Trading Updates of Two FTSE Listed Value Stocks Amid the Lockdown Conditions: Pearson PLC and Dart Group PLC

The prolonged lockdown conditions caused by deepened and intensified impact of coronavirus crisis has staggered the wholesale price index and retail sales of United Kingdom towards an all-time low in March 2020. Due to the government-imposed restrictions, the travel and hospitality stocks are the most battered, whereas digital businesses are performing resiliently amid the social distancing scenario. Today, we will discuss a blue-chip media stock Pearson PLC (PSON) and AIM-listed travel & leisure stock Dart Group (DTG). Both companies have released their trading statements today. Subsequently, the price of PSON and DTG plunged today by around 2.8 per cent and 4.2 per cent, respectively (at the time of writing, GMT 9:50 AM). Let’s get a glimpse over their respective business model, financial position, and outlook to understand the magnitude of their latest trading updates.

Pearson PLC (LON: PSON)

Pearson PLC is a FTSE 100 listed digital learning company, which is engaged in education and publishing with over 22,500 employees in 70 countries. It offers content, digital services and assessment to schools, colleges, universities, and government bodies. The company generates most of its revenue from the United States, albeit its business is diversified into multiple geographies.

(Source: Company Presentation, Company Website)

The above chart depicts the revenue distribution of the company across three verticals:

  • Digital: It refers to MyLab, which provides a collection of online books, catering over 10 million people.
  • Non-Digital: Comprises printing of textbook and course material.
  • Digitally Enabled: It refers to Pearson VUE, which is computed-based testing services.

Business Segments in Light of 2020 Revenue Guidance

  • Global Online Learning:
    • Business Units: Online Program Management (OPM) and Virtual Schools.
    • 2020 revenue drivers: Growth driven by enrolments is likely to yield Mid-single digits growth.
  • Global Assessment:
    • Business Units: Pearson VUE, US Student Assessment and US Clinical Assessment
    • 2020 revenue drivers: Low to mid-single digit growth is expected through the growth in Pearson VUE and stabilization in US Student Assessment
  • International:
    • Business Units: English, Core and Growth business which includes UK student assessment and qualifications.
    • 2020 revenue drivers: Growth driven by English and UK students are likely to offset the loss of National Curriculum Test (NCT), and mid-single digit growth is expected.
  • North American Courseware:
    • Business Units: Courseware of US Higher education and Canada.
    • 2020 revenue drivers: Similar downward trends are expected as 2019 in print business with decent growth in digital vertical.

Critical Developments of the Recent Past

  • 23rd April 2020: Andy Bird (former Chairman of Walt Disney International) will be joining the board of PSON as an Independent Non-Executive Director from 1st May 2020, and he will also be a part of Remuneration and Reputation & Responsibility committee.
  • 1st April 2020: The group had announced the disposal of remaining 25 per cent stake in Penguin Random House for the consideration on GBP 530 million to Bertelsmann SE & Co KGaA.
  • 23rd March 2020: PSON group announced the repurchase of 1,748,000 ordinary shares at 25 pence each from Citigroup Global Markets Limited on the London Stock Exchange.

Q1 Trading Update – Reflecting Overall Decline in Revenue with a Healthy Balance Sheet, Low Net Debt and Good Liquidity

  • In the first quarter of 2020, the company’s trading was in line with revised anticipations. The underlying revenue for Q1 FY20 decreased by 5%, driven by a COVID-19, partially offset by the growth of Global Online Learning division.
  • From the perspective of the group segments, the revenue from Global Assessment reduced by 3%, driven by a decline in Clinical Assessment attributable to school closures and the closure of testing centers in the Professional Certification business. Led by school and test center closures across many of the International markets as well as the phasing of courseware sales in the UK, the revenue from International division tumbled 10%. In North American Courseware, the revenue was down by 10%, due to a weaker performance in courseware in Canada (led by school closure), the anticipated continuation of trends seen in US Higher Education in 2019 and exacerbated by the closure of campus-based bookstores. In Q1 FY20, the revenue from Global Online Learning surged by 6% with a robust performance in Virtual Schools. This was driven by planned new school openings and growth in Online Program Management as well as good enrolment growth.
  • This trading results were impacting all the divisions by the three major trends:
  1. Closure of testing centers
  2. School closures, and
  3. Availability of online resources for free, during the COVID-19 pandemic.
  • The group has a strong financial position, with approximately £0.8bn of immediately available liquidity at the end of March through cash balance and committed facilities.
  • In Penguin Random House, Pearson has accomplished the sale of the remaining stake and received the amount of £530m after quarter-end.
  • Further, the company has recently secured new lines of credit to improve the current RCF (Revolving Credit Facility).
  • Led by higher opening net debt at the beginning of the year and the impact of the recently paused share buyback, the net debt increased from £1.2bn at the same point in 2019 to £1.4bn at 31st March 2020.
  • For 2019, the Board recommended a final dividend of 13.5p, reflecting total dividend of 19.5p. This will be payable on May 7, 2020.
  • On 24th April 2020, PSON announced the upcoming launch of 'UK Learns'.

