Pearson PLC

Pearson PLC (LON: PSON) is a FTSE 100 index listed Company that provides learning services by providing assessment, content, and digital solutions to universities, colleges, and schools.

Investment Rationale – BUY at GBX 571.80

• Stronger Financial Position: The net debt stood at £0.7 billion at the end of September 2021 compared to £0.9 billion in FY20.
• Solid Fundamentals: Pearson demonstrated a disciplined capital allocation approach and maintained a robust balance sheet.
• Strategic Progress: It showed strategic progress with implementing a new organizational structure, strategic review of international courseware, and launched a new college learning application for US students.
• Technical Indicator: From a technical standpoint, the momentum oscillator RSI (~33.70) confirms the oversold position, while the stock is hovering close to the lower standard deviation of the Bollinger Bands.
• Valuation Multiples: In terms of forward 12-month – EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book valuation multiples are undervalued against the industry median of the Media & Publishing industry. Moreover, its dividend yield is higher than the industry median.

Key Risks

• Omicron Variant: The international markets are opening slower than anticipated due to the resurgence in Covid-19 cases. Moreover, the prolonged closure of schools and test centres can cause liquidity risk and procrastinate its growth plans.
• Increased Finance Costs: Pearson’s net debt increased to £646 million at the end of June 2021 from £463 million at the end of FY20, which can impact its finance costs and liquidity.

Trading Update (for the nine months ending 30 September 2021, as on 15 October 2021)

• Top-line Growth: Pearson reported a 10% year-on-year growth in Group underlying revenue, driven by 14% and 15% revenue growth in Virtual Learning and English Language Learning division, respectively.
• Operational Achievements: The new organisation structure is now operational, while the new US learning app, Pearson+ progressed well.
• Disposal: The disposal of Brazilian K12 Sistemas business also supported the operational progress.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion

Pearson delivered strategic, operational, and financial progress in 9M FY21 and showed a solid rebound with encouraging momentum in the underlying business. It also reaffirmed that FY21's adjusted operating profit should remain in line with the market expectations.

Although there are Covid-19 challenges in some of its major markets, Pearson is moving in the right direction to meet its current market expectations. The stock made a 52-week High and Low of GBX 909.00 and GBX 571.00, respectively.

Based on the growth in underlying revenue, strategic progress, confidence in the outlook, reduced net debt, with support from the valuation conducted above, we have given a “BUY” recommendation on Pearson PLC at the closing market price of GBX 571.80 (as on 15 December 2021), with lower double-digit upside potential based 19.95x Price/Earnings (approx.) on FY21E Earnings Per Share (approx.).

Anglo Asian Mining PLC

Anglo Asian Mining PLC (LON: AAZ) is a FTSE AIM All-Share quoted Company, which is engaged in the production of gold, copper, and silver in Central Asia with a broad portfolio of production and exploration assets in Azerbaijan.

On 4 November 2021, AAZ paid its interim dividend of US 4.5 cents per ordinary share.

Investment Rationale – SPECULATIVE BUY at GBX 110.00

• Solid Production: AAZ has sustained a steady rate of production in FY21 so far. It shall be presented with compelling growth opportunities on the back of high-quality Zafar deposit, strengthened copper inventories, and three exciting new contract areas. Guidance: AAZ expects to produce 2,500 tonnes to 2,800 tonnes of copper and 48,000 ounces to 54,000 ounces of gold in FY21.
• Technical Indicator: From a technical standpoint, 14-day RSI (~44.55) is in the oversold territory, while the stock price is trading around the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, and Price/Earnings valuation multiples of AAZ are quite undervalued against the median of the Basic Materials sector.

Risk Assessments

• Copper Price Downturn: The possible debt crisis with the default of China's real estate developer, Evergrande Group, can keep the copper prices under pressure in the short term, as metals are widely used in construction activity.
• Gold Price Volatility: The sluggishness in gold prices due to US dollar strengthening, rising Omicron variant related concerns, and uncertain demand outlook can impact the Company’s financial condition.

Recent News

Permission Granted: On 2 December 2021, Anglo Asian affirmed that it has received access to the Zangilan district of Azerbaijan from the government. Therefore, it plans to begin exploration and processing in the near future.

Q3 F21 Production and Operations review (for the three and nine months to 30 September 2021, as on 13 October 2021)

 (Source: Company Website)

• Quarterly Production: During Q3 FY21, AAZ produced 16,316 of gold equivalent ounces (GEOs) against 18,190 GEOs in Q3 FY20.
• YTD Production: For 9M FY21, total production stood at 48,487 GEOs against 50,702 GEOs in 9M FY20.
• Liquidity: As on 30 September 2021, cash balance was stood at US$30.9 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

AAZ reiterated production guidance of 64,000 to 72,000 GEOs (gold equivalent ounces) for FY21. Moreover, it acquired three new concessions in Azerbaijan with significant copper reserves, which shall strengthen the Company’s portfolio. Moreover, the robust cash generation is the best part of the AAZ's financial profile, which shall also support the continuity of dividend payments. Furthermore, Zafar's maiden Mineral Resource estimates reported promising results, underpinning long-term production growth.

Notwithstanding, its nature of being a penny stock involves high risk, and thus, investors are suggested to invest cautiously. The stock made a 52 week High and Low of GBX 181.80 and GBX 104.00, respectively.

Based on the solid production in Q3 FY21, promising gold price environment, sound profitability, industry leading dividend returns, we have given a “SPECULATIVE BUY” recommendation on Anglo Asian Mining PLC at the closing market price of GBX 110.00 (as on 15 December 2021), with lower double-digit upside potential based 11.87x Price/Earnings (approx.) on FY21E Earnings Per Share (approx.).

*All forecasted figures and Peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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