Pearson Plc – Operating with Strong Balance Sheet

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.

Rationale for Valuation – Buy at GBX 546.80

• The Company has decent fundamental metrics as it has maintained a Net margin above the industry median in the past three years. In H1 FY20, the net margin was 3.2%.
• On the liquidity front, the current ratio was 1.94x in H1 FY20, which was higher than the industry median. It has also maintained a current ratio above 1.50x for the last five years, which is considerably above the industry median.
• In the last six months, the Company has delivered a sparkling return of ~15.56%, which is higher as compared to the FTSE 100 Index.
• The stock is offering a lucrative dividend yield of 3.53%, with a minimum 10-years track record of consistent dividend payment.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (529.9) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• It is worth noting that higher operating expenses, particularly selling & marketing, are expected to keep margins under pressure.
• Moreover, high debt and stiff competition represent another risk factor.
• The prolonged closure of schools and test centres can cause liquidity risk.

Recent News

24 August 2020, the Company announced the appointment of Andy Bird as new Chief Executive Officer (CEO) from 19 October 2020. He will take an annual base salary of $1.25 million (fixed until at least 2023).

Financial Highlights (for the six months to 30 June 2020, as on 24 July 2020)

(Source: Company Website)

• The Company has a strong balance sheet and managed to reduce net debt to £982 million.
• The liquidity position stood at £1.6 billion as on 30 June 2020 and maintained an interim dividend of 6 pence in H1 FY2020.
• Due to the closure of school and test centre amid Covid-19 restrictions, the total sales declined significantly from March to May; however, the improvement in sales were witnessed in June.
• Global online sales grew 5% year-on-year with strong enrolments in virtual schools.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative) 

Conclusion

The Company now expects to deliver the full-year adjusted operating profit broadly in line with market expectations. In H2 FY20, it expects a decent recovery in Global Assessment and North American Courseware businesses. Moreover, the Company expects full-year net interest charge to be around £60 million after the issuance of 10-year Education Bond of £350 million in June 2020. PSON also witnessed sales improvement in June 2020. Further, the Global Online Learning business shall benefit from Virtual Schools. The stock made a 52-week low and high of GBX 412.08 and GBX 727.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Pearson at the current market price of GBX 546.80 (as on 6 October 2020, before the market close at 8:15 AM GMT+1), with lower double-digit upside potential based on 1.60x EV/NTM Sales (approx.) on FY20E sales (approx.).

4imprint Group Plc - Strong financial position with good liquidity

4imprint Group Plc (LON: FOUR) is a Media Company, which is engaged in the business of promoting products using direct marketing techniques in the region of Ireland, UK and North America.

Rationale for Valuation – Buy at GBX 1,770.00

• The debt/equity ratio recorded by the Company in the past three years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 0.02x.
• On the liquidity front, the current ratio was 1.74x in H1 FY20, which is higher than the industry median.
• In the last five years, the Company has delivered a sparkling return of ~41.51%, which is higher as compared to the FTSE 250 Index.
• From the technical standpoint, 14-day RSI stood at 33.44, which is supporting the upside movement.

Key Risks

• The business conditions have already jolted across the board, and companies are cutting and suspending expenses to maintain adequate liquidity with them to sustain amid challenging times.
• The uncertainty about the heightened trade tensions between the US and China might also impact the Company’s financial performance.
• In the media market, the Company operates in a very dynamic environment and the potential second wave of the pandemic can worsen the situation.

Recent News

On 5 October 2020, the Company stated that EBT (Employee Benefit Trust) had purchased 6,000 ordinary shares of 38 6/13 pence each (on 5 October 2020), at a price of £17.89 per share.

Financial Highlights (for the period ended 27 June 2020, as on 13 August 2020)

(Source: Company Website)

• The Company witnessed a healthy financial position, with a cash balance at the half-year of US$37.49 million and US$20 million of undrawn bank facility.
• FOUR’s profitability declined significantly for the period, despite the decline in profits, the order counts have recovered to a current run rate above 50% of the previous year.
• In total, just more than 470,000 orders were processed in H1 FY20, compared to over 778,000 in the corresponding period of the last year.
• Prior to COVID-19 pandemic, the Company delivered a strong trading performance.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company remains in a strong financial position with good liquidity. The Board is confident of re-establishing the growth pattern by taking advantage of the opportunity presented by a recovering market. It also witnessed a strong average order value and is well-positioned to take market share as conditions improve. Further, it has continued to acquire new customers, and new-to-existing customer ratio has remained stable over this period. The stock made a 52-week low and high of GBX 1,067.31 and GBX 3,540.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on 4imprint Group at the current market price of GBX 1,770.00 (as on 6 October 2020, before the market close at 8:03 AM GMT+1), with lower double-digit upside potential based on 1.30x EV/NTM Sales (approx.) on FY20E sales (approx.).

 

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

*Dividend Yield may vary as per the stock price movement.

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