Page 36 - DIY Investor Magazine - Issue 25
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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) has net assets of c. £700m, and aims to achieve income and capital growth by owning songwriters’ music royalties. The manager targets songs expected to be beneficiaries of the global rise of music streaming.
SONG 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 shows no signs of slowing; the 2018 US Copyright Royalty Board ruling will increase the US royalty pot by 44% by 2022.
Attractive yield; prospect of income and capital growth NAV returns likely to be uncorrelated with equity and bond markets
Capital growth potential from industry trends and active management
Unfamiliar asset class, with no direct comparators listed Investment strategy requires temporary acquisition of high levels of gearing
Possibility that the current trend of rising royalty payments will reverse
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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.
Whilst SONG might not follow suit, there is potential given the 9% discount currently used. Market sentiment knocked SONG’s share price; in rating terms it 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 potential tailwinds from the industry 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.
  Initiatives include 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, which claims to be able to recover 20% more income on a like-for-like basis relative to other administrators. The portfolio’s earnings have covered this year’s 5p dividend twice over; the manager is optimistic for near-term 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 will see more tangible evidence of the portfolio performance, which could help reassure investors about
this relatively unknown asset class. 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 valuations elsewhere. We hope for more granularity on the portfolio when the report and accounts are published next month, illustrating SONG’s unique proposition.
Further potential upside comes from the independent valuer’s discount rate, which has stayed static since IPO; in renewable- energy infrastructure discount rates have come in significantly, driving NAVs upwards.
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