The whole concept of activist investing is a bit weird. Take Pearson, for instance. The company has spent nearly two centuries failing to find something it’s good at. Pearson built the Blackwall Tunnel, ran Alton Towers, was a founder member of the British Satellite Broadcasting consortium, tried a bit of merchant banking and published both the Brighton Evening Argus and The Rough Guide to Guatemala. Now it mostly binds school textbooks, albeit not enough of them, and it’s the turn of Cevian Capital to see what else it could be doing different.

The news overnight was that Cevian has taken a 5.4 per cent stake in Pearson. A Pearson flack says the group’s been having a “constructive, ongoing dialogue with Cevian for several months’. Cevian says in a US regulatory statement that it has “has discussed and intends to continue to discuss numerous operational and strategic opportunities to maximise shareholder value with [Pearson's] board of directors and/or management, including, without limitation, opportunities to improve management.”

It could be argued that with Pearson CEO John Fallon due to retire later this year, improving management was already a near certainty. What matters more is the type of improvement. Activists don’t normally assist with headhunting unless it’s with the ulterior motive of pushing for a breakup and whatnot. Here’s Citi:

Potential Option #1: Operational Improvements

Clearly 2020E is going to be a very unusual year because of the disruption caused by COVID-19 related lockdowns, but if we use 2019 as a base, Pearson is clearly under-earning vs. its recent history. Headline margins for the group at 15% or so don’t look massively depressed relative to historic peak margins (16.1% delivered in 2011) but once we factor in a combination of portfolio change and the distortion from PRH accounting, we estimate underlying margins at nearer 13% vs. historic peak of c. 17.3%. Clearly much depends on the trajectory of the top line but it does not seem unreasonable that the company could be pushed harder on efficiency and, simply benchmarking this back to history, it could add a meaningful amount to forecasts (£150m+ p.a to EBIT or 15p+ per share to EPS based on this simple analysis).

Potential Option #2: Asset Sales/Partial Break-Up

We have long argued that the market has not paid enough attention to the SOTP at Pearson. We include our SOTP [below] which values the group at 932p (the basis for our 930p PT). We make a number of points on this: (1) the company has historically given us the disclosure to break out all of the various businesses at least in terms of revenue which we can then use as the foundation for EV/Sales based valuations; (2) the main points of interest are Virtual Schools, OPM (aka US Higher Ed Online Services), Professional Testing (VUE) and US Higher Ed Courseware (aka USHECW) where we apply a valuation of £691m/92p per share, £1.4bn/186p, £1.3bn/177p and £949m/126p respectively.; (3) even if we exclude USHECW, Pearson would be worth 800p+ per share in our valuation which in turn means, at the current price, that either the market is applying a negative value of £2bn for USHECW or is valuing USHECW at zero and applying a 30%+ holding discount.

Our View: Deep Value in Plain Sight

We think Pearson has a compelling set of assets exposed to a very interesting and dynamic global sector while also enjoying a strong balance sheet. The standalone investment case is sadly, however, largely overlooked by an overwhelmingly bearish consensus. It is not clear what direction an activist investor will take Pearson, but we do see significant value and its very presence could be a positive catalyst to realising this. We rate Pearson as a Buy.

And Cazenove:

Pearson trades on 9x 2021E earnings with an unlevered balance sheet – or just 5x if it were to re-lever to 2x ND/EBITDA. Too cheap, in our view, particularly as PSON is one of the few stocks that can benefit from increased US unemployment. We have a DCF-based valuation and SOTP of 820p. This assumes a group WACC of 10% and 12% for US HE, with scope for lower WACCs if it can execute on its strategy, and longer term upside to earnings if it can deliver on its vision of a lifetime of learning.

The headline 2021E PE of 9x only tells half the story. Within its portfolio, there are fast growing businesses with significant value that make a limited near-term contribution to earnings as they invest to drive growth. We think PTE, VUE, OPM and virtual schools, which together represent c35% of revenues, should trade at a substantial premium. Furthermore, we would argue that Student Assessment / Qualifications offers modest growth & benefits from medium-term contracts, good barriers to entry and attractive margins, and should trade at a premium to the current group PE.

Even assuming all the SOTP work hangs together, the question remains why any independent board member should need nagged into looking after shareholder interests based on the grey-sky thinking of a bunch of identikit guys from Stockholm. Having said that, a 20 year price performance to mid May of zero per cent suggests Pearson’s board probably does.

In sellside, MoneySupermarket goes down to “hold” at Stifel post results. Switch into Goco, they say:

Yesterday's trading update confirmed our view that the cyclically exposed aspects of Moneysupermarket's business would be severely impacted. We take our (already bottom of consensus) forecasts down a notch, reducing EBITDA a further 13%. At these levels, cash generation remains strong and we view the dividend as secure, which should provide support to the shares. However, having rallied 54% from its recent low, the share now trades in line with our DCF. Multiples are above historic levels and without an obvious catalyst for a re-rating, we move to a Hold rating. During lock-down GOCO's share has performed in line with Moneysupermarket which we see as anomalous given its more defensive nature. The ratings disparity between the two looks pronounced; we retain our Buy rating on GOCO (88p). . . . 

We believe our forecasts for this year have now found a floor. On this basis, the 3.8% FCF yield and 2.4% dividend yield should support the share price to the downside. However, the shares trade at a premium to historic multiples on most counts. With a CEO transition underway over the summer, we struggle to see a catalyst for a rerating near term. We retain our DCF based target price but move to a HOLD rating. . . . 

