posts aren't moved as this could have an impact on dividend. This is well supported by earnings for now but remember no shareholder returns are ever guaranteed

Looking to the short-term, times of economic difficulty are often seen in conjunction with people upskilling, which is a structural opportunity for Pearson.

While we're happy Pearson's on the right track, and the turnaround plans are coming good, we're keeping an eye on a couple of points. It's unclear how much the group will benefit from a return to more normal teaching and exams. At the moment the uptick is promising, but they were starting from a very low base because of the pandemic. Much of the group's revenues are still anchored to physical teaching and testing. Demand for physical textbooks has been on the decline for years and that isn't going to reverse.

As the strategic pivot continues, we're mindful that budgets and margin projections can turn at short notice too, particularly in an inflationary environment.

Pearson is putting in a good showing, and we're feeling more positive that it can convince customers to stick with its digital shift. The price-to-earnings ratio is slightly below the ten-year average, which suggests the market isn't overly worried about Pearson's position, but there's work to be done if the group wants to spark a more meaningful reaction from investors.

Pearson key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 31st July 2023