ii view: Pearson flags solid start to 2021

This learning materials publisher is making good progress in its shift to digital. Buy, sell or hold?

First-quarter trading update to 31 March

Chief executive Andy Bird said:

"We are building pace and momentum. We are making good strategic progress in our ongoing shift to digital, we are in the advanced stages of preparation for the forthcoming launch of our new college app and our organisational redesign is on track.

“We are focused on executing our new strategy and believe that it will create sustainable and significant value for all of Pearson's stakeholders."

ii round-up:

Education company Pearson (LSE:PSON) today outlined a good start to the year with underlying revenue up 5% in the first quarter.

A one quarter jump in online global learning sales under the pandemic more than compensated for a 2% decline in disrupted assessment centre revenues. 

Pearson shares rose by more than 3% in UK trading, leaving them up by around 80% since Covid induced market lows in March 2020. Shares for scientific publisher and exhibitions provider RELX (LSE:REL) are up by close to a third over that time, while shares for advertising company WPP (LSE:WPP) have almost doubled.

Pearson, under relatively new chief executive Andy Bird, recently laid out a new strategy to target consumers directly with its suite of online learning courses, extending its supply behind schools and colleges. 

Management also reiterated forecasts for both revenue and profit growth over 2021 first detailed at its full-year results in March.

Broker Morgan Stanley noted that this latest performance came against a comparative of a 5% fall in sales during Q1 2020, with comparatives set to become easier given sales falls of 28% and 10% for Q2 and Q3 during 2020.

For the full year to 31 December 2020, Pearson reported a 46% fall in adjusted operating profit to £313 million. The total dividend for 2020 of 19.5p per share was unchanged from 2019. 

ii view:

CEO Andy Bird, who joined in October, hopes to reposition Pearson for sustainable growth. Building on demand for digital learning tools, workforce skills gaps and demand for accreditation and certification. Its new five division formation will be made up of Virtual Learning, Higher Education, English Language Learning, Workforce Skills and Assessment & Qualifications.

For investors, the pandemic has accelerated the company’s existing move online. Previous moves to switch from textbooks to online materials have now been extended to target consumers directly and beyond students attending schools and colleges. Business disposals have helped reduce group net debt, and a historic dividend yield in the region of 2% is not to be completely overlooked in an era of ultra-low interest rates. 

However, an estimated price/earnings ratio above the three- and 10-year averages suggests the shares are not obviously cheap. Some return to normality following the pandemic could see online sales slow, while the group’s record for transformations is arguably patchy. In all, and with the shares currently sat above analysts’ fair value estimation of 728p, they may well be up with events for now. 

Positives: 

• Cost efficiencies expected of £50 million during 2021
• Net debt reduced to £463 million from just over £1 billion in 2019

Negatives:

• Adjusted profit fell for three of its four existing divisions over 2020
• Share buyback programme remains halted

The average rating of stock market analysts:

Weak hold