ONLINE EDUCATION

SECTOR

VALUATION STUDY
Table of Contents
Executive Summary
Markets Overview
Education Industry Analysis
Company Considerations
Recent Corporate Actions (eg. M&A, Strategy reviews)
Share price performance
Operating Performance
Valuation
Trade Idea
EXECUTIVE SUMMARY
This presentation evaluates the education sector and within it, the global leader in the
publishing industry - Pearson PLC.
Through my analysis, I have identied the fundamental drivers of the industry and
company; to evaluate the intrinsic price of Pearson shares (PSOL). To do this I used a
fully integrated nancial statement forecast model and discounted cash ow valuation.
I have observed the following key drivers with respect to the companys operating
performance. Documenting assumptions for PSOLs growth, I have observed:
The global E-learning market is valued at 91bn - with projected p.a. growth of 23%.
This sector is dominated by education training & software companies.
The future for Pearson is a progressive transition to digital products and services.
This allows Pearson to access fast growing content segments primarily in the
edtech space.
Pearson has made signicant investments in growth through both M&A and organic
channels. Since 2006, 0.5bn has been invested in organic through digital channels
such as Pearson Access (Content), MyLabs (Formal testing) etc.
2.5bn has been invested in acquisitions; increasing Pearsons market presence in
the E-learning markets.
On a DCF basis, the company is fundamentally valued at 965p. Pearson PLC shares are
currently trading on the London Stock Exchange (LSE) at a premium: 1153p per share.
Applying diferent assumptions for terminal growth and WACC, the fundamental
share price valuation ranges from 7211,035p
MARKETS OVERVIEW
Investor Sentiment Quotes
They (Pearson) have been acquiring teaching systems and administration
systems that are incremental and new to Pearson. Its not straightforward
and there are bound to be bumps.
Steven Liechti (Investec Securities)
We still think the US is ahead of other countries in the economic cycle and
that relatively strong growth, and higher interest rates will lead to further
dollar gains. (Pound Sterling Live)

Under Scardino (Previous CEO), Pearson had a halo and it performed well
and delivered earnings growth.With the new CEO, earnings growth has
gone into reverse. Sales are irrelevant; - its about prot.
Alex DeGroote (Media analyst at Panmure Gordon)
Pearson introduces a level of uncertainty over outcomes which has no parallel in
the recent history of the companyStill, we are condent the transition to digital
education represents a signicant opportunity for Pearson.
Claudio Apesi (Sanford C. Bernstein Analyst)
Pearson Overview
Pearson is the largest education company and largest book publisher in
the world. The company delivers its services through a variety of
channels including books, newspapers and online services.

- Operates in more than 70 countries globally
- Over 36,000 employees worldwide
- Major markets include the United states (60% sales), Europe (22%
sales)
- Generated revenues of 5.7bn in 2013, with EBIT margin of 8%
- Recently merged a core business with external publisher to create
Penguin-RandomHouse; the worlds largest publishing organisation
- The rm is rapidly digitizing its business; 60% of its business revenue
is now derived from digital services (2013) compared with 50%
(2012)
EDUCATION INDUSTRY
ANALYSIS
Education Industry Overview
1.4bn students out of 7.1bn world pop
North America & Europe are the biggest
consumer markets
4,435bn global education expenditure
7.4% p/a growth in education exp till 2017
Education costs have risen 84% since 2000
E-Learning is set to grow at 23% p/a
Education Expenditure by
region
Growth by education markets Growing education sectors
7.90%
25.20%
16.60% 32.60%
3.10%
14.60%
Latin America
Europe
Emerging Asia-Pacic
North America
Middle East & Africa
Developed Asia-
Pacic
23%
41%
30%
20%
E-learning Social Serious Gaming Language
2.2
2.5
2.8
1.4
1.7
1.9 0.4
0.6
0.8
0.4
0.6
0.8
0
1
2
3
4
5
6
7
2012 2015 2017
Other
Corporates
Post secondary
K12
E-Learning Market Overview
E-learning global market valued at 91
bn
Smartphone penetration highest with
18-34 year olds
Asia has the fastest growth rate of 17.3%
32% of sector is comprised of education
& training software companies -Europe
UK has the 2
nd
largest number of E-
learning companies in Europe
Growth in smartphone sales
(m)
E-learning companies by sector
Growth rate by region (2011-16)
297
468
631
792
953
1200
2010 2011 2012 2013 2014 2015
!"#
%&'
%("
)%"
#
#*&
5.0%
14.6%
6.6%
16.9%
17.3%
8.9%
15.2%
0.0% 5.0% 10.0% 15.0% 20.0%
North America
Latin America
Western Europe
Eastern Europe
Asia
Middle East
Africa
Competitive Landscape
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'"()*+% ,-.$+-/01"#
COMPANY
CONSIDERATIONS
Strategic Considerations

