SocGen upgrades Pearson as it hails restructuring plan

Societe Generale upgraded Pearson to ‘buy’ from ‘hold’ following the education publisher’s announcement of a new restructuring programme on Thursday.

Pearson put out an update earlier in the day saying it would carry out a £320m restructuring in order to generate £250m of cost savings from 2016 and a further £100m from 2017.

“With the shares down 55% since their peak last year, and a credible growth plan on the table, we upgrade,” SocGen said, adding the restructuring “clears the decks”.

The bank said Pearson’s growth plan was credible and a major relief for investors, as it pointed out that concerns had been building that a more radical restructuring/investment plan or dividend cut was looming.

"With this three-year plan supported by the full board, and, in our view, offering a realistic prospect of a return to growth, we think the share price should steadily recover some of its lost ground on improved confidence.”

At the same time, it noted the stock is down 55% from its March 2015 peak and full year 2016 consensus earnings per share has been cut 25% since then, but 15 percentage points of that was simply a function of holding cash following asset disposals.

“We see +11% potential EPS accretion, as £1bn of capital could be redeployed,” the bank said.

In addition, it said the shares were already close to its ‘trough’ valuation, suggesting a compelling low risk/high-reward entry point.

“We argue that whilst Pearson faces significant structural challenges from new entrants, its 16-year track record for taking share in US Schools/Colleges should dampen the structural fade.”

SocGen cut its price target on the stock to 965p from 1,375p as it downgraded its EPS forecasts to reflect the company’s new guidance.

Pearson shares surged 11.4% to close at 732.45p on Thursday.