Pearson PLC

Pearson PLC (LON: PSON) is an FTSE 100 listed operating as a multinational education and publishing company, catering to private and public institutions, governments, and individual learners. 

PSON had paid an interim dividend of 6.3 pence per share on 20 September 2021, while the ex-dividend date was 12 August 2021.

Investment Rationale for Valuation – BUY at GBX 600.60

• Decent Revenue Growth: The top-line revenue increased by 10% on a YoY basis during 9M FY21 despite increased market volatilities.
• Significant Progress of Pearson+: Pearson+ made accelerated progress as it gained more than 2 million registered users and a strong response from students, faculty, and authors.
• Robust Divisional Performance: The Assessment & Qualifications division’s revenue surged by around 24% during 9M FY21, with a strong performance across Pearson VUE, School Assessment and Clinical Assessment.
• Technical Indicator: From a technical standpoint, the stock price is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Key Risks

• Technology Risk: The disruptive technology changes and cyber threats impose risk to its business model. Also, the inability to manage intellectual property rights could impair the value of core assets.
• Liquidity Risk: The prolonged closure of schools and test centres can cause liquidity risk and procrastinate its growth plans.

9M FY21 Trading Update (for the nine months ended 30 September 2021, as of 15 October 2021)

(Source: LSE Website)

• Increase in Virtual Learning Revenue: The strong enrolment growth in Virtual Schools drove revenue higher by around 14% during 9M FY21.
• Strategic Progress: PSON made significant strategic progress as the new organizational structure became fully operational.
• Reduction in Net Debt: The Company had strengthened its balance sheet by showing a significant reduction in net debt from £0.9 billion as of 30 September 2020 to £0.7 billion as of 30 September 2021.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company had completed the disposal of the Brazilian K12 Sistemas business on 1 October 2021. Moreover, PSON had launched the Pearson+ application in late July 2021, having more than 2 million registered users and an App Store rating of 4.7. Meanwhile, PSON had also initiated the marketing of international courseware local publishing businesses. In a nutshell, the Company remained on track to achieve adjusted operating profit for FY21 in line with market expectations. The stock made a 52-week low and high of GBX 540.20 and GBX 909.00, respectively.

Based on the modest revenue growth during 9M FY21, and valuation as done using the above method, we have given a “BUY” recommendation on Pearson PLC at the closing market price of GBX 600.60 (as of 08 November 2021), with a lower-double digit upside potential based on 21.52x Price to NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

*All forecasted figures and Peer information have been taken 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.

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