Hipgnosis Songs Fund SONG

[CraigSB]

Hi all
During the pandemic, when individual companies I held were slashing dividends, it was pleasing to see virtually all of my Trust holdings continue to pay out, and I've been building this up and moving money across ever since. I have a small position in Hipgnosis as I like the concept, and it feels like a slightly different play on the market. Anyone's thoughts on this as investment case would be very welcome. Thanks.

[airbus330]

I like this and have held for some time now.
Its uncorrelated to most other sectors.
The business is cash generative with long time horizons.
I personally like the catalogs that they have bought. I think they play to a market which will always be in demand.
New streaming platforms are likely to emerge in time.
The recent CRB court case victory for song writer writes potentially is a big uplift to revenue.
Theres a potential tie up with Blackstone being worked on.

The downsides are whether you trust Mr. Mercurio, but he has been fleet of foot so far.

[BullDog]

Hmmmm. I like it more now that it's available at a discount. Wouldn't buy at a yield less than well North of 5% though. Too many other options out there to attract me at the present yield.

[CraigSB]

I like this and have held for some time now.
Its uncorrelated to most other sectors.
The business is cash generative with long time horizons.
I personally like the catalogs that they have bought. I think they play to a market which will always be in demand.
New streaming platforms are likely to emerge in time.
The recent CRB court case victory for song writer writes potentially is a big uplift to revenue.
Theres a potential tie up with Blackstone being worked on.

The downsides are whether you trust Mr. Mercurio, but he has been fleet of foot so far.

Thanks Airbus. I agree about the correlation and the type of back catalogues purchased. Regardless of music tastes the likes of Fleetwood Mac, Neil Young and Red Hot Chilli Peppers are crowd pleasers - especially with nostalgic shows like Stranger Things being such big hits recently. The exposure to platforms like TikTok also feels like it intends to future-proof itself.

[CraigSB]

Hmmmm. I like it more now that it's available at a discount. Wouldn't buy at a yield less than well North of 5% though. Too many other options out there to attract me at the present yield.

Thanks BullDog. I agree there are lots of options out there - it just felt like when searching for passive income, an alternative investment such as this could be a good diversifier within a portfolio.

[DrFfybes]

I bought some early last year, one of my '10%ers' - things that have a 10% chance of taking off or going bust (this year's was Rivian the other week after seeing them on Top Gear).

It is 0.5% of my portfolio, and was just unlike anything else to invest in I liked the idea, and the dividends. I'm about 10% down on my purchase price, but it is cash generative and making acquisitions. Only time will tell if they have chosen the best catalogue songs, but it looks a strong and diverse lineup. I might even top up.

Paul

[CraigSB]

I bought some early last year, one of my '10%ers' - things that have a 10% chance of taking off or going bust (this year's was Rivian the other week after seeing them on Top Gear).

It is 0.5% of my portfolio, and was just unlike anything else to invest in I liked the idea, and the dividends. I'm about 10% down on my purchase price, but it is cash generative and making acquisitions. Only time will tell if they have chosen the best catalogue songs, but it looks a strong and diverse lineup. I might even top up.

Paul

Thanks Paul. Yes, the recent dip in price makes it even more of an attractive proposition at the moment for me also.

[simoan]

I like this and have held for some time now.
Its uncorrelated to most other sectors.
The business is cash generative with long time horizons.
I personally like the catalogs that they have bought. I think they play to a market which will always be in demand.
New streaming platforms are likely to emerge in time.
The recent CRB court case victory for song writer writes potentially is a big uplift to revenue.
Theres a potential tie up with Blackstone being worked on.

The downsides are whether you trust Mr. Mercurio, but he has been fleet of foot so far.

First of all, the writer of "Line of Duty" has no involvement with the company but the investment adviser is Merck Mercuriadis.

Like you, I hold a few of these as an alternative to equity investments. In theory, it should be uncorrelated to equity markets but that doesn't seem to be the case so far this year (down -13.6% YTD) which is a lot more than the FTSE AS. Given increasing interest rates there is good reason for this i.e. the NAV is calculated using a Discounted Cash Flow (DCF) model and the discount rate used to calculate the NAV should increase in line with USD interest rates which means the present NAV should be decreased. For the past couple of years the discount rate used has been 8.5%.