The future for Pearson is a progressive transition to ofer digital products
and services. This allows Pearson to access fast growing content segments
mainly in the edtech sphere.
Pearsons sales are expected to fall again in 2014. This is a direct result of
weakness in its underlying business trends, negative headwinds from FX
and the disposal of Mergermarket. The share price performance outlines
this modest performance with respect to its traded peers.

Post 2015, the company looks set to gain traction once again with sales
steadily rising. Structural risks still exist and will mostly display a mix of
headwinds and tailwinds.
There is currently heavy investment in organic growth and M&A. Since
2006, 0.5bn has been invested in organic growth through digital
channels such as LabLearning.
2.5bn has been invested in acquisitions; increasing Pearsons market
presence in the E-learning markets.

Current geographical focus lies in the developing markets such as the
South Africa, China; where total emerging market revenue stands at
819m (14%) of total sales. This strategy involves entering markets early
and building scale.

Given Pearsons position and strategy, target rms are unlikely to be
large scale transactions (>200M). Early innovation and software-based
rms are of increasing relevance to the rms desired direction. In the
US/Europe the McAfee institute is a prime example of such a niche
segment.
Financial Considerations
Share Price Performance vs
Competitors (Last 12 Months)
50.0
70.0
90.0
110.0
130.0
150.0
170.0
190.0
26-Jul-13 26-Aug-13 26-Sep-13 26-Oct-13 26-Nov-13 26-Dec-13 26-Jan-14 26-Feb-14 26-Mar-14 26-Apr-14 26-May-14 26-Jun-14
Pearson Apollo group John Wiley
Pearson Financial Forecasts
EBIT & Margin (14-18)
Prot & Margin (14-18)
Sales & Growth (14-18)
5016
5185
5325
5600
5900
-11.8%
3.4% 2.7%
5.2%
5.4%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
4400
4800
5200
5600
6000
2014E 2015E 2016E 2017E 2018E
Sales Growth (%)
539.6
600.2
659.9
680.5
701.1
10.76%
11.57% 12.39%
12.15%
11.88%
9.50%
10.00%
10.50%
11.00%
11.50%
12.00%
12.50%
13.00%
0
200
400
600
800
2014E 2015E 2016E 2017E 2018E
Profit Margin (%)
730
850
932
958
984
14.6%
16.4%
17.5%
16.2%
16.7%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
0
200
400
600
800
1000
1200
2014E 2015E 2016E 2017E 2018E
EBIT Margin (%)
Top line sales is forecasted to grow
between 3-5% after accounting for
Penguins restructuring
International education division is
expected to generate 31% of sales in
FY18 vs 27% in current year
EBIT margin is expected to grow from
15% to 17%. Net income margin is set to
grow to 14% due to restructuring and
operational improvements.
Key Financial Metrics - Gearing
Without planned transformative
acquisitions, Pearsons leverage
ratios are expected to fall as the
bus i ness es f ocus es on cas h
generation and optimises for its line
of acquisitions

