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Pearson and Relx: a tale of two publishers

Fund manager Nick Train invested in both stocks about 15 years ago, but they now face very different challenges
Pearson and Relx: a tale of two publishers

Pearson’s (PSON) numbers for 2019 had been foreshadowed within a disappointing January trading update. But that didn’t stop its shares from sinking further on results day – hitting their lowest price since 2003. At issue is the academic publisher’s turbulent transition towards becoming a digital learning company, laid bare by the performance of its US higher education courseware business. Here, significant declines in print – namely textbooks – have dragged down modest revenue growth in online products, while masking improvements in all other parts of the broader group.

Pearson also faces upheaval in its highest managerial ranks. We learnt last month that chief financial officer Coram Williams was heading for the door – taking a role at a company in continental Europe. He will be replaced by his deputy, Sally Johnson. Pearson had already revealed in a pre-Christmas announcement that chief executive John Fallon was leaving after seven years at the helm. Mr Fallon – whose tenure has been punctuated by multiple profit warnings – will stay in situ until a successor is appointed.

The challenges endured by Pearson look starker when one views the group alongside publishing peer Relx (REL). It is true that the latter – which reported eight days before Pearson – also faces change at the top. Chairman Anthony Habgood is stepping down. But in the more than 10 years since Sir Anthony took the reins, Relx’s shares have soared by 300 per cent – giving it a market value of almost £40bn.

 

Digital transition

Like Pearson, Relx has sold off print publications while sharpening its focus on electronic assets. At the time of the financial crisis, it had about 300 business-to-business magazines. Last December, it unveiled plans to dispose of its final print mag – Farmers Weekly. Today, the group supplies essential data and decision tools to customers spanning the fields of medicine, law and insurance, among others. Its preliminary figures offered up reliable, if unexciting, growth in revenues and earnings.

But that’s not to say that Relx’s future is obstacle-free – nor that Pearson’s is ridden with doubt. For Relx, the open-access debate rages on – with discord among academic institutions and libraries pertaining to the paid subscription model, via which most of its scientific, technical and medical (STM) primary research content is sold. Meanwhile, Mr Fallon highlighted that 76 per cent of Pearson was “already growing strongly”, with all parts profitable. He described Pearson as “a simpler and more efficient company” – one that has "built the platform by which we can lead the next generation of digital learning".

 

Box 2: Nick Train’s view

One high-profile stockpicker to have identified potential in both companies – and to have bought into each of them – is Nick Train, manager of funds including Finsbury Growth & Income Trust (FGT) and LF Lindsell Train UK Equity (GB00BJFLM156).

“We invested in Pearson and Relx at the same time, about 15 years ago, and for the same reasons,” Mr Train explained. “We believed both companies had an opportunity to digitise their valuable 20th century intellectual property (IP). In the process we expected digitisation would improve the efficacy of the IP for its users, while decreasing the capital intensity of delivering the content – so leading to higher customer retention rates and better profitability.

“The thesis has worked out well with Relx, which has emerged as one of the leading UK tech-growth companies. For Pearson, as is well understood, the transition has turned out to be more complex and more expensive than anyone anticipated and there is still uncertainty as to whether faculty or students actually want digital learning services, or in what form”. Ultimately, Mr Train said, “there is a big economic prize for the company that finds a way to improve educational outcomes – as well as a bigger societal prize, of course. Pearson may still be that company”. End box

 

 

Pearson: the numbers

Pearson reported further progress on its digital journey for the 12 months to December, with digital and digitally-enabled revenues rising to 36 per cent and 30 per cent respectively of the total – up from 34 per cent and 28 per cent.

Overall, underlying revenues were flat year on year, landing at £3.9bn. The group’s ‘core’ business – spanning established and mature education markets – grew by 5 per cent, while the ‘growth’ business unit was up by 4 per cent. But the largest segment, North America, slipped by 3 per cent.

The latter decline came after sales of US higher education courseware fell by 12 per cent, with print plunging by close to 30 per cent. Within its stateside operations, Pearson has been unbundling premium-priced print and digital products in favour of digital-only formats – leading sales of bundled units to slide by 45 per cent. Campus bookstores also bought less physical inventory, with more than half of students now preferring to read an electronic or ‘eBook’.

To that point, Pearson saw eBook growth of 18 per cent during 2019 – signalling the potential opportunity at hand, if the group can rise above its burdensome print problems. It is debuting an enhanced direct-to-learner version of its eBook this year, and – more broadly – expects digital growth to increase as product launches accelerate on its new ‘Pearson Learning Platform’.