Having said that, the NAV is calculated in USD and reported in sterling which has weakened by 11% against the dollar which should have a counter effect. So, who knows what the current premium or discount to NAV is? Not me! Anyway, we should find out soon as FY22 results should be released any day now, possibly next week.

All the best, Si

[CraigSB]

I like this and have held for some time now.
Its uncorrelated to most other sectors.
The business is cash generative with long time horizons.
I personally like the catalogs that they have bought. I think they play to a market which will always be in demand.
New streaming platforms are likely to emerge in time.
The recent CRB court case victory for song writer writes potentially is a big uplift to revenue.
Theres a potential tie up with Blackstone being worked on.

The downsides are whether you trust Mr. Mercurio, but he has been fleet of foot so far.

First of all, the writer of "Line of Duty" has no involvement with the company but the investment adviser is Merck Mercuriadis.

Like you, I hold a few of these as an alternative to equity investments. In theory, it should be uncorrelated to equity markets but that doesn't seem to be the case so far this year (down -13.6% YTD) which is a lot more than the FTSE AS. Given increasing interest rates there is good reason for this i.e. the NAV is calculated using a Discounted Cash Flow (DCF) model and the discount rate used to calculate the NAV should increase in line with USD interest rates which means the present NAV should be decreased. For the past couple of years the discount rate used has been 8.5%.

Having said that, the NAV is calculated in USD and reported in sterling which has weakened by 11% against the dollar which should have a counter effect. So, who knows what the current premium or discount to NAV is? Not me! Anyway, we should find out soon as FY22 results should be released any day now, possibly next week.

All the best, Si

Thanks for highlighting the NAV discrepancy Si. Interesting.

[MDW1954]

I like this and have held for some time now.
Its uncorrelated to most other sectors.
The business is cash generative with long time horizons.
I personally like the catalogs that they have bought. I think they play to a market which will always be in demand.
New streaming platforms are likely to emerge in time.
The recent CRB court case victory for song writer writes potentially is a big uplift to revenue.
Theres a potential tie up with Blackstone being worked on.

The downsides are whether you trust Mr. Mercurio, but he has been fleet of foot so far.

First of all, the writer of "Line of Duty" has no involvement with the company but the investment adviser is Merck Mercuriadis.

Like you, I hold a few of these as an alternative to equity investments. In theory, it should be uncorrelated to equity markets but that doesn't seem to be the case so far this year (down -13.6% YTD) which is a lot more than the FTSE AS. Given increasing interest rates there is good reason for this i.e. the NAV is calculated using a Discounted Cash Flow (DCF) model and the discount rate used to calculate the NAV should increase in line with USD interest rates which means the present NAV should be decreased. For the past couple of years the discount rate used has been 8.5%.

Having said that, the NAV is calculated in USD and reported in sterling which has weakened by 11% against the dollar which should have a counter effect. So, who knows what the current premium or discount to NAV is? Not me! Anyway, we should find out soon as FY22 results should be released any day now, possibly next week.

All the best, Si

Thanks for highlighting the NAV discrepancy Si. Interesting.

First, welcome to Lemon Fool.

Second, Simoan wasn't actually saying that there was a NAV discrepancy. What he said was that:

1) SONG isn't as uncorrelated to equity markets as might be expected, although I have to say that this doesn't surprise me, and...
2) Two separate exogenous factors are having an impact on SONG's NAV (rising UK interest rates and depreciating sterling), making guessing the current discount/ premium very difficult.

So no discrepency, just difficulty.

If you look at SONG's latest annual report (which I haven't), there will almost certainly be a section on how NAV is calculated. I'd start there.

Something else to plug into your thoughts is that with the current cost of living crisis, streaming subscriptions are reportedly heading south, big time. Cancellations are rife. I'd imagine that this would have an impact, too, somewhere along the line.

MDW1954

[airbus330]

I like this and have held for some time now.
Its uncorrelated to most other sectors.
The business is cash generative with long time horizons.
I personally like the catalogs that they have bought. I think they play to a market which will always be in demand.
New streaming platforms are likely to emerge in time.
The recent CRB court case victory for song writer writes potentially is a big uplift to revenue.
Theres a potential tie up with Blackstone being worked on.

