Pearson declines on worries over virtual schools

Pearson led the FTSE 100 lower on Thursday after Exane BNP Paribas raised concerns about virtual schools, one of its fastest growing businesses.

Exane worried that growth rates may not be sustainable for Connections Academy, an online-only public primary and secondary schools operator bought by Pearson in 2011.

Headwinds for the business include a lack of new school openings, enrolment caps on established schools and regulatory headwinds, it said.

Pearson has no new virtual schools due to open for the upcoming academic year, against nine in the past three years, and caps on student numbers mean enrolment growth has been slowing since 2013, it said.

The broker also noted evidence that student performance is worse at virtual schools than regular public schools with research from the Walton Family Foundation non-profit last year showing cyber schools had “significantly weaker academic performance in math and reading”.

Nevada, New Mexico, Michigan and Ohio have all moved to cut funding for virtual schools, it said.

“We are increasingly sceptical about the group’s ability to return to growth in North America this decade.

Faced with structural challenges in several of its segments, the shares are not cheap,” said Exane, which put a 550p target on Pearson shares. The stock, which was trading ex a 34p dividend, closed 6.7 per cent lower at 637p.

The wider market followed Wall Street’s overnight decline with the FTSE 100 losing 0.4 per cent, or 28.48 points, to 7,303.20.

Allied Minds slipped further below its 2014 flotation price, losing 5.4 per cent to 175p, after the technology incubator’s warning on Wednesday that it was writing off more than a quarter by value of its portfolio.

Asos faded 4.3 per cent to £54.57, with Credit Suisse downgrading to “underperform” on the back of the online retailer’s recent interim results.

Credit Suisse worried about Asos’s long-term margin potential given increased scale has not come with reduced distribution and warehouse costs, which together account for over half of the group’s operating costs.

The 40 per cent premium Asos trades to German peer Zalando “looks stretched” as the latter delivers superior margins and cash conversion, it said.

EasyJet rose 4.2 per cent to £10.60 after reporting a bounceback in passenger numbers for March.

Short covering lifted Tullow Oil 7.5 per cent to 212.2p, the stock recouping an initial drop to 195p, after shareholders approved its rights issue. More than 22 per cent of Tullow’s free float is on loan to short sellers, Markit data show.

Regulatory uncertainty meant Sky slid 1 per cent to 962p, the lowest since December when 21st Century Fox made its formal £10.75 per share bid.