 

Simplification

As well as striving to advance its digital transition, Pearson has undertaken a simplification programme. At the year-end, it had achieved annualised cost savings of £335m. And, in a reflection of its ongoing bid to slim down, the sale of the group’s remaining stake in Penguin Random House is expected to close during the first half. In the past, Pearson has also offloaded the Financial Times (publisher of Investors Chronicle) and its stake in The Economist.

 

“Stabilisation, then growth”

Pearson has now excluded Penguin from its guidance for 2020 – anticipating adjusted operating profits of £410m-£490m, down from 2019’s profits of £581m. The group expects all businesses except US courseware to sustain low-single-digit sales growth in aggregate. But courseware will endure ongoing “heavy declines” in print, only partially offset by modest digital growth. In the longer term, Pearson – which has reorganised its reporting structure for future periods – expects courseware to see “stabilisation, then growth”.

 

PEARSON (PSON)   
ORD PRICE:558pMARKET VALUE:£ 4.3bn
TOUCH:558.2-558.6p12-MONTH HIGH:951pLOW: 533p
DIVIDEND YIELD:3.5%PE RATIO:16
NET ASSET VALUE*:560pNET DEBT:23.5% **
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20154.47-0.43-43.352.0
20164.55-2.56-28752.0
20174.510.4249.917.0
20184.130.5075.618.5
20193.870.2334.019.5
% change-6-53-55+5
Ex-div:26 Mar   
Payment:7 May   
*Includes intangible assets of £2.9bn, or 377p a share **Includes lease liabilities of £881m

 

Relx: the numbers

Relx is most of the way there on its path from print to digital, with electronic and face-to-face revenues making up 91 per cent of the total last year. On an underlying basis, sales grew by 4 per cent to £7.9bn. Statutory operating profits rose by 5 per cent underlying to £2.5bn.

Within the scientific, technical and medical (STM) business, the group’s largest segment, which houses flagship science titles such as The Lancet, underlying sales edged up by 3 per cent to £2.6bn.

It is possible that discussions around open access will intensify – something that shouldn’t be overlooked. Among the “external risks” that could affect its operations, Relx noted that some alternative methods of content funding – such as fees charged to authors or authors’ funders – “if widely adopted, could adversely affect our revenue from paid subscriptions”. Encouragingly, Elsevier (STM’s market name) launched 100 full open-access journals in 2019, along with six new subscription journals. It said that it now publishes more than 370 full open-access titles. Relx expects another year of modest underlying revenue growth for the division.

Relx’s second-largest business, risk and business analytics – which provides data and analytics to industries including insurance and banking – saw sales rise by 7 per cent to £2.3bn during 2019. The group said that fundamental growth drivers here remain strong. This year should see the benefits of two recent acquisitions – credit and fraud risk specialist ID Analytics, and email-based fraud prevention company Emailage.

 

Exhibitions and coronavirus

It wasn’t all positive. While underlying growth trends are expected to continue in line with recent years for Relx’s exhibitions business (16 per cent of revenues), the group can’t yet gauge how much it will be hit by the coronavirus outbreak in China or in other regions. That said, management pointed out that revenues from Chinese exhibitions constitute just 1 per cent of overall group revenues.

 

RELX (REL)    
ORD PRICE:2,079pMARKET VALUE:£40.2bn
TOUCH:2,079-2,080p12-MONTH HIGH:2,109pLOW: 1,597p
DIVIDEND YIELD:2.2%PE RATIO:27
NET ASSET VALUE*:560pNET DEBT:£6.2bn
Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20155.971.3146.429.7
20166.901.4756.336.0
20177.341.7281.639.4
20187.491.7271.942.1
20197.871.8577.445.7
% change+5+7+8+9
Ex-div:24 Apr   
Payment:28 May   
*Includes intangible assets of £2.9bn, or 377p a share

 

The footnotes

The market reaction to Pearson’s numbers indicated continued scepticism about its ability to turn things around. But it wouldn’t be the first digital recovery story in the publishing world. Haynes (HYNS) successfully rose from the financial ashes, enhancing its print car manuals business with a digital database of technical information for professional mechanics. Earlier this month, it attracted a £115m takeover offer from a leading automotive data provider. But this comparison is rather tenuous; Haynes is a family-controlled minnow, while Pearson is a relative giant.

Meanwhile, bearish broker Investec argues that Relx’s share price ascent leaves limited room for disappointment. But, notwithstanding the very real need to monitor the open-access debate, the group continues to deliver steady growth, aided by technology investments that have enhanced the stickiness of customers.