The downsides are whether you trust Mr. Mercurio, but he has been fleet of foot so far.

First of all, the writer of "Line of Duty" has no involvement with the company but the investment adviser is Merck Mercuriadis.

Like you, I hold a few of these as an alternative to equity investments. In theory, it should be uncorrelated to equity markets but that doesn't seem to be the case so far this year (down -13.6% YTD) which is a lot more than the FTSE AS. Given increasing interest rates there is good reason for this i.e. the NAV is calculated using a Discounted Cash Flow (DCF) model and the discount rate used to calculate the NAV should increase in line with USD interest rates which means the present NAV should be decreased. For the past couple of years the discount rate used has been 8.5%.

Having said that, the NAV is calculated in USD and reported in sterling which has weakened by 11% against the dollar which should have a counter effect. So, who knows what the current premium or discount to NAV is? Not me! Anyway, we should find out soon as FY22 results should be released any day now, possibly next week.

All the best, Si

Thanks for highlighting the NAV discrepancy Si. Interesting.

First, welcome to Lemon Fool.

Second, Simoan wasn't actually saying that there was a NAV discrepancy. What he said was that:

1) SONG isn't as uncorrelated to equity markets as might be expected, although I have to say that this doesn't surprise me, and...
2) Two separate exogenous factors are having an impact on SONG's NAV (rising UK interest rates and depreciating sterling), making guessing the current discount/ premium very difficult.

So no discrepency, just difficulty.

If you look at SONG's latest annual report (which I haven't), there will almost certainly be a section on how NAV is calculated. I'd start there.

Something else to plug into your thoughts is that with the current cost of living crisis, streaming subscriptions are reportedly heading south, big time. Cancellations are rife. I'd imagine that this would have an impact, too, somewhere along the line.

MDW1954

Thanks to Simoan for the spelling correction and the thoughts on NAV calculation. SONG makes up 3% of my Income portfolio. Whilst it has some headwinds at the moment IMV the potential for upside is still good especially after the court ruling. SONG is still a very young company in a very old industry which is still coming to terms with having its business model upended. Streaming in conjunction with live appearances, is IMV the new normal for the music industry and those who own the best catalogs should do well out of it. IMV while there has been a drop off in subscriptions for both audio and video services, the big music streamers have a powerful hook in that they offer a huge percentage of all recorded music that it available. The video streamers can't do that and offer only a small diversified portion. IMV this makes it more likely that a customer will stump up the cash for Spotify knowing its a one off, whereas if they are taking Disney+, Netflix and Amazon Video, it is a lot easier to economise. Update soon, so we shall see.

[CraigSB]

Thanks for the differing arguments guys - appreciate the time and is a huge food for thought.Going back to subscription service model, I suppose I’m coming at it from a brand (and industry perspective). The current terrestrial television concept is a dinosaur industry IMO. People nowadays are of an immediate culture, they want to watch shows and video content instantly - the current set-up doesn’t cater for this. Within my circle, everyone has Netflix, Disney+ or Amazon Prime (which I am an investor in both of the former). We are in a time where owning Netflix (I’m not an investor by the way because I feel the content is poor but the user interface is exceptional) is the norm, it’s like having a pair of trainers in the 90s that aren’t Adidas or Nike - it’s a brand to have. I know people who currently don’t pay a TV licence because Netflix is cheaper and delivers the content they want on demand. Whilst the current cost of living crisis is an obvious headwind - isn’t this the case for every other sector (to varying degrees)? I suppose this is a slightly different discussion but couldn’t you argue the current situation is a bump in the road for a long-term investor. Hipgnosis is tapping into an area where in the long-term on demand TV for millennials and their descendants will be heading?

[simoan]

Second, Simoan wasn't actually saying that there was a NAV discrepancy. What he said was that:

1) SONG isn't as uncorrelated to equity markets as might be expected, although I have to say that this doesn't surprise me, and...
2) Two separate exogenous factors are having an impact on SONG's NAV (rising UK interest rates and depreciating sterling), making guessing the current discount/ premium very difficult.

So no discrepency, just difficulty.

If you look at SONG's latest annual report (which I haven't), there will almost certainly be a section on how NAV is calculated. I'd start there.

