Hipgnosis Songs Fund (LSE:SONG) is a £1bn FTSE 250 investment company that acquires the publishing rights to songs. That means it gets paid every time a track it owns is streamed or used on radio, TV or film.
As an investor, the economics of that sound appealing to me. But is there a less attractive B-side to this story? Let’s take a look.
Impressive record collection
The company’s portfolio totals more than 65,000 songs, including Mariah Carey’s 1994 song All I Want for Christmas Is You, which still regularly enters the charts come Christmas. Other hits it owns include Umbrella by Rihanna, Single Ladies by Beyoncé, and Jon Bon Jovi’s Livin’ on a Prayer.
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Its revenue is derived from millions of microtransactions, whether that’s streaming, physical purchase, downloading, performance, licensing and merchandising. I like that because people are always going to consume music in some form, regardless of how the economy is performing.
Indeed, Merck Mercuriadis, the co-founder and CEO of Hipgnosis, has likened classic hit songs to gold or oil. He said: “When I say it is as good or better than gold or oil, it is because it is uncorrelated to what is happening in the marketplace…Music is always being consumed.”
There does seem to be some truth in this. Last month, for example, Spotify reported having 205m paying customers from a total of 489m monthly active users. That was year-on-year growth of 14% for paid subscribers, despite high inflation eating into consumers’ budgets.
Problems
The problem with the fund, unlike gold or oil, is it’s difficult to assess the true intrinsic value of the catalogue of hits it has spent over $2bn compiling. This is probably part of the reason the shares have been out of favour since listing back in 2018.
Excluding dividends, the stock is down 27% over the last year and 18% since its market debut.
At 84p today, the shares are trading at a 49% discount to the net asset value (NAV) of the fund (or at least a discount to the firm’s own estimate of its catalogue valuation).
Accounting standards write off the cost of the fund’s catalogue over 20 years. However, Hipgnosis doesn’t write it off until 70 years after a composer’s death.
In its latest full-year results (to March 2022), that meant an amortisation charge of $106m (approximately £88m). That has now led to cumulative amortisation of $200m.
Value gap
So basically, there’s a big discrepancy here between what the market and the company thinks is the fair value of the fund’s catalogue. This prompted Hipgnosis to recently launch a debt-funded share buyback programme.
I don’t like that this buyback is financed by more borrowing. The company now has net debt of around $559m. It seems to be paying 6% interest on the debt while the dividend yield is also currently 6%.
Meanwhile, the underlying revenues generated by its current song portfolio have been declining. But the falling share price has left the fund essentially unable to raise new equity with which to buy more songs. To me, the company seems to be in a bit of a bind.
Overall, I think there are too many uncertainties here for me to buy any of its shares today.
