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Pearson - ups margin outlook

Underlying sales rose 6%, ignoring the effect of exchange rates, to £1.8bn, reflecting broad-based growth...

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Underlying sales rose 6%, ignoring the effect of exchange rates, to £1.8bn, reflecting broad-based growth. Underlying operating profit rose £33m to £160m.

The group's on track to meet full year targets, but has uncovered further cost-savings, meaning the improved margin expectations have been bumped to 2023 from 2025.

An interim dividend of 6.6p per share was announced, a 5% improvement.

The shares rose 6.4% following the announcement.

View the latest Pearson share price and how to deal

Our view

Education specialist Pearson's shift towards digital is happening faster and more smoothly than we - or the market for that matter - expected.

That's being achieved by some well-suited acquisitions, as well as organic growth through its own efforts. These include, focussing on direct-to-consumer business and slimming the group's physical footprint.

Digital sales are potentially highly cash generative and higher margin than physical sales, while digital subscribers are potentially stickier. We said that this would represent a significant improvement to earnings quality if Pearson can deliver the transition - especially in the core education courseware business. And we are starting to see digital make up a bigger part of the whole - largely thanks to accelerated demand for virtual learning and exams brought on by the pandemic.

But 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's made Pearson's pivot to digital protracted and painful.

Even where Pearson has been able to grow sales, profits haven't historically flowed smoothly. Huge investment has caused some short-term pain to margins too. We're heartened that extra cost savings have upped the outlook here, but as the strategic pivot continues, we're mindful that budgets and margins projections can turn at short notice, particularly in an inflationary environment. We're also aware that those currently dipping their toes in online education for the first time could swim away when more traditional alternatives become available.

Overall the group's poured an enormous amount of cash into securing a new digital-focussed future. Although net debt's more manageable on an annual basis, providing the foundation for shareholder returns. Please remember no shareholder returns are ever guaranteed.

Pearson is putting in a good showing, and we're feeling more positive that it can convince customers to stick with its digital shift. If this is achieved, the pain of the last few years will have been worth it. If not, the group risks becoming a lesson in how not to handle the digital revolution. The price to earnings ratio is higher than the ten-year average, reflecting confidence from the market.

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.

Half Year Results (constant currency)

In Assessment & Qualifications sales rose 16% to £697m, with an outperformance from Clinical Assessment offsetting declines in VUE. There was also "exceptional" underlying sales growth of 45% in US Student Assessment, reflecting the return of spring exams across most states. Underlying operating profit rose 34% to £137m.

Virtual Learning sales rose 3% to £390m, reflecting "robust" retention rates in Virtual Schools. Increased investment in the Virtual Schools' platform, curriculum and customer support meant underlying operating profit fell 21%.

Pearson is undertaking a strategic review of its Online Program Management division, which saw sales fall by 2%.

A continued decline in enrolments contributed to a 4% fall in Higher Education sales to £373m, which in turn meant operating profit swung £8m to a £4m loss. Registered users for digital Pearson+ are up 64% to 4.5m.

English Language Learning and Workforce Skills saw revenue rise 22% to £122m and 6% to £127m, respectively.

Total operating expenses fell to £690m from £744m this time last year. Free cash flow was £79m, compared to £151m, while net debt stood at £810m, reflecting a reduction in available cash because of acquisitions, the payment of shareholder returns and debt payments.

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: 1st August 2022