Yes, there are a few moving parts that make the NAV in sterling difficult to know at any point in time. In fact it's pretty much impossible! particularly given that it uses a DCF model and is based in USD, so is then subject to currency fluctuations to convert into GBP. So I always take information quoting the premium/discount to NAV in GBP with a sack of salt. As with any of these types of collective investments e.g. property, infrastructure etc. that use a DCF method to calculate NAV you must read the annual report, not only to understand what assumptions it is based on, but also to read the "Risks and Uncertainties" section so you know what you're dealing with. It's also important to know who is making the assumptions used in calculating the NAV - I sold out of TRIG when I discovered that the investment adviser was also responsible for calculating the NAV! Luckily, with SONG there is an Independent Valuer:

Valuations of Catalogues
The Board engaged the Portfolio Independent Valuer, Massarsky Consulting, Inc., to value the Catalogues as at 30 September 2020 and as at 31 March 2021. Each income type from each Catalogue was analysed and forecast to derive the fair value of the Catalogues by adopting a DCF valuation methodology using a discount rate of 8.5%, unchanged since the interim results of 30 September 2020 (31 March 2020: 9.0%). Income was analysed and forecast at the level of each individual Catalogue (Kobalt was analysed at a Fund level) and by income type. Future revenues were also estimated, often at the level of individual Songs, and incorporated into their valuation. Massarsky Consulting, Inc., has also taken into consideration macro factors including the growth of streaming revenue, the global growth of the recorded music industry and the short- and medium-term impact of COVID-19 in their analysis. The Board received a report from Massarsky Consulting, Inc., and held two meetings with them to discuss the fundamental changes emerging over the year influencing the value of catalogues, the discount rate methodology and further factors impacting the movements in valuations before approving the valuation.

The report also gives an idea of the sensitivity of the NAV to a change in the discount rate:

-0.5% discount rate will grow the FV of the Portfolio by 9.2%, increasing the Operative NAV by $204 million which represents an increase of $0.19 Operative NAV per share.
+0.5% discount rate will reduce the FV of the Portfolio by 7.8%, reducing the Operative NAV by $172.4 million which represents a decrease of -$0.16 Operative NAV per share.

As you can see, if the discount rate increases in line with USD interest rates, the NAV can very rapidly shrink. This is the major risk currently IMHO. We will see what they say on the NAV and what discount they assume for FY22 very soon.

Something else to plug into your thoughts is that with the current cost of living crisis, streaming subscriptions are reportedly heading south, big time. Cancellations are rife. I'd imagine that this would have an impact, too, somewhere along the line.

MDW1954

If you look at the last reported numbers for Spotify (April results) this isn't actually true as they had a record number of users at 422m and only 182m were Premium subscribers. Unfortunately, Apple do not report separate numbers for Apple Music which is within their Services business unit. It's important to remember that Hipgnosis get paid by Spotify even if the song is played on the free version! Streaming is not going away and even if people unsubscribe, they are not going to stop listening to music. Anyway, you have to counter this with the increase in streaming royalties to rights holders which is back dated to 2018, plus the re-opening of live music. In addition, Hipgnosis have a team that actively manage the catalogues in a way the previous owners did not by placing songs in films, tv series, ads, video games etc. This is principally why I invested; there is also the possibility of growth, it's not a pure income investment.

All the best, Si

[MrFoolish]

I've thought about this one, but was concerned it would be investing with the heart rather than the head.

I also think copying and privately storing music is just too easy these days.

[Laughton]

I also think copying and privately storing music is just too easy these days.

Remember cassettes?

[airbus330]

I also think copying and privately storing music is just too easy these days.

Remember cassettes?

Happily I do remember sitting by the radio trying to 'rip' a track from Radio1 onto a cassette. And all the subsequent techs which came along. Even 10 yrs ago my kids were happily stripping the soundtracks from Youtube videos to avoid buying expensive CD's. That is all largely over. With a family membership of a streaming service, for the equivalent of £2/week each you have access to virtually any music ever recorded. By their mid 20's kids gave up on ripping tracks years ago and build enormous playlists of music for very little outlay instead. The streamers also act like radio stations by creating weekly suggested playlists of new material. All without the irritating distraction of a hyperactive DJ. I can't see this model changing anytime soon, it is too simple and cheap for the consumer.

