Pearson Pre-Supply Profile Though Looks Tight For Rating

Baa2/NR/BBB

Company is on an improving operational trajectory, underpinned by ongoing efficiency efforts with a renewed focus on AI and sensible policy though Q1 was followed by a Fitch upgrade and Q2 by a Moody’s upgrade so much of the name’s rating upside has been realised and their existing 3.75% 2030 GBP line (+5bps on the mandate) already sits tight/flat for it's rating curve and there are leverage increases on the horizon.

• UK-based global producer of both printed and digital learning content for schools, higher level education and professional enterprises. Sees it’s growth as driven by both demographic shifts (high retirements, low births) and widening skill gaps.
• Revenue split into five segments led by Assessment and Qualifications (~42% of rev, ~61% of op profit), Higher Education (~23%, ~19%), Virtual Learning (~17%, ~13%).
• Organic growth has been positive since 2021 driven by largest segment and growth driver A&Q. Weaker performance seen in Higher Education though the segment has been the focus of recent restructuring efforts and management expect a return to growth in H2. Company guiding for a MSD CAGR from 2022-2025; Fitch see 3.7% CAGR over same period.
• Margins have increased steadily on the back of efficiency improvements and cost discipline, led by A&Q but with similar trajectories since 2020 across each segment (excl. Workforce Skills; only 6% of business). Guiding for 16-17% for FY25 which seems reasonable from the 15.6% seen in FY23 (BBG consensus implies 16.8%).
• OCF and FCF margins have seen growth since 2021 though leverage has risen over the same period due to buybacks - the group commits to solid IG and leverage of ~2x though remains below this level with the recent indication that buybacks would not be extended implying the headroom is to facilitate acquisition optionality.
• H1 results were mixed with underlying revenue growth falling to 2% though op margins were +100bp YoY to 14% and guidance was reiterated. More focus was on the strategic update which didn’t include any large changes to capital policy with MT growth, cash conversion and leverage guidance in line with recent levels along with an additional to 40bp annual margin growth beyond 2025.