Hipgnosis Songs 20 July 2021
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Hipgnosis Songs. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Hipgnosis Songs Fund (SONG) broke new ground in the London listed funds market, being the first to invest in music royalties. SONG launched in 2018 and has attracted considerable interest from investors, now having raised c. £1.3bn of equity since launch. It is listed on the main market of the London Stock Exchange, and is now formally an investment trust.
SONG aims to generate total returns of greater than 10% per annum, with a high dividend yield and the prospect of capital growth. Using the manager’s relationships and industry knowledge, SONG’s portfolio has been built up to 138 catalogues, representing a total of 64,098 songs.
Aside from the tailwind provided by the growth of streaming, as we discuss in the Portfolio section, the managers aim to add value through active management of the song catalogues owned, as well as the use of technology and their industry knowledge to increase the efficiency of royalty collection.
In addition, the team expect a material impact from entirely new revenue sources such as TikTok and Peloton, which according to the manager are expected to represent up to 15% of revenues in due course. Emerging markets such as India, Africa and China are also expected to be a driver of growth now that music piracy is largely redundant. Any contribution from these sources represents pure upside for investors.
Following the most recent placing which completed (over-subscribed) in early July 2021, the board have stated that they “do not intend to issue further shares for cash consideration until after publication of the NAV as at 31 March 2022”. This could mean the shares achieve “rarity value” and potentially trade at a premium.
SONG has proved its resilience against the challenges that 2020 presented, but also shown that it is benefitting from structural changes to the music industry that are transforming what was arguably a broken model prior to streaming.
The impact of the pandemic has only had a marginal effect on revenues so far and has been mainly felt in performance revenues, which is expected to continue into the current financial year. That said, pent-up demand for concerts and live performances could mean a significant bounce-back in activity (and therefore revenues) in future years. We think the strength of SONG’s model is illustrated by (leveraged) free cash flow, which was $82.1m for the year ending March 2021, covering dividends paid out during the year by 1.58 times.
Aside from an improving background to earnings, the music industry shift towards subscription models could lead to important changes to the way that revenues are valued. An improvement in the predictability of revenues means that discount rates could move lower, offering a potential boost to returns.
This is a relatively new area for alternative income investors, and therefore arguably bears higher risks. However, should the managers achieve their objectives, the potential long-term total returns look attractive. SONG’s dividend yield of 4.3% compares to 4.9% for listed infrastructure funds and 5.7% for the renewable energy infrastructure funds. Whilst lower, we think SONG’s dividend yield is attractive because of the added potential for capital growth and the uncorrelated nature of its returns.
|Attractive yield, with prospect of income and capital growth
|Unfamiliar and illiquid asset class, meaning the portfolio is difficult to analyse, even as disclosure improves
|NAV returns likely to be uncorrelated with equity and bond markets
|Gearing (currently c. 24% of NAV) can exacerbate downside
|Opportunity for capital growth from industry trends as well as active management
|Possibility that current positive industry trends will reserve