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Hypgnosis Songs Background (LSE:SONG) is one trillion British pounds FTSE 250 investment company that acquires the publishing rights of the songs. That means you get paid every time a track you own is broadcast or used on radio, TV, or in movies.
As an investor, I find the economics of that attractive. But is there a less attractive B-side to this story? We’ll see.
Impressive record collection
The company’s portfolio numbers more than 65,000 songs, including Mariah Carey’s 1994 song. All I want for Christmas is you, which still regularly enters the charts at Christmas. Other hits she owns include Umbrella by Rihanna, Single Women Beyonce and Jon Bon Jovi living in a sentence.
Its revenue is derived from millions of microtransactions, be it streaming, physical purchase, download, performance, licensing, and merchandising. I like that because people are always going to consume music in some form, regardless of how the economy performs.
In fact, Merck Mercuriadis, co-founder and CEO of Hipgnosis, has compared classic hit songs to gold or oil. He said: “When I say that it is as good or better than gold or oil, it is because it has no correlation with what happens in the market… Music is always consumed..”
It seems that there is some truth in this. Last month, for example, Spotify reported having 205 million paying customers out of a total of 489 million monthly active users. That was 14% year-over-year growth for paying subscribers, despite high inflation hurting consumer budgets.
Issues
The problem with the fund, unlike gold or oil, is that it’s hard to assess the true intrinsic value of the catalog of hits it has spent more than $2 billion to compile. This is probably one of the reasons why the stock has fallen out of favor since it was listed in 2018.
Excluding dividends, the stock is down 27% over the past year and 18% since its market debut.
At 84 pence today, the shares are trading at a 49% discount to the fund’s NAV (or at least a discount to the company’s own estimate of its catalog valuation).
Accounting standards cancel the cost of the fund’s catalog for 20 years. However, Hipgnosis does not rule it out until 70 years after a composer’s death.
In its latest full-year results (through March 2022), that meant a write-down charge of $106 million (approximately £88 million). That has now led to a cumulative write-down of $200 million.
value gap
Basically, there is a big discrepancy here between what the market and the company think is the fair value of the fund’s catalogue. This led Hipgnosis to recently launch a debt-financed share buyback program.
I don’t like that this buyback is financed with more debt. The company now has net debt of about $559 million. You appear to be paying 6% interest on the debt, while the dividend yield is also currently 6%.
Meanwhile, the underlying revenue generated by its current portfolio of songs has been declining. But the falling share price has left the fund essentially unable to raise new shares with which to buy more songs. To me, the company seems to be in a bind.
Overall, I think there are too many uncertainties here to buy any of its stocks today.
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