2 stocks for the e-learning boom

-- | 08/03/2021

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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Michael Field. He is an equity analyst with Morningstar. Hello.

Michael Field: Hi, Holly.

Black: So, Michael, you've been doing a deep dive on the e-learning sector. Obviously, this is something a lot of households have had to get to grips with over the past 12 months. What are some of your main findings?

Field: Yeah, indeed, it's a topic close to everyone's heart, I think. And I think while investors had been kind of skeptical about the education sector in the beginning, they started to warm up to it over the course of the year as they saw that many education companies adapted quite well to the pandemic and the closures, and that a lot of exposures these companies have in terms of digital and online have developed quite well as well and are now coming to the fore.

Black: So, what were some of the differences you saw between companies that were able to adapt to this environment and those that weren't?

Field: I think two things really. One is in terms of brand name presence and the ability to generate content and the companies that had that already were able to kind of migrate to more online offerings and push their digital offerings and kind of benefit from that perspective. The other areas in terms of exposures—so, for some companies that had exposure to areas that were in decline like textbooks, for instance, they had a pretty tough year as students kind of shunned physical textbooks that they might have used before now that they're stuck working from home, they had no use for them.

Black: And what about if we think about younger learners because I think that's been a more challenging area? What about the companies serving that audience?

Field: Yeah, completely. So, I think if you look at our forecast for growth going forward, we're generally quite positive on the education sector and particularly the digital education sector, but it's very much skewed. There's a spectrum, if you will. And at the high end of that in terms of where we see the most growth, it's more in corporate education where workers like you and I now value the flexibility of our time and might be more willing to do courses online rather than go to a physical location. But at the opposite end of that spectrum, like you mentioned, you have younger students, primary school students, K-12 as it's known in the US And while you saw a large migration of those students to online over the last year, it was because they've been forced to do so. It wasn't by choice necessarily, definitely not the choice of their parents, and probably not their teachers either. So, what we're probably going to see there is a migration back to physical classrooms for the most part for these students. Because what we've observed is that the efficacy of online education for them isn't as high as it is for other groups.

Black: I certainly know a lot of parents who are keen to get the classrooms open again. So, based on your research, which are some of the top picks for investors in this sector?

Field: So, I think for investors looking today, it's getting more difficult. A lot of the education stocks have rallied over the last six to nine months as investors have kind of looked at the numbers and seen the potential for growth going forward. But there's two stocks within our coverage that are still looking pretty interesting in terms of potential upside.

The first of those is UK-listed Pearson (PSO). If you look at their exposures in terms of areas like assessment where digital penetration is increasing, grading of exams, delivering of exams is increasing, their exposure to digital textbooks, which is growing and replacing the hard textbook and numerous other areas that are exposed to kind of digitally growing areas are kind of shining a light on that stock in the future. The other one then is New Oriental Education (EDU), so one of our Chinese-listed stocks. There you have exposure to the after-school tutoring market, which has been on a huge growth ramp-up over the last number of years in China. And within that, digital education is increasing even faster. So, they have a brand name that allows them to attract students more easily than newer startups. And they're one of the ones we think will benefit over the next number of years.

Black: Fantastic. Michael, thank you so much for your time. For Morningstar, I'm Holly Black.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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