Pearson is forecast to attain a net
cash position in FY18E adding debt
capacity in future acquisitions
Net Debt / EBITDA
Debt / Equity Net Debt / (Cash) - M
2469
1318.9
875.2
563.3
242.5
-73.5
2013A 2014E 2015E 2016E 2017E 2018E
1.54x
0.90x
0.54x
0.23x
-0.07x
2013A 2014E 2015E 2016E 2017E
54.0%
29% 28% 27%
25% 24%
2013A 2014E 2015E 2016E 2017E 2018E
Headline Operational Metrics
I nternati onal educati on di vi si on;
emerging markets such as China and
Brazil deliver signicant growth

Digital and services stream is now 60%
of company revenue as opposed to print
FY13

Nor t h Amer i can MyLab usage
continues to expand with graded
submissions up 15% on 2012

Digital revenue as % of sales (m)
MyLab registrations (m) Sales by division (3Yrs)
0%
20%
40%
60%
80%
100%
2013 Y1+ Y2+ Y3+
Penguin
FT Group
Professional
International
Education
North
American
37%
40%
45%
50%
60%
0%
10%
20%
30%
40%
50%
60%
70%
2009 2010 2011 2012 2013
7.3
8.9
9.9
11
0 2 4 6 8 10 12
2010
2011
2012
2013
No of registrations (m)
Acquisition History
Since 2007, Pearson has acquired 15 businesses; investing a total amount of 2.5bn.
Pearsons main strategy has been to invest in digital based/E-learning businesses. The
company has invested across the whole E-learning environment, including content, LMS
and analytics.
This has provided Pearson with superior reaction capabilities to the changing market
environment. In addition to this, Pearson has been able to build scale in fast-growing
markets such as emerging economies.
M&A Transaction History
Announced Date Target Description Deal Value
16-Oct-2012 Embanet
Compass
Strengthen Pearsons
position in educational
services
404m
25-May-2012 Global English Build English Language
training business
58m
15-Sept-2011 Connections
Learning
Product extension in
virtual school market
254m
26-Apr-2011 Schoolnet Product extension in
diagnostic tools
140m
TRADE IDEA
Valuation Considerations
In order to calculate the intrinsic value of Pearson stock, I used a 5-year
discounted cash ow forecast for the FY14-18E. These projected gures were
designed to incorporate assumptions I made about Pearsons future
prospects.
Key assumptions used include:
WACC: 8.4%
Long-term growth rate: 2.5%
Net Debt Position as at 30 June 2013: 2,469m
No. outstanding shares: 808m
On a DCF basis, the company is fundamentally valued at 965p. Pearson PLC
shares are currently trading on the London Stock Exchange (LSE) at a
premium: 1153p per share. (Downside of 19.4%)
This implies FY15 EV/EBITDA multiple of 10.6x
Applying diferent assumptions for terminal growth
and WACC, valuation ranges from 7211,035p
LT Growth Rate
965.4 1.5% 2.0% 2.5% 3.0%
W
A
C
C

7.5% 990 1,081 1,190 1,323
8.5% 810 874 948 1,035
9.5% 675 721 774 836
10.5% 570 605 644 689
11.5% 485 512 543 577
Discounted Cash Flow Analysis
Financial Year (Dec. Year end) 2013 2014 2015 2016 2017 2018 Terminal Period
Total Turnover 5,690 5,016 5,185 5,325 5,600 5,900
growth (%) -11.8% 3.4% 2.7% 5.2% 5.4%

EBIT 458 730 850 932 958 984
margin (%) 8.0% 14.6% 16.4% 17.5% 17.1% 16.7%

Depreciation & Amortisation 617.0 128.3 117.8 112.5 110.2 110.9

Tax @ 30.0% (137.4) (219.1) (255.1) (279.6) (287.4) (295.3)
Capital Expenditure 199.0 100.3 103.7 106.5 112.0 118.0
Capex/Sales (%) -3.5% -2.0% -2.0% -2.0% -2.0% -2.0%

Working Capital (493.0) 200.6 185.1 4.6 (12.8) (35.4)
Working Capital / Sales (%) 8.7% -4.0% -3.6% -0.1% 0.2% 0.6%

