Pearson does the math and discovers big US tax boost

Pearson's revenue declined in the third quarter as US higher education remained weak but the education and testing group remained on track to hit full year profit targets, with earnings receiving a large one-off tax boost.

Sales, which had been up in the first six months of the year, have flattened off over the nine-month period to end-September.

But Pearson said it still expected to generate full year adjusted operating profits of £520-560m and has now guided to earnings per share of 68-72p, up from the 49-53p indicated at the half-year stage.

Having previously pencilled in an adjusted effective tax rate of 20%, on Wednesday the FTSE 100 group said it now was likely to receive a credit of 5-7% thanks to the reassessment of historical tax positions and one-off benefits following a review of the White House's tax reforms.

Revenue was flat in the first nine months of 2018 in North America, having been up 2% in the first half of the year and accounting for around two thirds of the group total, as declines in school and higher education courseware and expected declines in learning studio were offset by growth in online program management due to higher enrolments, growth in the Connections Academy virtual school and growth in professional certification, which benefitted from the launch of a contract to administer medical college admissions tests.

The core segment, including the UK, Australia and Italy, maintained revenue growth of 2% despite declines in revenue in UK student assessment and qualifications, and UK school and higher education courseware.

In the 'Growth' segment, which includes Brazil, China, India and South Africa, revenues remained down 4% over nine months, due to the loss of a South Africa school courseware contract the year before. Helped by growth in English courseware in China, underlying sales, excluding the South Africa effect, were up 1%.

"We are on track to return to underlying profit growth and, with a strong balance sheet, are set up well for the future," said chief executive John Fallon, adding that year end net debt would remain in line with 2017.

"We are picking up the pace in our growth opportunities, performing well competitively and making good progress in our digital transformation. There's a lot still to do but we are increasingly excited about the opportunity to help learners acquire the knowledge and skills to succeed in a fast changing world."

Fallon also confirmed that the company remains on track to achieve £300m of annualised costs savings, with full benefits expected to accrue from the end of the 2019 trading year.

There was no new news on the intended sale of the US K12 Courseware business more than a year after offering it up.

Shares in Pearson rose almost 4% to 847.6p in the first hour of trading on Wednesday.

The key overall point, for broker Liberum, was that US higher eduction remains is "still very weak and, despite the positive language, there is still no top-line growth", with EPS guidance the same if the tax boost is ignored.

"The main driver of declines in North America continues to be US Higher Education Courseware," analysts said, with Q3 net sales down around 10% amid a "modest" impact from delivery delays due to software implementation, that should reverse out in Q4, "but trends look poor" and the division looks to be heading towards the bottom of its guidance range, ie a 5% decline.

Liberum added: "They have still not sold the US K-12 business, which has been on the block for over a year and we are increasingly sceptical they will be able to sell the business for any reasonable price (we put a value of £100m-150m on the business)."

Broker Shore Capital was more positive on the potential for Pearson to "tap into long-term growth in global learning spend" and was "cautiously optimistic that it now appears to be making tangible progress in negotiating the substantial organisational and cultural change required to fully realign to a digital future".