Hipgnosis Songs Fund has published results for the year ended 31 March 2023. The independent valuer has left the discount rate used to calculate the fund’s NAV unchanged at 8.5% [some commentators will question the logic behind this given how far interest rates have risen. Given the complexities of valuing the fund and working out its profitability, it might be worth focusing first on its cash flow statement.]
Net cash generated from operating activities rose from £84.9m to £102.1m. Dividends absorbed £56.3m of this and interest payments a further £23.4m. A £7m bank loan was repaid. Overall, the net movement in cash/cash equivalents was +£7m [which is encouraging, but still feels a bit anaemic to me].
Dividends of 5.25p were covered 1.08x by cash flow after servicing the debt.
The IFRS NAV per share fell from $1.3065 to $1.1863. The 9.2% decrease reflects the accounting depreciation of the valuation of the company’s music catalogues. The board and manager feel strongly that this does not reflect the true value of the company and so they focus on an ‘operational NAV’ which includes an estimate of the current value of these catalogues. On this basis, the NAV rose from $1.8491 to $1.9153. The main driver of this was an uplift in the valuer’s estimation of the fair value of the portfolio, which in turn was driven by royalty statements received exceeding expectations, especially related to performance income and streaming income from older vintage catalogues.
As above, the discount rate was left unchanged at 8.5%. A 0.5% increase in the discount rate would take 7.9% off the fair value of the portfolio, while a 0.5% decrease would add 9.4% to fair value.
The company has a $700m revolving credit facility and at 31 March 2023 had drawn down $600m of that. The borrowing facility comes with some covenants – debt:catalogue value must not exceed 40%, currently this is 31.5% [this is based on the lender’s determination of the catalogue value – which looks like it is on the IFRS valuation to us. What that means, in turn, is that an increase in the discount rate used to calculate the operational NAV would not have an impact on the covenant calculation].
Addressing the discount
Merck Mercuriadis (CEO of Hipgnosis Song Management) says “Despite our strong numbers, I am aligned with shareholders in believing that the fundamental value and opportunity of the company fails to be reflected in the current share price. As a result, we have been working with the board, following consultation with many of our largest shareholders, on a number of options to enhance shareholder value. We look forward to updating the market prior to the AGM and the continuation vote.”
[This is the main event in this results statement. Investors and analysts have been calling for Hipgnosis to sell some of its catalogues and use the money to fund buybacks to narrow the discount. A sale would also help validate the operational NAV calculation and the discount rate. We have been wondering whether the fund is vulnerable to a bid – this could help stave that off. Whatever happens, tinkering at the margin won’t cut it.]
Operational results
Pro forma annual revenue (based on actual royalty statements) increased 12.1% year-on-year to $130.2m. Streaming income grew by 14.8% year-on-year and made up just over 40% of income. Synch revenue grew by 24.7%, and performance income, which had been suppressed since the COVID-19 lockdowns is starting to recover as evidenced by a 41% increase in the second half of the company’s financial year. The statement notes that there is a lag to this income and suggests that there is more to come.
The 4.0% net increase in the fair value of the portfolio to $2.8bn and the increase in the operative NAV were driven by revenue in excess of the independent valuer’s forecasts.
The increased cut in revenue due to songwriters under CRB III was a positive during the year.
SONG : Hipgnosis promises action on discount ahead of continuation vote