Free Cash Flow 245.6 739.7 794.4 662.9 656.2 646.6 646.6

Discount Factor 0.9224 0.8508 0.7848 0.7239 0.6677 0.6677

Terminal Value 11,206

Present Value 682.31 675.91 520.25 474.99 431.70 7,482
Enterprise Value (m) 10,267
Net Debt as at (Dec 2013) 2469
Market Capitalisation (m) 7,798
No. Shares (m) 808
Share Price (p) 965.4



APPENDIX
Operating Assumptions
Sales Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
2011 2012 2013 2014 2015 2016 2017 2018
North American education 2584 2658 2779 2612 2634 2665 2761 2861
International education 1424 1568 1539 1570 1623 1694 1773 1857
Professional 382 390 410 485 572 603 641 681
FT Group 427 443 449 349 356 363 370 378
Penguin 1045 1053 513 0 0 0 0 0
Total 5862 6112 5690 5016 5185 5325 5600 5900
Divisional Revenue Split
North American education 44% 43% 49% 52% 51% 50% 49% 48%
International education 24% 26% 27% 31% 31% 32% 32% 31%
Professional 7% 6% 7% 10% 11% 11% 11% 12%
FT Group 7% 7% 8% 7% 7% 7% 7% 6%
Penguin 18% 17% 9% 0% 0% 0% 0% 0%
Divisional Revenue Growth
North American education 2.9% 4.6% -6.0% 0.8% 1.2% 3.6% 3.6%
International education 10.1% -1.8% 2.0% 3.4% 4.4% 4.7% 4.7%
Professional 2.1% 5.1% 18.3% 17.9% 5.4% 6.3% 6.2%
FT Group 3.7% 1.4% -22.3% 2.0% 2.0% 1.9% 2.2%
Penguin 0.8% -51.3% -100.0% 0.0% 0.0% 0.0% 0.0%
Operating Prot (EBIT) Actual Actual Actual Forecast Forecast Forecast Forecast Forecast
2011 2012 2013 2014 2015 2016 2017 2018
EBIT 1226 487 458 730 850 932 958 984
EBIT Margin (%) 20.9% 8.0% 8.0% 14.6% 16.4% 17.5% 16.2% 16.7%
EBIT Growth (%) -60% -6% 59% 16% 10% 3% 3%
Financial Assumptions
Pearson Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.
Financial Assumptions 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Income statement
Sales growth 4.3% -6.9% -11.8% 3.4% 2.7% 5.2% 5.4%
COGS as % of sales 44.8% 35.8% 40.6% 40.6% 40.6% 40.6% 40.6% 40.6%
Annual depr. as % of previous PPE 20.9% 25.1% 37.5% 37.5% 37.5% 37.5% 37.5%
SG&A as % of sales 34.3% 49.0% 42.3% 0.0% 0.0% 0.0% 0.0% 0.0%
Amortization of other intangibles amount 518.0 553.0 535.0 0.0 0.0 0.0 0.0 0.0
Non-recurring items amount 124.0 31.0 3.0 0.0 0.0 0.0 0.0 0.0
Efective tax rate 15.5% 35.3% 22.8% 30.0% 30.0% 30.0% 30.0% 30.0%
Shareholder info
Diluted weighted average shares outstanding 800.2 804.3 807.8 809.1 809.1 809.1 809.1 809.1
Dividend per share growth rate 7.9% 7.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Balance sheet: current assets
Accounts receivable as % of sales 23.6% 18.1% 20.6% 20.8% 19.8% 20.4% 20.1% 20.3%
Inventories % of COGS 0.0% 53.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Other current assets % of sales 18.2% 15.3% 20.8% 20.0% 20.0% 20.0% 20.0% 20.0%
Balance sheet: non-current assets
Capital expenditures % of sales 2.7% 2.5% 3.5% 2.0% 2.0% 2.0% 2.0% 2.0%
