Academic publisher Pearson (PSON) is down 6.7% to 911p, erasing some of the gains it has enjoyed over the last 12 months, as a trading update renews concerns about the structural problems facing the business.
At first glance today’s year-end trading update looks fine, with adjusted profit bang in the middle of previous guidance (which stood at £520m to £560m) at £540m to £545m.
However, this has not been achieved as a result of revenue growth - in fact underlying revenue was down 1% year-on-year - but instead is due to larger than expected cost savings. At £130m these were £35m ahead of what was previously promised by the company.
Back of an envelope calculations suggest if efficiencies had delivered the £95m originally predicted then operating profit would have been £505m to £510m or, in other words, short of guidance.
Liberum analyst Ian Whittaker also notes earnings per share guidance for 2019 does not suggest any upgrade to consensus despite a higher cost saving target for the year, ‘again suggesting to weaker than expected revenues being offset with extra cost savings’.
SAME OLD PROBLEM
The main problem for the company looks to be unchanged, that US students are not buying as many expensive academic textbooks as this space sees digital disruption.
Whittaker says: ‘This underlines the fundamental problem for Pearson, namely that the rest of the business just does not have the growth to offset structurally declining US Higher Education and K-12 (which remains for sale but we suspect Pearson will not be able to sell this business) Courseware revenues, which make up an estimated 40%-plus of profits.’
AJ Bell investment director Russ Mould adds: ‘Academic publisher Pearson looks to be running to stand still based on the latest trading update. Investors will be disappointed that the key structural headwind for the company - the fact demand for expensive academic textbooks in the US has fallen away as students go online instead - remains an issue.’
As Mould observes the company is at least in a strong financial position, with year-end net debt expected to more than halve on the 2017 total at £200m, giving it some breathing space while it attempts to tackle this issue.
