DCF Studio

    PSON.L · LSE · Communication Services

    Pearson plc

    Also onConsensus Drift

    Implied value per share

    GBp 2003.09

    Market price

    GBp 1178.50

    Implied upside

    +70.0%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    NoteRisk-free rate is an assumption: GBP assumption - no free live source available for this market.

    Value Per Share

    Perpetuity growth
    GBp 2003.09+70.0%
    Exit multiple
    GBp 1089.93-7.5%
    Market price
    GBp 1178.50

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (GBP). Outflows negative.

    0m386m772mFY26FY27FY28FY29FY30
    Nominal FCFFDiscounted to todayGBP
    LineFY26FY27FY28FY29FY30CAGR
    RevenueGBP 3.5bnGBP 3.4bnGBP 3.3bnGBP 3.3bnGBP 3.2bn-2.3%
    EBITGBP 491.2mGBP 479.7mGBP 468.4mGBP 457.5mGBP 446.7m-2.3%
    NOPATGBP 374.9mGBP 366.1mGBP 357.5mGBP 349.1mGBP 340.9m-2.3%
    Add depreciation & amortisationGBP 538.3mGBP 525.7mGBP 513.3mGBP 501.3mGBP 489.5m-2.3%
    Less capital expenditureGBP -126.6mGBP -123.6mGBP -120.7mGBP -117.9mGBP -115.1m-2.3%
    Less increase in working capitalGBP -14.4mGBP -14.1mGBP -13.8mGBP -13.4mGBP -13.1m-2.3%
    Free cashflow to firmGBP 772.1mGBP 754.0mGBP 736.3mGBP 719.1mGBP 702.2m-2.3%
    Discount factor0.97230.91900.86870.82120.7763-
    Present valueGBP 750.7mGBP 693.0mGBP 639.7mGBP 590.5mGBP 545.1m-7.7%
    Present Value Of The ForecastGBP 3.2bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate4.50%GBP assumption - no free live source available for this market (assumption)
    Equity risk premium5.50%Market assumption
    Beta0.307Reported -0.034, pulled toward 1.0 (Blume)
    Cost of equity6.19%Risk-free + beta x equity risk premium
    Cost of debt5.08%Interest expense / average total debt
    Market capitalisationGBP 7.1bn82.7% of capital
    Total debtGBP 1.5bn17.3% of capital, book value as a proxy
    Tax rate23.7%Effective, capped at statutory
    WACC5.79%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareGBP 20.03

    78% of EV

    Forecast FCFF, final year
    GBP 702.2m
    Capex at depreciation, working capital in reinvestment
    GBP 655.9m
    Less reinvestment at g/ROIC (29.7% of NOPAT)
    GBP -194.7m
    Capitalised
    GBP 461.2m
    ROIC (reported)
    8.4%
    Terminal value, undiscounted
    GBP 14.4bn
    Terminal value, discounted
    GBP 11.2bn
    Enterprise value
    GBP 14.4bn
    Less net debt
    GBP 1.1bn
    Equity value
    GBP 13.2bn

    Exit at 7.1x EBITDA

    Value per shareGBP 10.90

    61% of EV

    Terminal value, undiscounted
    GBP 6.6bn
    Terminal value, discounted
    GBP 5.1bn
    Enterprise value
    GBP 8.3bn
    Less net debt
    GBP 1.1bn
    Equity value
    GBP 7.2bn

    Spread between methods: 59%.

    Sensitivity

    Value per share (GBP) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    3.79%33.9839.8850.3273.93178.87
    4.79%23.6525.6828.5833.0741.00
    5.79%18.1318.9620.0321.4723.51
    6.79%14.6915.0315.4515.9616.62
    7.79%12.3312.4512.5912.7412.92

    Outlined: this model. Green text: above today's price of 11.79. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    Revenue growth, every year-2.3%-11.8%-9.5pp
    EBIT margin14.1%3.7%-10.4pp
    Discount rate5.8%8.2%+2.4pp
    Download as Excel

    Live formulas, not pasted numbers - edit a driver and the workbook reprices.

    Yahoo Finance and RBA data. General information, not advice. Methodology.