Other assets % of sales 8.8% 8.4% 10.7% 10.0% 10.0% 10.0% 10.0% 10.0%
Balance sheet: liabilities
Accounts payable and accruals % of COGS 66.3% 25.5% 26.4% 26.0% 26.0% 26.1% 26.0% 26.0%
Accrued income taxes % of tax expense 131.5% 210.9% 188.5% 180.0% 180.0% 180.0% 180.0% 180.0%
Other long-term liabilities % of sales 20.9% 19.1% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Balance sheet: equity
Common stock amount 3,131.0 3,265.0 2,870.0 2,676.0 2,676.0 2,676.0 2,676.0 2,676.0
Share repurchases amount (show as positive) (46.0) (5.0) 0.0 0.0 0.0 0.0 0.0
Debt (/ amount)
Loans due for repayment 78.0 55.0 47.0 0.0 0.0 0.0 0.0 0.0
Other long-term debt repayment 1,973.0 2,217.0 2,179.0 0.0 0.0 0.0 0.0 0.0
Interest Rate (%)
Short term debt 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Loans due for repayment 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Other long-term debt repayment 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Cash 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Income Statement
Pearson Hist. Hist. Hist Proj. Proj. Proj. Proj. Proj.
Income Statement 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Net Sales 5,862.0 6,112.0 5,690.0 5,016.0 5,185.0 5,325.0 5,600.0 5,900.0
COGS 2,624.0 2,187.0 2,312.0 2,038.1 2,106.8 2,163.7 2,275.4 2,397.3
SG&A 2,012.0 2,996.0 2,407.0 2,121.9 2,193.4 2,252.6 2,368.9 2,495.8
EBIT 1,226.0 487.0 458.0 730.3 850.3 931.9 958.1 984.4
Depreciation 70.0 80.0 82.0 128.3 117.8 112.5 110.2 110.9
Amortization 518.0 553.0 535.0 0.0 0.0 0.0 0.0 0.0
EBITDA 1,814.0 1,120.0 1,075.0 858.6 968.1 1,044.4 1,068.4 1,095.3
Non-recurring items 124.0 31.0 3.0 0.0 0.0 0.0 0.0 0.0
Interest Income 11.0 10.0 9.0 5.5 6.0 9.7 12.9 16.1
Interest Expense 66.0 75.0 82.0 114.8 84.7 84.7 84.7 84.7
Prot before taxes 1,047.0 391.0 382.0 621.1 771.6 857.0 886.4 915.8
Taxes 162.0 138.0 87.0 141.5 231.5 257.1 265.9 274.7
Prot after tax 885.0 253.0 295.0 479.6 540.2 599.9 620.5 641.1
Discountinued Operations (Prot) 71.0 61.0 244.0 60.0 60.0 60.0 60.0 60.0
Net income 956.0 314.0 539.0 539.6 600.2 659.9 680.5 701.1
Shareholder information
Diluted weighted average shares
outstanding 800.2 804.3 807.8 809.1 809.1 809.1 809.1 809.1
Diluted earnings per share 1.19 0.39 0.67 0.67 0.74 0.82 0.84 0.87
Dividends per share 0.40 0.43 0.46 0.46 0.46 0.46 0.46 0.46
Dividends 319.0 346.0 372.0 372.6 372.6 372.6 372.6 372.6
Balance Sheet
Balance Sheet Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.
31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Cash and cash equivalents 1,369.0 1,062.0 729.0 374.1 817.8 1,129.7 1,450.5 1,766.5
Accounts receivable 1,386.0 1,104.0 1,173.0 1,042.0 1,027.5 1,086.4 1,126.1 1,196.3
Income Tax refund 0.0 1,172.0 0.0 0.0 0.0 0.0 0.0 0.0
Other current assets 1,066.0 937.0 1,183.0 1,003.2 1,037.0 1,065.0 1,120.0 1,180.0
