Investment trust insider on discount rates – James Carthew: Inflation fears weigh on some income trusts
Recent market turmoil has affected the ratings of a number of funds. Within my portfolio, one of the more peculiar de-ratings is that of Hipgnosis Songs Fund (SONG), which now looks to trade on an 8% discount to net asset value (NAV). The share price has fallen nearly 10% since the start of the year – well in advance of the recent row between Neil Young and Spotify which garnered a number of headlines.
I gave you the buy case for SONG last July, but to reiterate – more streaming, more streaming platforms, predictable revenue increases as revenue already earned takes time to flow through to the fund, post-Covid recovery in live performances and the potential for a significant shift in the UK in the allocation of income in favour of songwriters at the expense of the publishing companies – bake in revenue growth for the fund and hold out the prospect of more to come.
SONG’s broker Singer Capital Markets has also drawn attention to a recent deal that suggests the NAV is conservative. In October 2021 US private equity group KKR (KKR.N) and a family investment office bought the Kobalt II portfolio of over 62,000 copyrights from Kobalt Music for $1.1bn. An independent valuer – FTI Consulting, which is not a firm that SONG uses – has valued the KKR portfolio on 23.9 times historic revenues. On a discounted cash flow basis, this values that portfolio on a 6.25% discount rate.
Contrast that with SONG, which bought the Kobalt I portfolio in September 2020, which is valued on a multiple of 19 times revenue and a discount rate of 8.5%. Just lowering the discount rate to 8% would add $283m, or 9.3%, to the NAV, while valuing SONG on a 6.25% discount rate would imply more than 40% upside.
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