Pearson PLC (PSON) is a British learning company, headquartered in London, United Kingdom. The company was initially a construction company and was established by Samuel Pearson in 1844 as S Pearson and Son, before switching to publishing business in the 1920s. In the 2000s-2010s, the company began concentrating purely on education, and spun-off operations that were not related to it. The company was listed on the London Stock Exchange in 1969 and on the New York Stock Exchange in 2000. Today, the company employs more than 24,000 personnel for its operations across 60 countries. The company's stock is a constituent of the FTSE 100 index. The group serves private and public institutions, governments, and individual learners in numerous countries to provide them with education products and services like test development, processing, and scoring services and a wide range of other education services. The group owns and operates schools as well. The group's products include a myriad of digital resources, apps, and textbooks, including Revel, ELT Courseware, PTE Academic, Edexcel, and others with the aim of helping learners increase their skills and employability prospects.

Management
Sidney Taurel is the current Chairman of the Board. He was appointed to the position in January 2016 and is a member of the nomination & governance and remuneration committees as well. The Chief executive officer is John Fallon. He was appointed to the position on 1 January 2013. Coram Williams is the Chief financial officer, he was named on 1 August 2015.

Geographical Segments
The principal segments for management and reporting are differentiated by geographies: North America, Core and Growth. The North America segment includes businesses in the US and Canada, with operations including services provided to governments and English language teaching centres. Through the core segment, the company intends to cater to the mature markets of the UK, Australia and Italy. The Growth segment includes courseware, assessments and services businesses in markets like Brazil, China, India and South Africa.
 
Key Statistics

Key Financial Metrics (FY 2018, in £m)
 
(Source: Company Filings)

Key Financial Highlights (FY 2018, in £m)
In 2018, revenue decreased by 9%, i.e. £384m to £4,129m, against £4,513m in FY 2017. The drop in the revenue was due to the portfolio changes which reduced revenue by £216m and currency movements which led to a decline of £134m. However, revenue was down by 1% year on year in underlying terms. Excluding this, aggregate growth of 1% was reported for the rest of the business. Sales in Core was the same as the last year, growth surged by 1%, and North America declined by 1%. The company reported adjusted operating profit of £546m in FY 2018, against £576m in FY 2017, reflecting a fall of 5% in headline terms, but still in the upper range of the guidance provided at £520m to £560m. However, the underlying value grew by 8%, while the statutory operating profit for the year was £553m, against £451m in FY 2017. The statutory profit was £553m in FY 2018, against £451m in FY 2017, primarily because of the boosts from profit on disposal and diminished intangible charges. The adjusted EPS grew to 70.3p from 54.1p in 2017, due to a one-off tax benefit and a lower finance charge. The operating cash flow declined by £156m from £669m in 2017 to £513m in 2018 in headline terms, reflecting higher incentive payments in 2018 and a decline in dividends from Penguin Random House because of divestment of a 22% stake in the business in 2017. The statutory value declined to £547m in 2018 compared to £462m in 2017. The closing net debt at 31 December 2018 was £143m, against £432m reported in FY 2017, due to proceeds from disposal, leading to net debt to EBITDA at 0.2x. In line with the company's policy, a final dividend of 13p was announced, leading to an increase of 8%, bringing the total paid and payable in respect of 2018 to 18.5p.

Financial Ratios

 (Source: Thomson Reuters)

Ratios Commentary
The gross and EBITDA margin slightly declined in FY 2018 and were significantly below the industry median. However, considerable improvement was reported in the rest of the profitability margins. The net margin was considerably better than the industry median. The liquidity position of the company improved significantly in FY 2018 and was significantly better than its peers. The company had been gradually improving its leverage position, and the company had relatively less debt than its competitors. Moreover, a higher proportion of assets was funded by the equity with debt as a portion of equity also decreasing. The activity ratios were less than the industry median.
 
Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM)



To compare Pearson with its peers, Price/Earnings multiple has been used. The peers are Wolters Kluwer NV(NTM P/E was 21.19), Daily Mail and General Trust P L C (NTM P/E was 17.56),Relx PLC(NTM P/E was 17.48),Informa PLC (NTM P/E was 13.75)and Publicis Groupe SA(NTM P/E was 10.17). The mean of Price/Earnings (NTM) of the company’s peers was 16.03x.

Method 2: Price/Cash Flow Multiple Approach (NTM) (Cash Flow Per Share (FY19E) approximately)



To compare Pearson with its peers, Price/Cash flow value multiple has been used. The peers are Relx PLC(NTM P/CF was 12.43), Informa PLC (NTM P/CF was 12.59),Wolters Kluwer NV(NTM P/CF was 14.89), and Daily Mail and General Trust PLC(NTM P/CF was 18.55). The mean of Price/Cash flow (NTM) of the company’s peers was 14.61x.
 
*All forecasted figures and peers have been taken from Thomson Reuters.

Share Price Commentary

Daily Chart as at Mar-11-19, before the market close (Source: Thomson Reuters)
 
On 11th March 2019, at the time of writing (before market close), PSON shares were trading at GBX 821.6, up by 0.46 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,030.00/GBX 730.40. At the time of writing, the share was trading 20.23 per cent lower than its 52w High and 12.48 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 2,162,401.80; 30 days - 2,829,891.17 and 90 days - 3,044,765.53. The average traded volume for 5 days was down by 23.59 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 12.1x as compared to the industry median of 10.4x. The share at its previous closing price was 11.07 per cent lower than its 60-day SMA. The company’s stock beta was 0.32, reflecting relatively lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £6.39 billion and a dividend yield of 3.18 per cent.
 
Risks Assessment and Growth Prospects
In FY 2020, the company aims to report adjusted operating profit between £590m and £640m with adjusted earnings per share of 56.5p to 62.0p and expects company-wide sales to stabilise. The company in the latest financial Year 2018, exceeded its cost savings plan and made further investments in the digital platforms and applications that are making the group a transparent, more efficient and innovative company, with better accessibility for the customers. The business is transforming at a breakneck pace which is also widening the scope of the company's business. Though this provides an excellent opportunity to grow business, it also poses that benefits may not be fully realised, costs may increase, or that the company's business as usual activities may be impacted. Since the company has business across diverse countries, any adverse fluctuation in the exchange rate can also influence the financials.
 
Conclusion
The company has successfully implemented its cost savings plan. Further, its intention to invest in digital platforms and aim of shifting from selling ownership of its content to selling print or digital services offers an ample opportunity to expand and grow. Based on strong underlying fundamentals supported by healthy increase in demand for digital products and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 817.4 (as on 8th March 2019) with double-digit upside potential based on 16.03x NTM Price/Earnings on FY19E earnings per share and 14.61x NTM Price/Cash Flow on FY19E cash flow per share.
 
*The buy recommendation is valid for the current price as covered in the report (as on 11th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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