UBS upgrades Pearson to 'buy'

It noted that the shares are down 13% year-to-date, impacted mainly by disappointing FY23 guidance and concerns around how generative AI could impact its Higher Education business.

"However, we see positive operating momentum in the business post Q1 results, and into Q2, and note our revised forecasts are ahead of consensus," UBS said. "We see a clear path for Pearson to deliver more than £400m of free cash flow by 2024 (versus £175m in 2022) which means Pearson trades at circa 7% estimated FCF yield versus peers on 5%."

The bank said it was upgrading its rating for three reasons. It said it expects the assessment & qualifications business will outperform consensus expectations, potentially materially.

"We have identified a number of strategic opportunities that imply A&Q could sustain growth at 6% per annum in an upside case," it said.

In addition, UBS said it sees upside in English. "We note the recent decision of Canadian authorities to allow the Pearson Test of English to enter the Student-Direct-Stream (SDS) component of student visas; which could add circa 20% to total 2022 PTE volumes starting in August 2023."

Finally, UBS said it’s not convinced generative AI poses a risk to Pearson. "While it will lower the cost of text book production, Pearson already competes against free open educational resources.

"Our forecasts for Higher Education remain cautious but there is upside risk if new leadership can deliver improvement in market share in line with guidance."

At 1540 BST, the shares were up 2.3% at 836.00p.