Pearson's directors (PSON) have taught many investors a lesson: the promise of cost savings and the guarantee of a chunky yield can outweigh a profit warning. Their unveiling of an extensive restructuring programme - which will simplify the company's structure, centre its gaze on growth markets and slash headcount by a tenth - sent the education giant's shares up 17 per cent. They also committed to paying a yearly dividend of 52p a share. This tempered lower guidance, with the market now being told to expect adjusted EPS of 50p to 55p in 2016, down from an estimated 69p to 70p in 2015.
What's new
• Launch of £320m restructuring programme
• Weak trading in major markets
• Growth forecasts lowered
The weaker forecasts reflect recent disposals and tepid trading in key markets. Pearson continues to battle falling enrolment in both US colleges and vocational courses in the UK, lower textbook sales in countries such as South Africa and macroeconomic pressures in emerging markets such as Brazil. It also faces structural challenges such as mounting demand for online and personalised learning, and students snubbing mint textbooks, choosing instead to buy used copies on Amazon and eBay. In response, Pearson plans to develop new education software and online courses, streamline its US testing business, sell properties and boost back-office efficiency.
Management pegs reorganisation costs at about £320m and hopes to complete most of the work by the summer. It expects to unearth about £350m in annual cost savings by the start of 2018. Moreover, it guided towards adjusted operating profits of at least £800m in 2018, compared with an estimated £720m in 2015. One major caveat: hitting that target will require successful restructuring with minimal disruption, new products gaining traction in a broad range of markets, rising demand for digital services and a recovery in both US college enrolments and UK qualifications.
Investec Securities says...
Buy. Market sentiment regarding Pearson has deteriorated to such an extent that its restructuring plan - despite not answering several questions and arriving with further downgrades - has been taken positively. We would really like the group to reinvigorate organic growth on a self-help basis, outside of the regulatory and macroeconomic cycles and structural pressures. Yet the valuation isn't expensive compared with media peers, there's a large, secure yield and Pearson arguably has more attractions and support than other high-yielding stocks such as resources and banks. We downgrade our EPS forecast for this financial year to 53.6p, rising to 63.7p in FY 2017 (FY2015: 68.7p).
Benstein Research says...
Buy. Pearson's restructuring plan is much larger than anyone anticipated, showing management is willing to take decisive steps on the cost side. Those measures buy time, but they don't solve the company's fundamental problem: it has little or no power to stimulate revenues and remains dispersed across a vast number of businesses and countries. We would like to see a smaller Pearson focused on its most profitable markets where it enjoys the greatest competitive advantage and digital transformation can happen sooner. It would also return the proceeds of disposals to shareholders over time. We slash our EPS forecast to 20.4p in FY 2016, down from an estimated 68.4p in FY 2015.
