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 602.40

• Strong Platform for Growth: Pearson delivered strategic, operational, and financial progress in 9M FY21, and showed a solid rebound with encouraging momentum in the underlying business.
• 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.
• Outlook: It reaffirmed that FY21’s adjusted operating profit shall remain in line with the market expectations.
• Technical Indicator: From a technical standpoint, the momentum oscillator RSI (~23.03) 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 – 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

• Delta Variant: The international markets are opening slower than anticipated due to 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 demonstrated disciplined capital allocation approach and maintained a robust balance sheet. Moreover, the robust performance in Assessment & Qualifications shall offset declining enrolments in Higher Education.  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, and thus, FY21 outlook remained unchanged. The stock made a 52-week High and Low of GBX 909.00 and GBX 495.50, 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 602.40 (as on 29 October 2021), with lower double-digit upside potential based on 21.31x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Halfords Group PLC

Halfords Group PLC (LON: HFD) is an FTSE All-Share listed company engaged in retailing Cycling, motoring, and leisure products.

Upcoming Event: On 10 November 2021, HFD will release H1 FY22 interim results.

Investment Rationale for Valuation – Speculative Buy at GBX 266.40

• Segmental Growth:
  • On a two-year basis, the B2B sales grew by around 80%, and online sales rose by about 83% during the period.
  • For the autocentres division, HFD had managed to show robust year-on-year growth of around 43.8% during the period
• Strong Outlook: HFD projects FY22 profit before tax to remain slightly higher than the FY21 levels. Moreover, it expects solid growth in the Services and B2B businesses with an improved Retail Motoring performance
• Technical Indicator: From a technical standpoint, HFD is hovering around the lower Bollinger band, while the 14-days RSI (~24.07) is falling in oversold territory
• Undervalued Multiples: On a forward 12-month basis, valuation multiples (EV/Sales, EV/EBITDA, Price/Earnings, and Price/Book) of HFD are undervalued against the Specialty Retailers industry’s median.

Key Risks

• Softened Economic Recovery: The labour shortages, supply chain woes, poor factory activity levels, and inflationary conditions have derailed the economic recovery.
• Subdued Retail Sales: Britain’s retail sales have moderately picked up; however, reduced footfall due to the 'pingdemic', fuel crisis, and lower consumer confidence can continue to curb sales.

Recent News

Directorate Change: On 13 October 2021, HFD appointed Jo Hartley as Executive Director and Chief Financial Officer.

Trading Update (for 20 weeks ended 20 August 2021, as of 08 September 2021)

(Source: LSE Website)

• Top-line Growth: The total sales growth stood at around 18.7% when compared with an equivalent period of 2019 and about 10.5% as compared to the similar period of 2020.
• Segmental and Channel Growth: HFD’s service segment revenue grew by +23%, B2B business by +40%, and the online business grew by more than 110% during FY21 when compared with the prior-year levels.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Conclusion 

Despite the challenging market backdrop, HFD reported a strong performance in FY22 so far. Looking ahead, HFD plans to increase investments in Retail Motoring pricing, and Project Fusion trials. It would also scale up the network of garages and vans. Therefore, it remained on track to achieve a full-year profit before tax of above £75 million during FY22. The stock made a 52-week low and high of GBX 218.50 and GBX 441.80, respectively.

Based on the strong sales momentum during FY22, decent profitability guidance, and valuation as done using the above method, we have given a “Speculative Buy” recommendation on Halfords Group PLC at the closing market price of GBX 266.40 (as on 29 October 2021), with lower-double digit upside potential based on 10.55x Price/NTM Earnings (approx.) on FY22E 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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