Pearson PLC (LON: PSON) – Repositioning for growth to seize the global opportunity.

Pearson PLC (LON: PSON) is an FTSE 100 index listed Company, which provides learning services by providing assessment, content, and digital solutions to universities, colleges, and schools. PSON has total of five business divisions: Virtual Learning, Higher Education, English Language Learning, Workforce Skills, and Assessment & Qualifications. The Company has a widespread presence in about 200 markets and has around 20,000 employees.

On 30 April 2021, the Company will have its Annual General Meeting.

(Source: Company website)

Recent trend of dividend payments

PSON will pay a final dividend of 13.5 pence per share on 07 May 2021. Moreover, the ex-dividend date was 25 March 2021. Thus, the total FY20 dividend remained at 19.5 pence per share, same as the dividend paid for FY19.

Growth Prospects and Risk Assessment

PSON is currently operating in the £5 trillion global learning market, which has untapped potential and robust growth characteristics with more than a billion new learners expected to join formal education by 2030. The Company is well-positioned to capitalize on growing market opportunities through the expertise required in the lifelong learning spectrum. Moreover, PSON has made significant investment towards the technology enhancement for its Learning Platform. Furthermore, PSON is simplifying its business model with an increased focus towards a direct to customer approach.

(Source: Company presentation)

Furthermore, the Company had identified several global market opportunities such as a rise in digital learning tools, workforce skills gap, and demand for accreditation and certification to boost up the demand levels.

PSON is undergoing several significant risks. The failure to integrate the latest technology in digital learning tools may impact the brand reputation of the Company. Moreover, the prolonged closure of schools and test centres can cause liquidity risk. Furthermore, failure to deliver tests & assessments (e.g., for UK Qualifications, School Assessments and Pearson VUE) and other related contractual requirements because of operational headwinds might result in the negative publicity of PSON. 

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of Pearson PLC.

Q1 FY21 Trading Update (for three months ending 31 March 2021, as of 26 April 2021)

(Source: Company update)

• PSON had shown underlying revenue growth of 5% during Q1 FY21 from an equivalent period of the prior year.
• The Global Online Learning division had shown stellar 25% growth in underlying revenues during Q1 FY21, driven by robust growth in virtual schools.
• Moreover, the underlying revenue for the North American Courseware division had shown a growth of 1% during Q1 FY21, benefitted by continued sales shift to digital and a school funding increase in Canada.

Financial and Operational Highlights for the twelve months ended 31 December 2020 (as of 08 March 2021)

(Source: Company result)

• The underlying revenue for the Global Online Learning division went up by 18% during FY20, illustrating higher demand for online learning.
• The operating cash flow stood around £315 million as of 31 December 2020, with a robust cash conversion rate of around 101% due to efficient working capital management.
• Moreover, the statutory operating profit went up from £275 million in FY19 to £411 million in FY20, driven by the gain on sale of its stake in Penguin Random House.
• The Company had maintained a good balance sheet illustrated by a significant reduction in net debt from £1,016 million during FY19 to £463 million for FY20.

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 26 April 2021, at 09:53 AM GMT, PSON’s shares were trading at GBX 820.40, up by 2.42% against the previous day closing price. Stock 52-week High and Low were GBX 909.00 and GBX 412.08, respectively.

PSON's prices are consolidating on higher levels for the past three months after a sharp upside movement. Prices are trading above an upward sloping trend line for the past four months and indicating a positive direction for the stock. The momentum indicator RSI (14-period) is trading at ~64.68 levels coupled with the trend-following indicators 21-period SMA and 50-period SMA, sustaining below current market price and further supporting a positive stance for the stock.

In the last one year, PSON’s stock price has delivered a positive return of ~80.56%; and it has outperformed the FTSE All-Share Media index with a return of around 33.71% and the FTSE 100 index with a return of about 18.63%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

Pearson had shown resilient business performance by delivering decent revenue growth during the first three months of 2021 despite various operational headwinds caused by the Covid-19 pandemic. Moreover, PSON had accelerated the strategic progress for its ongoing transition to digital learning. The Company remained on track to launch the new collage app and the organizational restructuring. Meanwhile, the improved financial performance during Q1 FY21 was driven by a boost in trading of its Global Online Learning division.

PSON had anticipated year-on-year revenue growth during FY21 in comparison to the prior year driven by robust growth of Virtual learning. Furthermore, the adjusted operating profit would remain in line with current market expectations during FY21. The cost efficiencies would be likely to remain around £50 million during 2021. Besides Virtual Learning, PSON had expected to show significant improvement in the trading conditions of other segments as well. The Assessment & Qualifications division would show revenue growth due to relaxation in Covid-19 related restrictions during April 2021, and the operations would be expected to reach normal levels by H2 FY21 with the resumption of US school assessments. Overall, the Company is on course to enter the new era as a digital-first company by delivering sustainable growth in its top-line and bottom-line business.

(Source: Company presentation)

Considering the significant reduction in net debt during FY20, adequate growth opportunities, good liquidity profile, boost in the online learning industry, strong financial performance, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Pearson at the current price of GBX 820.40 (as on 26 April 2021 at 09:53 AM GMT), with lower-double digit upside potential based on 27.67x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The dividend yield is subject to change as per the stock price movement.

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