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) is a £409m market cap listed fund, aiming to achieve income and capital growth by owning songwriters’ music royalties. The managers (The Family (Music) Ltd) believe that, aside from being able to buy these royalties from songwriters on a gross yield of c. 8%, investors should benefit from trends and active management, which will increase the level of income (and capital value) over time.
The managers are aiming for total returns of greater than 10%, and have demonstrated their ability to invest the fund’s capital relatively quickly – no mean feat in a market where there are no formal brokers or “exchange” for royalties. Merck Mercuriadis leads the management team, and he is clearly a music industry “insider”; we understand his relationships have been key to accessing the quality of the portfolio that SONG has built up so far.
Having spoken to the team, they tell us that royalties from the copyright of songs tend to be relatively predictable – certainly after the first three years when the “buzz” has largely subsided. We discuss the intricacies of music royalties in more depth in the portfolio section, but it is worth noting that these are long life assets, with copyrights in some cases lasting for 70 years past the death of the writer. The catalogues acquired by 31st August have seen revenue growth (excluding post 2016 releases) of 49% from streaming sources, and 19% overall.
Streaming is increasingly being recognised as a huge growth area for the music industry, not only opening up the potential market (by reducing distribution barriers to zero), but also significantly increasing and extending the length of a song’s earning potential. JPMorgan predicts that global music industry revenues will surpass the peak of the late 1990s, with 10% p.a. compound growth expected through to 2030. The number of people paying for a streaming music service is rapidly increasing with 255m paying subscribers for streaming services currently (according to the IFPI Global Music Report 2019), and which JPMorgan predicts will grow to north of a billion. Notwithstanding this, the managers intend to apply significant resource towards the management of the fund’s songs, and to boost revenues and the capital value of the portfolio using more intensive, active management.
In its first year, SONG has delivered what it promised at launch. Recognised net revenues from the portfolio from incorporation on 8 June 2018 to the financial period end on 31 March 2019 were £7.2m, equivalent to a 6.1% gross yield on the £120m invested component of the portfolio over the period - in line with projections at launch. The company has paid its target dividend of 3.5p over the first year (in four instalments). As we examine in the dividend section, the company has a stated aim to pay dividends of 5p in the current financial year.
Since launch to 31 March 2019 (the last reporting date), the fair value NAV has risen from 98p to 103.27p. Including dividends paid, this means that the total NAV return has been 6.4% - a strong performance during a period in which the fund has been sitting on cash as it builds the portfolio up. The shares are trading at a small premium to fair value NAV, which means that total shareholder returns (including dividends) to the end of August has been 8.5%.
The prospective dividend of 5p per share equates to an income yield of 4.8% at the share price on 31 August 2019, which compares with the Global Equity Income sector average yield of 4.1%, 4.1% for infrastructure funds, and 5.1% for the renewable infrastructure funds (Source: Numis).
This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.
Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.
Kepler Partners is not authorised to market products or make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.
The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.
The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.
This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.
Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.
PLEASE SEE ALSO OUR TERMS AND CONDITIONS
Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN 480590), registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.
Talk to us about what you like (or don't) about Kepler Trust Intelligence and we'll enter you into the draw...
Invesco Perpetual UK Smaller Companies offers investors a proven approach to a particularly compelling sector...
Two of our analysts go head-to-head, debating whether gold is the ultimate safe haven asset...
We look under the hoods of Global sector trusts to see which offer the best diversification prospects for UK investors...