The Swiss bank’s rating, which had been upped to ‘buy’ back in September, was marked down to ‘neutral’ and the share price target was slashed to 600p from 820p.
Analysts said that when they made the upgrade, “we thought that group margins could be sustained as the impact of declines in US HE Courseware could be offset by growth in other businesses, and further costs could be removed from the business”.
“This thesis has not played out,” they admitted, noting that last week’s trading update revealed declines in US HE courseware were “accelerating”, growth in other businesses was only making “limited” contributions to underlying profit, and management did not indicate that any further costs have been removed.
Post the year-end trading statement, UBS’s forecasts for 2020 underlying profits (EBIT) have been cut 15%, on top of the 13% cut made post the disposal of the Penguin Random House stake in December.
The 2020 forecasts incorporate an improvement in US HE Courseware to a decline of 8% with other revenue expected to grow 3%
“Given underlying cost inflation, for Pearson to deliver profit growth we think US HE Courseware needs to stabilise.
“We believe this could happen in 2021, as inclusive access scales and print sales to students potentially trough in 2020. However, we will not have visibility that stabilisation is happening until the Q3 2021 peak selling season.”
The analysts recommended investors were best served by waiting to see the direction indicated when a replacement for departing chief executive John Fallon is appointed, but also saw “upside risk” if press reports suggesting a potential private equity bid prove correct.