(Source: Annual Report)

Share Price Performance

Daily Chart as of April 24th, 2020, before the market close (Source: Thomson Reuters)

PSON’s shares, at the time of writing before the market close (at 8:20 AM GMT) on 24th April 2020, were trading at GBX 446.10. Stock's 52 weeks High is GBX 951.20 and Low is GBX 436.10.

Future Scenario – Reflecting Strategic Progress and Next Generation of Digital Learning

For 2020, the company’s product road map is in well-positioned and is also continuing to invest in the Pearson Learning Platform. In US Higher Education, the company is hastening the shift to a digital platform, which will move the company to access models. In light of the growing demand for online education, the company is investing in Global Online Learning division. Recently, the group has completed the simplification programme, which enabled PSON to identify an additional GBP 50 million of structural cost savings to be realised in 2021. Through the unprecedented crisis, the company is on-going to invest in the platform, products, and services, which will make the next generation of digital learning a reality.

Dart Group PLC (LON: DTG)

Dart Group PLC is a FTSE AIM-listed company which is engaged in Leisure Travel, Distribution and Logistics services. The group operates with three brands, namely Jet2.com, Jet2holidays and Fowler Welch.

(Source: Company Presentation, Company Website)

Business Operations with respect to Key Performance Indicators

The Dart group has two business segments (which caters both aviation and distribution), differentiated into the following three brands:

  • Leisure Travel:
    • com:
      • Provides leisure air services with low fair and charter flights. It operates over 400 routes across 70 destinations.
      • KPI in FY2019 (versus FY2018): 8% growth in the number of routes operated and 23% growth in the availability of leisure travel sector seats in FY2019.
    • Jet2holidays:
      • Provides ATOL (Air Travel Organiser’s Licence) protected holiday packages with direct contracts of over 4,000 hotels.
      • KPI in FY2019 (versus FY2018): 27% growth in package holiday customers and 6% growth in the average package holiday price.
    • Distribution and Logistics:
      • Fowler Welch:
        • Provides full range of distribution services throughout the United Kingdom. It serves retailers, processors, and importers by distributing fresh produce, ambient and temperature-controlled products.
        • KPI in FY2019 (versus FY2018): 1% growth in Annual fleet mileage and 3% growth each in the number of tractor and trailer units in operation.

Major Announcements of 2020

  • 14th April 2020: Robin Terrell (former Chief Customer Officer at Tesco) will be joining the Dart Group as an independent non-executive director with immediate effect. He will also be a member of the Audit and Remuneration Committee.
  • 18th March 2020: The Dart Group had suspended the flying programme of Jet2.com until 1st May 2020 due to unprecedented travel restrictions imposed by the government.

Trading Update (as on 24th April 2020) – Tentative announcement On Resuming Aviation Operations

  • As earlier announcement on 18th March 2020, the management expects to report pre-exceptional Group profit before foreign exchange revaluation and taxation in the range of £265m - £270m in FY2020, an approximately 49% of increase from the prior year.
  • From 17th June 2020, the Jet2.com and Jet2holidays will start their sale. Currently, the operations being suspended for an indeterminate period, but it will resume in the near term. After resuming the holiday flights, the Board estimates that the company will record an approximately £109m of net exceptional charge relating to foreign currency hedges in the FY20 results and ineffectiveness on a proportion of FY21 fuel.
  • Led by the unprecedented travel restrictions imposed by governments across Europe, the Jet2.com had to hang its flying programme in mid-March 2020.
  • The company will reduce its flying programme from 17th June 2020 and have cancelled all 12 summer-only third-party leased aircraft.
  • For the 6-month period (from 1st April to 30th September 2020), the group has asked all colleagues to take a pay cut of up to 30 per cent, including Directors.
  • Fowler Welch, is the distribution & logistics business, continues to perform strongly.

Share Price Performance

Daily Chart as of April 24th, 2020, before the market close (Source: Thomson Reuters)

DTG’s shares, at the time of writing before the market close (at 8:35 AM GMT) on 24th April 2020, were trading at GBX 575.70. Stock's 52 weeks High is GBX 1,950.00 and Low is GBX 182.50.

Short-Term Scenario

Recent Coronavirus outbreak had impacted the growth of the company, and further pressure on its revenue and profitability could be seen in the near term. In the short-term and long-term period, these have both consequences for demand and the structure of the industry. The impact and duration of Coronavirus stay difficult to determine, and the management has no clarity as to how this will impact Group profit before foreign exchange revaluation and taxation for FY21.

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