Hipgnosis Songs Fund (SONG) currently has net assets of c. £700m, and aims to achieve income and capital growth by owning songwriters’ music royalties. In particular, the manager targets songs expected to be beneficiaries of the global rise of music streaming.
SONG now owns 54 catalogues, comprised of multiple writers, performers and genres. In total, the portfolio has over 13,000 songs, featuring 1,810 number-one hits (in at least one country). 49 have been awarded a Grammy. At current valuations, the portfolio is generating gross income of c. 6.7%.
The manager hopes to grow both the capital value and income from the portfolio in a number of ways. A secular tailwind is provided by the growth in global streaming, which is showing no signs of slowing. Additionally, the 2018 US Copyright Royalty Board ruling will increase the US royalty pot by 44% by 2022.
Manager-led initiatives include having a dedicated resource behind each song the trust owns, ensuring that revenues are maximised. Efficiencies in collecting revenue are expected as the portfolio administration is transitioned to Kobalt Music over the next two to three years. Kobalt is the preferred administrator, which claims to be able to recover 20% more income on a like-for-like basis relative to other administrators.
Over the past year, the portfolio’s earnings have covered this year’s 5p dividend two times over. The manager seems optimistic for the near-term prospects for income generation, and the board has reiterated its dividend target.
We think the uncorrelated nature of the NAV and the high income the portfolio provides are key attractions of SONG. The next year or so will see more tangible evidence of the portfolio performance, which on its own could help reassure investors about this relatively unknown asset class.
Recent corporate activity in the wider music-publishing sector suggests that SONG’s historical valuation multiple of 13.9x (and current valuation of 15x) compares favourably to corporate valuations elsewhere. With the report and accounts due to be published next month, we hope more granularity on the portfolio will be provided, and further illustrate SONG’s unique proposition.
Further potential upside comes in the form of the independent valuer’s discount rate, which has so far stayed static since IPO. Within the renewable-energy infrastructure universe discount rates have come in significantly, driving NAVs upwards. Whilst SONG might not follow suit, there is certainly potential given the 9% discount rate currently used.
Market sentiment knocked SONG’s share price; in rating terms it therefore has some way to go to recover the previous double-digit premium. However, on a yield of 4.4% the dividend is attractive and differentiated. With the potential tailwinds from the industry trends and management initiatives, the current discount might be viewed as an opportunity.
The uncorrelated returns potential, and the fact that this is the only UK-listed share giving exposure to music royalties, means we think that SONG deserves a premium rating again.
|Attractive yield, with prospect of income and capital growth||Unfamiliar asset class, with no direct comparators listed (although Spotify, Warner Music and Vivendi have some of the same dynamics)|
|NAV returns likely to be uncorrelated with equity and bond markets||Difficult portfolio to analyse, even if disclosure improved|
|Opportunity for capital growth from industry trends as well as active management||Possibility that the current trend of rising royalty payments will reverse|