Over the last two years, Moneysupermarket has rightly outperformed its smaller peer by c.50%. However, during lock-down, the share price performance of both companies has been in line. We find this surprising given (1) The Money segment (where GOCO has little exposure) is entering a downturn just as the car insurance segment (which represents the majority of GOCO's revenue) is emerging from one. (2) Since March, we have reduced our FY20 EBITDA estimate for Moneysupermarket by 30% and GOCO's EBITDA by 'only' 8%. While we believe Moneysupermarket is up with events, we continue to see the possibility of a rerating of GOCO's shares.

On The Beach goes down to “hold” at Jefferies as part of a travel sector sector survey. It finds “the road to recovery will be long, with -” many a winding turn? “- low demand for international travel in summer 2020 and 2021. Our new forecasts assume revenue only reaches summer 2019 levels in summer 2023.” Tui’s still a sell, Dart’s still a buy.

Highlights from JEFData travel surveys: 1) Weak demand for summer 2020 international travel; 2) Reluctance to book international travel for summer 2021, with expected late booking cycle; 3) Long road to recovery, with risk to full recovery for holiday travel; 4) Consumers will be more price sensitive post-COVID; 5) Difficulties and delays in getting refunds will significantly impact customer loyalty.

How might the industry change? In the medium term, we explore potential consequences of this crisis, including: 1) Hoteliers looking to change payment terms; 2) Regulators requiring cash deposits to be ring-fenced; 3) Brand perception damage and impact on loyalty; 4) Digital shift accelerated. Overall, we see DTG as the most attractive operator in a changing landscape.

Forecast changes: We now forecast a four-month travel lockdown from mid-March to mid-July followed by a prolonged recovery across the tour operators, with revenue only reaching summer 2019 levels in summer 2023. We cut EBIT forecasts by 304% FY21E DTG, 112% FY20E OTB, 235% FY20E TUI.

DTG 'The Package Deal; Reiterate Buy': We continue to view Jet2 as the best vertically-integrated operator: robust airline foundations; business model flexibility (more limited capital commitment and no retail footprint); balance sheet health; and positive brand perception. Shares are >+50% in the past month, but we think DTG's long-standing business model characteristics will be increasingly appreciated in a changing post-COVID-19 landscape. Positioned to gradually rebuild capacity and continue to take share, reiterate Buy.

On The Beach 'Between a Rock and a Hard Place; Downgrade to Hold': We continue to like OTB's balance sheet and operational flexibility in this backdrop and see it as well positioned for potential industry changes. However, we have concerns that the business model does not fare well in distressed travel environments, with difficulties gaining market share reflected in ailing historical earnings: Downgrade to Hold.

'TUI or not TUI? Reiterate Underperform': Shares have almost doubled in the past month but with updated forecasts our analysis highlights risk of additional liquidity requirements in FY21E. We also think that >€6bn long-term gross debt levels (pre-IFRS 16) are unsustainable and see longer-term covenant risk. TUI's high fixed cost base, capital commitments and more levered balance sheet continue to not fare well in the current crisis, or in a backdrop of potential industry changes, our analysis suggests. Reiterate Underperform.

We continue to value the stocks on a DCF basis, removing our previous beta premium for DTG and OTB, but not TUI. Risks include: Hard Brexit, slower recovery, consolidation, extended lockdown, second coronavirus wave.

Citi has a thing about EMEA iron ore miners that suggests taking profit in out of Ferrexpo and Kumba, in part on a change in lead analyst.

Recovery of iron ore equities from March lows seems mostly complete, in our view, with equities rallying between 100-125% driven by iron ore moving back up above US$100/t level on the back of Brazilian supply disruptions. The pure-play iron ore equities appear to be pricing in US$70/t long term iron ore price (adjusted for respective quality premiums), materially above Citi's long term iron ore price forecast of US$55/t.

Citi house forecast is US$55/t for long term iron ore prices, broadly in-line with market consensus. Although persistent supply deficit and resilient Chinese demand have been driving the case for higher long term incentive prices, US$70/t is close to the bull case scenario, in our view. Our models are set at normalized level for quality premiums, i.e. Fe premium over 62% grade, lump premium and pellet premium, while spot premiums are materially weaker. Therefore at spot premiums, implied benchmark price (adjusted for respective quality premium for both Kumba and Ferrexpo) would be higher by another US$12-13/t.

Iron ore equities under over coverage are likely to generate an average 10% FCF yield for 2020, which is attractive relative to other miners and should support elevated cash returns. However, both stocks seem priced for perfection taking into account company specific risks, in our view. Short mine life at just 13 years for Kumba is a key risk for its long term value proposition relative to average mine life of over 50 years for big-4 iron ore miners. Kumba runs a risk of higher than expected capex in the medium term to extend mine life. For Ferrexpo, corporate governance risks continue to be elevated with additional risks from upfront capex on longer dated pellet capacity expansion program.

Ashmore goes down to “underperform” at Bank of America as its “high valuation does not reflect expected outflows and emerging markets uncertainty”. It’s all part of a deep dive into income funds that suggests Jupiter is the most exposed and advises a switch out of all the UK names and into global ones like DWS Group and Banca Mediolanum.

And Deutsche goes cautious on Johnson Matthey post Thursday’s results.

We like the group's well-run asset base (with a high degree of variable costs in Clean Air), strong balance sheet/liquidity position, and management's ongoing focus on organisational efficiencies – all of which were highlighted in FY19/20 results. However, we downgrade the stock to HOLD for two key reasons: 1) We expect an increasing ramp-up of cathode supply globally closer to 2024, JMAT’s targeted commercial launch of its novel eLNO cathode material, unfavorably shifting the "crunch point" of price pressure in the industry. 2) We expect a delay in benefits from growth investments made in Clean Air as automotive production does not meaningfully pick up over the short/medium term, in addition to potential for delayed phasing in of some emission standards.

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