Charles Stanley downgrades Pearson to 'hold'

Charles Stanley downgraded Pearson to ‘hold’ from ‘accumulate’, pointing to the company’s disappointing nine-month trading update last week.

“We continue to believe that Pearson should benefit from structural growth in global demand for education services over the long term, but the risk of further reductions in medium term earnings expectations and additional restructuring charges remains,” it said.

Charles Stanley said the group has been proactive in repositioning its business towards digital content and emerging markets in recent years, but the persistence of cyclical and policy related headwinds is inevitably raising concerns that the trends may be structural.

Disposal proceeds from the FT Group and Economist Group stake sales will be around.£1.3bn and Pearson is expected to be nearly debt free by the year end, but the disposals will be earnings dilutive in the near term and dividend cover is forecast to fall to around 1.2x next year, the brokerage said.

It added that risks the dividend will be rebased on a two to three year view are growing.

“The shares have fallen by around 25% since the update, but reduced estimates for 2016 mean the valuation (December 2016 PE 13.9x) still does not appear cheap.”

At 1247 GMT, Pearson shares were down 1.4% to 863.50p.