UBS upgrades Pearson on US higher education opportunity

UBS said there is more upside than downside risk to FY21 consensus forecasts; the disposal of non-core assets followed by a buyback and cost-out could be more than 20% earnings accretive; Pearson can build profitable businesses in US Higher Education, enabling 7% FY21-25 estimated group EBIT compound annual growth rate.

The bank said Pearson is attractive, offering earnings growth, an 8% estimate FY22 free cash flow yield and M&A optionality.

"There is upside risk to our FY21E forecasts if we see a recovery in school text book sales," it said.

The bank said US higher education is a "material opportunity" for Pearson.

UBS said the question investors ask most is whether Pearson can deliver profitable growth in US higher education, in both Courseware and Online Program Management. The bank’s analysis suggests the answer is yes.

"First, as students find it harder to source current editions in the secondary market, we believe they will they will increasingly switch to low priced eBooks. Second, our survey suggests the new features in Pearson’s next generation products could lead to higher adoption of digital courseware.

"Finally, we think Pearson can grow OPM enrolments without additional investment, with key customer risks manageable."

At 1350 GMT, the shares were up 2.5% at 525p.