ii view: Pearson targets better workforce skills in era of AI

First-half results to 30 June

• Adjusted revenue up 2% to £3.7 billion
• Adjusted operating profit up 4% to £250 million
• Interim dividend up 6% to 7.4p per share
• Net debt up 33% from a year-ago to £1.2 billion

Chief executive Omar Abbosh said:

"Since joining Pearson at the start of the year, I have led a comprehensive review of our business and the markets in which we operate. This process has only reinforced my conviction in the potential of Pearson and the vital role we play in helping people realise the life they imagine through learning. 

"Our good strategic and financial performance in the first half of the year sets us up to achieve our guidance for the current year and for 2025, and we expect thereafter to continue to deliver attractive growth with progressive improvements in our margins alongside consistently strong cash generation."

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ii round-up:

Education materials provider Pearson (LSE:PSON) today reiterated its drive to reshape the company to better capture growth under expected changes in demographics as baby boomers retire and developments brought about by artificial intelligence (AI).

First-half sales to the end of June fell 7% on a headline basis to £1.75 billion, leaving operating profit flat, although they rose by 2% and 4% respectively when allowing for ongoing business portfolio changes. A relatively new CEO, an ex-Microsoft Corp (NASDAQ:MSFT) executive, is now to prioritise growth in workforce skills and early careers in particular.  

Shares in the FTSE 100 company fell 1% in UK trading having come into these latest results up 9% year-to-date. That’s behind a 27% gain for fellow media sector company ITV (LSE:ITV), which is also undergoing changes, although broadly in line with an 8% improvement for the FTSE 100 index in 2024. 

Pearson operates across five core divisions and highlights itself as the world's leading learning company, serving customers with digital content, assessments, qualifications, and data

Adjusted sales when allowing for continued business changes for its core Assessment & Qualifications (A&Q) business rose 2% to £811 million, with sales on the same basis for the Workforce Skills division and up 6% to £143 million. English Language learning related sales after adjustments, climbed 11% to £188 million. 

On the downside, sales at Virtual Learning fell by a third to £254 million, or by 8% on an adjusted basis. Adjusted Higher Education sales fell 2% from a year ago to £358 million.

Pearson reiterated its prior forecasts for this financial year and the next, with sustained profit margin improvement expected over the medium term. 

The interim dividend rose 6% from a year ago to 7.4p per share. Net debt climbed by a third year-over-year to £1.2 billion, fuelled by a previously announced £500 million share buyback programme. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on Pearson shares post the results. A nine-month trading update is likely mid-to-late October. 

ii view:

Originally founded as a construction company in 1844, Pearson today employs around 17,000 people. Recent management focuses have included growing its digital related sales, focusing down on costs, and reshaping its business portfolio. Following the retirement of baby boomers, employers will need to find new pools of talent and continuously develop and verify the skills of their workforces to keep pace with and benefit from technology and AI advancements - these are trends Pearson now aims to generate growth from. Group investment priorities are now towards assessments and verifications, then enterprise or work skills and early careers.  

For investors, predicting the exact impact of AI on the education sector is difficult and uncertain. Both Higher Education and Virtual sales fell in this latest period. College costs mixed with a cost-of-living crisis continue to make for a tough student backdrop, while an estimated forward price/earnings (PE) ratio broadly matching the 10-year average may suggest the shares are not obviously cheap.  

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To the upside, a refocused strategy and what Pearson notes as an addressable $80 billion marketplace cannot be overlooked, while a focus on cost savings persists. Demand for IT skills regularly assists its A&Q business, while an increased emphasis at its Work Skills division is being given, as the company attempts to help the one billion people estimated by the World Economic forum that will require reskilling by 2030.  

For now, and while some caution looks sensible, a technology experienced CEO and a consensus analyst estimate of fair value above £11.30 per share are likely to keep long-term fans of this FTSE 100 company happy. 

Positives: 

• Diversity of business divisions
• Refocused strategy

Negatives:

• Uncertain economic outlook
• Currency movements can hinder performance

The average rating of stock market analysts:

Buy