Page 21 - DIY Investor Magazine | Issue 37

He said a century ago, when there was live music on radio for the first time, it was believed that this would mark the end of live music attendance; however, technology and art generally seem to find ways to co-exist and thrive and, overall, he seemed incredibly positive about the future. I was lucky to meet Hipgnosis Songs’ (SONG) manager and founder, Merck Mercuriadis, in 2017, when SONG was just an idea, and there was despondency in the music industry. However, Merck very accurately predicted that major artists would sell their ‘babies’ to a careful owner and streaming would make it just too inconvenient to download individual songs; legally or illegally. People who rarely bought a CD or a record are comfortable with a monthly subscription delivering all the music, all the time. The point of the Real Book anecdote is that even musicians were using other musicians’ compositions without paying, but got there in the end when a new publisher gave them a legitimate and, crucially, more accurate version. ‘THE STRUCTURE OF THE FUND MANAGEMENT INDUSTRY AND THE STOCK MARKET CAN LEAD TO OVERREACTIONS IN SHARE PRICES AND I THINK THAT’S WHAT IS GOING ON HERE’ SONG currently trades at a very wide discount and is constrained in what it can do to alleviate that, as it owns private assets and carries some gearing. With dramatically rising interest rates I believe there is a legitimate debate about whether the value of SONG’s assets should change more than they have. Many of its shareholders are institutional fund managers with a broad range of assets who will reassess the value of SONG if, for example, they are currently being offered corporate bonds at yields several hundred basis points higher than two years ago. So, if other assets are suddenly so much more attractive, why has SONG’s valuation, and the discount rate used, stayed the same? Which is the same legitimate argument for all kinds of assets – interest rates are a fundamental part of almost all valuations. For SONG, the counter-argument is that its valuation has stayed the same because the independent valuer is giving more weight to the fact that revenues are increasingly subscription-based, rather than discretionary. Or, as they’d say in the world of corporate bonds, the spread has narrowed as the risk has reduced. This trend has been underway for a while, but is solidifying even as interest rates have risen and I think it’s a powerful counter. Investors also legitimately worry that even subscriptions will suffer in an inflationary environment; no one really has the data to say otherwise, as this is the first time that TV and music streaming services have existed in times of inflation. But subscriptions of all kinds are sticky and the SONG share price implies a discount rate on the assets of c.12%, compared to the 8.5% which the independent valuer has used to calculate the net asset value. I think this leaves quite a bit of room for the more negative view to play out and still come out the other side with a discount to net asset value. PSH’s Bill Ackman seems to agree on the general principle, with PSH’s largest holding being Universal Music Group, which is a more complex business to value but which is exposed to all the same trends that SONG is. My Real Book anecdote also shows how much of life and investment exists in the grey area between absolute certainties. I’ve come to learn that share prices are often a consequence of smart people with intelligent views and I don’t feel any of the negative arguments are plain wrong. But I’ve also come to learn that the structure of the fund management industry and the stock market can lead to overreactions in share prices and I think that’s what is going on here. Patience will, in all things, be rewarded. See the full research on SONG here > Disclosure – This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary. 21 Apr 2023 DIY Investor Magazine ·