Liberum bearish on Pearson ahead of FY results

Education publisher Pearson was under the cosh on Monday as Liberum highlighted concerns about the company’s cash flow.

Pearson, which is due to report full-year 2016 results on Friday, has already stated its headline results and given guidance for 2017, so Liberum said there shouldn’t be any major surprises.

“However, we expect the details of its 2016 results to concern the market particularly around cash flow. We also do not see further major cost savings as a risk to our sell case.”

Liberum noted that at the full-year 2015 results presentation, Pearson emphasised that its underlying cash conversion rate for 2015 was 95% as opposed to the reported 60% as there had been a number of ‘one-off’ issues at the group.

“The implication was that 2016 should see an improvement in the reported rate. However, when it reports numbers, we expect the cash flow numbers to look weak and to raise further questions about their cash flow profile.”

Liberum also pointed to goodwill and said it expects to see more significant writedowns. It said given that goodwill is a reflection of future expectations of cash flow, this would suggest a more negative long-term picture.

The brokerage said there are two areas where there could be risk to its bearish call into the FY numbers: Pearson could announce a new cost-saving programme and/or disposals, particularly around its 47% stake in Penguin Random House.

Liberum reiterated its 'sell' rating and 360p price target on the stock.

At 1230 GMT, Pearson shares were down 3.2% to 647p.