Music royalty funds: Income, growth and predictability all in one suggests Liberum
Fill your boots with music royalty funds if you are looking for income mixed with a decent chunk of revenue growth, broker Liberum suggested today.
In a detailed assessment of the fast-growing sector, the broker said both Hipgnosis Songs Fund and Round Hill Music Royalty give attractive exposure to long-term uncorrelated cashflows.
The sector demonstrated its resilience during the pandemic, Liberum adds, as streaming growth more than offset the lack of performance revenue.
Income growth should benefit further from favourable market drivers (streaming, new platforms) with the potential for asset management upside from synchronisation fees.
Streaming is now the largest single component of recorded music revenues (62% in 2020) and market projections are for 15-20% growth over the medium term, said the broker.
Emerging markets offer considerable scope for growth for streaming providers, it added, and the continual emergence of new digital platforms provides additional licensing opportunities.
In addition to predictable and growing income streams, NAV growth of above 10% a year is also achievable, given the likelihood of discount rate compression on existing portfolios, added the broker.
The main headwind for the sector is the steady increase in acquisition multiples as competition intensifies and money flows into the sector.
A number of recent transactions have reportedly seen acquisition multiples in excess of 20 times said the broker and while this means valuation uplifts for existing royalty portfolios it will likely compress returns on new investments.
Hipgnosis has already deployed $1.75bn since IPO in July 2018 but the fund’s manager has stated that it is seeking to double the portfolio over the next two years, notes Liberum.
“This will require significant capital raising, which we believe will restrict any improvement in the share rating over the medium term.
“Steady cash generation enabled a 5% dividend increase in 2020 and we expect continued growth in distributions as streaming revenue drives ongoing earnings improvements.”
The target price on Hipgnosis is 135p compared to 124.5p in the market, while Round Hill has a target of US$1.15 compared to US$1.04 today.
Round Hill is its favourite for a mature portfolio while Liberum also likes the diversification into master rights and its fully integrated management offering.
“Hipgnosis offers significant scale and greater diversification, but we believe the company’s portfolio growth ambitions may weigh on the share rating”.