Pearson plc (PSON) Ordinary 25p
HL comment (15 October 2021)
Pearson said it's on track to report underlying operating profit of £377m for the full year, in line with expectations. Performance is still being held back by reduced school enrolments because of the pandemic.
In the first nine months of the year, there was growth in every division apart from Higher Education, which includes the physical courseware business. The new Pearson learning app is said to be making a "promising start".
The shares dropped 2.3% following the announcement.
Pearson is still suffering from declines in physical courseware. But the pandemic has accelerated demand for digital learning and testing. Pearson's doing its utmost to make the most of the shift.
Digital courseware sales are potentially highly cash generative and higher margin than physical sales, while digital subscribers are potentially stickier. That would represent a significant improvement to earnings quality if Pearson can deliver the transition.
Virtual Schools and VUE Online Proctoring were particular beneficiaries of lockdown rules. We're particularly encouraged to see online revenues driving a larger portion of the whole. The gap is closing. A step in the right direction, 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 in Global Online Learning means margins are only being propped up by the increased revenue. Those currently dipping their toes in online education for the first time could swim away when more traditional alternatives become available. That would hurt profits.
Overall the group's poured an enormous amount of cash into securing a new digital focussed future. And the sale of Penguin Random House saw the departure of a prized asset. Although it does mean net debt's drastically improved, providing a stronger foundation from which to propel growth.
That brings us to the new strategy. Focussing on direct-to-consumer business and slimming the group's physical footprint makes sense. All-in, it feels like digital transformation efforts have a new lease of life.
But that's not to say Pearson's report card is a straight-A situation. These ideas have merit, but that's very different to getting the job done on budget and in time. These plans mean yet more money is being poured into plugging the hole in revenues, and it's far too soon to know if the efforts will stem the flow long-term. Shaking up the corporate structure brings significant execution risk.
Essentially there are a lot of "what ifs". If Pearson can convince customers to stick with their digital shift as lockdowns ease, then all 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. Although the market doesn't seem to share our concerns, with a price to earnings ratio some way higher than the ten-year average.
Pearson key facts
- Price/Earnings ratio: 19.1
- 10 year average Price/Earnings ratio: 14.8
- Prospective dividend yield (next 12 months): 2.9%
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.
Nine-month trading update
Virtual Learning saw revenue rise 14%, reflecting strong enrolment in Virtual Schools for the current academic year. Virtual Schools revenue is expected to be flat in the second half, reflecting a less lucrative pricing format. There was flat revenue in Online Program Management, where underlying growth was offset by the impact of discontinued programs in the US and Australia.
Revenue was down 7% in Higher Education, as declines in US Higher Education Courseware offset growth elsewhere, including the UK and Canada. Pearson's data suggests there's been a decline in enrolments, especially community colleges, following the pandemic and a healthier labour market. The Pearson+ app now has 2m users since launching in July.
The reopening of test centres helped English Language Learning revenue rise 15%. However, performance was constrained thanks to movement restrictions in its key market, Australia.
Workforce Skills and Assessment and Qualifications revenue rose 5% and 24% respectively.
At 30th September net debt stood at £0.7bn compared to £0.9bn in 2020, with "strong operating cashflow offset by dividends".
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
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Previous Pearson plc updates
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