[airbus330]

SONG Annuals https://investegate.co.uk/hipgnosis-son ... 00074154S/

NAV up
SP up 4% this morning.
New agreement with 2 CMO's
Div maintained

[simoan]

So, the FY22 numbers were published this morning: https://www.investegate.co.uk/hipgnosis ... 00074154S/

It all reads very well with the key bit with regard to NAV:

Operative NAV increased by 9.9% to $1.8491 per Share (31 March 2021: $1.6829)
o As at 31 March 2022, the Operative NAV presented in Sterling would be 140.79p per Share (GBP:USD 1.3134)
o As at 13 July 2022, the Operative NAV presented in Sterling would be 154.76p per Share (GBP:USD 1.1949)

The discount rate was maintained at 8.5%:
The Portfolio Independent Valuer believes that a discount rate of 8.5% is the correct rate within a rising interest rate environment, and also reflects music's stability as an asset class, given its decreased risk profile compared to other industry sectors, such as predictability of earnings.

Other key highlights for me:
On Streaming...
Whilst Streaming growth is not a new story, 2021/2022 saw some Streaming providers increase certain subscription prices in test markets. These price increases led to Spotify's first increase in Average Revenue Per User (ARPU) for five years, supporting our view that the DSPs have pricing power.

This strong Streaming market is reflected in these annual results, with 19% like-for-like Streaming PFAR growth in the second half of 2021 in our Portfolio compared with the first half of 2021, as shown in the PFAR analysis within the Financial Review.

Streaming remains an extremely attractive consumer proposition: it has the lowest pricing, provides the highest quality and depth of content and the highest level of interaction of all entertainment subscription offerings. With music revenues historically proven to be uncorrelated to consumer spending, and relatively low penetration rates in both developed and emerging markets, we continue to believe that this affordability and convenience of Streaming will continue to grow global subscriptions and revenues strongly. This view is shared by leading industry experts, who have in the last month upgraded global Streaming revenue growth forecasts, despite the current macro-economic conditions.

On Emerging platforms...
Emerging platforms, such as TikTok, Triller and Twitch, also continue to be an increasingly important part of the music industry. TikTok, which few of us had heard of when we launched Hipgnosis in 2018, now has over 1 billion active users and is delivering a new revenue stream to copyright owners. Record companies and publishers, who have a shorter time lag on receiving income than Hipgnosis, received material revenues from these platforms in 2021. Due to this time lag, Hipgnosis received almost no revenue from these platforms in 2021/22, despite them contributing 5% of global music industry revenues in 2021. The continued emergence and increasing popularity of these new platforms is expected to drive strong growth, with revenues predicted to hit 12% of industry revenues by 2030. We expect material TikTok revenues to be paid through to us in this current financial year.

Given the dilutive effect of the placings to raise funds for catalogue purchases, it's not surprising that there is no increase in the FY23 dividend. Of course, that kind of thing doesn't bother me Everyone loves a dividend, but the key factor here for me is the uncorrelated assets and good potential for increases to the NAV over time. Current yield at this mornings increased share price is 4.66%.

Overall, these results have eased my concerns on the NAV, particularly as the discount is now so wide. If I was an income investor I'd be all over this one, as it offers a decent dividend with the prospect of some useful capital growth over time, both through the increasing institutional interest in the assets held and from active management of those assets e.g. music placement in ads, films etc. What would upset me is if the company were to get taken out even if the takeout price fully reflected the current NAV as this is a slow burner I'm happy to hold for a long while. I don't see the durability of music ever fading.

All the best, Si

[airbus330]

Interesting take on SONG https://www.musicbusinessworldwide.com/ ... e-by-140m/

[PeanutsMolloy]

With equity-raises required to complete purchases of SONG's interests in the headlining catalogues acquired by the Blackstone JV but the SP languishing at c25% discount to the latest NAV, and with the sector still hot among the institutional and PE investors, can see MM calling time on SONG and, armed with Blackstone's $$, offering to take it private.
Worth an interest either way IMHO, as an uncorrelated income provider or a bid candidate.