Pearson has had many faces in its 180-year history. Starting out in construction in the 1840s, it branched out into banking, television and publishing — and now it is the world’s biggest publisher of textbooks. But in the past few years, the FTSE 100 business has been trying to transform itself from a fusty education group into a digital disruptor.
Artificial intelligence is at the heart of Pearson’s vision for the future, as students increasingly rely on technology to support their education. Think AI tutors that can answer questions alongside a video, or help teachers design custom tests for their classes.
Pearson’s transformation was kicked off by Andy Bird, formerly a boss at Walt Disney International, although Omar Abbosh, the former Microsoft executive who took over from Bird as Pearson’s chief executive at the start of the year, has largely stuck to the same strategy: improving customer service, pushing for cost-savings and using AI to grow further into a huge market for global learning. The company thinks there is a $15 billion opportunity in US learning, growing at about 2 per cent each year.
It may seem that Abbosh has had a tough baptism in the top job: pre-tax profits came in at £212 million in the first half of this year, down from £236 million in the same period last year, while sales dropped 7 per cent to £1.75 billion, from £1.88 billion previously — though the company insisted that it is still on track to meet its targets for both 2024 and 2025.
However, while the top line has wobbled, underlying revenues (which strip out currency movements and portfolio changes) are beginning to grow again.
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The company has been sharpening up its efficiency, with £120 million worth of costs stripped out last year. Meanwhile, the business portfolio has been simplified into five divisions; the largest is assessments and qualifications, which tests nurses and transport workers in the US, as well as organising GCSEs in computer science and English language and literature for foreign students. This division is followed by higher education, virtual learning, English language and workforce skills.
Pearson’s adjusted profit margin is steadily improving, too, at 14 per cent at the end of its first half, compared with 7.9 per cent at the same point three years ago and on track to achieve its targeted 16 to 17 per cent range next year. Revenue grew at a compound annual rate of 6 per cent from 2020 to 2023, and the company has returned more than £1 billion to shareholders via dividends and buybacks.
The company’s slow and steady progress over the past few years has attracted interest from big investors. Two years ago, Pearson fended off three takeover offers from the American investment group Apollo, while its single biggest shareholder is the activist firm Cevian Capital, which owns a 12.6 per cent stake worth £875 million. Last year, the company came under pressure from Cevian to switch its listing from London to the US to improve shareholder value, with the activist reasoning that most of its sales and executives were already in America.
But the London market is gradually growing keener on the shares. In 2018, 58 per cent of the analysts who covered Pearson rated it as a “sell”. Now the same proportion rank it as a “buy”, according to research compiled by FactSet.
The shares have ticked up by more than 5 per cent this year and trade at 16.5 times forward earnings, which looks relatively modest against forecasts that aggregate earnings and dividends will grow by 20 per cent and 18 per cent, respectively, from 2024 to 2026, according to estimates compiled by FactSet. Pearson is certainly cheaper than Relx, another London-listed publisher, which trades at a multiple of 28.9, though this partly reflects its much larger size and more diverse portfolio.
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Given Pearson’s significant room for growth, smarter structure and reasonable valuation, its investment case looks more robust than it did a few years ago.
Advice Buy
Why More streamlined business with big growth opportunity
Henderson Smaller Companies trust
It has been a volatile few years for the Henderson Smaller Companies trust. But the £641 million fund, which invests in British companies outside of the FTSE 100, looks like it could be on the up again.
The fund aims to maximise total returns, which includes both share price gains and dividends, by investing in smaller companies listed in London. It defines this by any company outside of the FTSE 100 — so if one of its holdings grows so much that it joins the benchmark index, the fund typically has six months to sell out of the business.
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Its biggest single holding as of the end of August was the housebuilder Bellway, which made up 3.4 per cent of the portfolio. That was followed by Paragon Banking at 3.2 per cent and the pub chain Mitchells & Butlers at 2.9 per cent.
The investment trust launched in 1887 but has been managed by the asset manager Janus Henderson since 2002, led by Neil Hermon. Its performance over the past five years has been a rollercoaster ride — the shares sold off heavily during the pandemic, rebounded during 2021 and then suffered again when interest rates started to rise.
But the trust now looks like it could be building a more sustainable momentum — rates are beginning to fall back again and the UK economy is slowly returning to growth. This should be supportive for the companies in the portfolio, which make the majority of their sales in Britain.
The fund also looks attractive from an income perspective. It yields 3.2 per cent, but more impressive is its 20 successive years of annual dividend growth — from 2003 to 2023 the trust’s dividends have notched a compound annual growth rate of 21.8 per cent, compared with just 4.5 per cent from the FTSE All-Share. Only a handful of other funds that invest in small companies can lay claim to such a long track record.
Shares in the trust have rallied by 27 per cent in the past year but still trade at an 11.8 per cent discount to their net asset value.
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Advice Buy
Why Seasoned fund with a narrowing discount