Total current assets 3,821.0 4,275.0 3,085.0 2,419.3 2,882.3 3,281.1 3,696.7 4,142.8
Net PP&E 383.0 327.0 342.0 314.1 300.0 294.0 295.7 302.8
Goodwill 183.0 15.0 1,092.0 1,092.0 1,092.0 1,092.0 1,092.0 1,092.0
Other intangibles 6,342.0 6,218.0 5,801.0 5,801.0 5,801.0 5,801.0 5,801.0 5,801.0
Other assets 515.0 513.0 611.0 501.6 518.5 532.5 560.0 590.0
Total assets 11,244.0 11,348.0 10,931.0 10,128.0 10,593.8 11,000.6 11,445.4 11,928.6
Short term debt 136.0 262.0 533.0 0.0 0.0 0.0 0.0 0.0
Accounts payable and accruals 1,741.0 1,556.0 1,505.0 1,304.2 1,346.5 1,391.9 1,458.0 1,536.9
Accrued income taxes 213.0 291.0 164.0 254.6 416.7 462.8 478.6 494.5
Total current liabilities 2,090.0 2,109.0 2,202.0 1,558.8 1,763.2 1,854.7 1,936.7 2,031.4
Total long-term debt 1,964.0 2,010.0 1,693.0 1,693.0 1,693.0 1,693.0 1,693.0 1,693.0
Other long-term liabilities 1,228.0 1,165.0 1,136.0 1,003.2 1,037.0 1,065.0 1,120.0 1,180.0
Total liabilities 5,282.0 5,284.0 5,031.0 4,255.0 4,493.2 4,612.7 4,749.7 4,904.4
Common stock 3,131.0 3,265.0 2,870.0 2,676.0 2,676.0 2,676.0 2,676.0 2,676.0
Retained earnings 2,980.0 2,902.0 3,128.0 3,295.0 3,522.6 3,809.9 4,117.7 4,446.2
Treasury stock (149.0) (103.0) (98.0) (98.0) (98.0) (98.0) (98.0) (98.0)
Total equity 5,962.0 6,064.0 5,900.0 5,873.0 6,100.6 6,387.9 6,695.7 7,024.2
Total Liab.& Equity 11,244.0 11,348.0 10,931.0 10,128.0 10,593.8 11,000.6 11,445.4 11,928.6
Balance? OK OK OK OK OK OK OK OK
Cash Flow Statement
Pearson Hist. Hist. Hist. Proj. Proj. Proj. Proj. Proj.
Cash Flow Statement 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18
Net Income 956.0 314.0 539.0 539.6 600.2 659.9 680.5 701.1
Depreciation 70.0 80.0 82.0 128.3 117.8 112.5 110.2 110.9
Amortisation 518.0 553.0 535.0 0.0 0.0 0.0 0.0 0.0
Change in OWC 0.0 304.0 (493.0) 200.6 185.1 4.6 (12.8) (35.4)
Change in other assets 0.0 2.0 (98.0) 109.4 (16.9) (14.0) (27.5) (30.0)
Change in other liabilities 0.0 (63.0) (29.0) (132.8) 33.8 28.0 55.0 60.0
Cash from Operating Activities 0.0 1190.0 536.0 845.0 919.9 791.0 805.5 806.6
Capex 156.0 152.0 199.0 100.3 103.7 106.5 112.0 118.0
Cash from Investing Activities -156.0 -152.0 -199.0 -100.3 -103.7 -106.5 -112.0 -118.0
Change in Common Stock 0.0 134.0 -395.0 -194.0 0.0 0.0 0.0 0.0
Change in Treasury Stock 0.0 46.0 5.0 0.0 0.0 0.0 0.0 0.0
Dividends (319.0) (346.0) (372.0) (372.6) (372.6) (372.6) (372.6) (372.6)
Long Term Debt Repayment 0.0 2010.0 (317.0) 0.0 0.0 0.0 0.0 0.0
Cash from Financing Activities (319.0) 1844.0 (1079.0) (566.6) (372.6) (372.6) (372.6) (372.6)
Net Cash Flow (475.0) 2882.0 (742.0) 178.1 443.7 311.9 320.9 316.0
Beginning Cash 0.0 1233.0 800.0 196.0 374.1 817.8 1129.7 1450.5
Ending Cash 1233.0 800.0 196.0 374.1 817.8 1129.7 1450.5 1766.5



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