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Questor: Hipgnosis hits the right note despite getting caught in the Neil Young-Spotify crossfire

Neil Young
Neil Young

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Investors in Hipgnosis Songs Fund, a trust that owns the rights to popular songs, will have noticed that share price performance has been a little off-key in recent times.

Its shares have fallen 10pc since Jan 24, the date that Canadian singer and songwriter Neil Young asked Spotify, the streaming service, to remove his recordings.

The star, whose hits include Heart of Gold, issued the ultimatum because he felt Spotify had given podcaster Joe Rogan a platform through which Covid misinformation was spread.

Hipgnosis owns 50pc of the copyright and income interests of Mr Young’s entire catalogue, which means it is entitled to collect royalties when the star’s songs are sold, streamed, performed or broadcasted.

However, the trust does not own the star’s “master rights”, which relate to how his recordings are used. These belong to Mr Young’s record label, Warner Records, which has supported the artist in taking a stand against Spotify and Mr Rogan. Hipgnosis has also been supportive, even though its revenues could be impacted by the public spat.

Investors have been less understanding, however. The trust has moved to a 13pc discount, which is a rare event in its three-and-a-half-year history.

Up until the start of the year, Hipgnosis had hit the right notes with investors, who were drawn to its attractive yield, which stands at 4.7pc today.

Its income stream has been resilient, even faced with Covid uncertainty, which highlights the attractions of songwriters’ rights: they provide a long-term utility-like income because a writer’s copyright on a song lasts for 70 years after their death.

So how significant is the Young-Spotify dispute for Hipgnosis?

In spite of the headlines, Mike Pinggera of Sanlam Investments is not surprised to hear an artist publicly request that their work be treated in a certain way.

Far from having negative repercussions, he suggests Hipgnosis’ support for Mr Young should help the trust to seal future deals. “If Hipgnosis is out there telling potential sellers they will treat their body of work with care, it is not such a bad shop window.”

Of course, the big question is whether the valuation of Hipgnosis’ investment in Mr Young’s catalogue will be impaired as a result of the dispute, given that Spotify had accounted for 60pc of his streaming income.

So far, things are looking promising. Instead of putting listeners off, the announcement has sparked interest in the star’s music: sales and streams of his music have skyrocketed.

Fergus Shaw, who owns the trust in his Cerno Select fund, does not expect to see a writedown on the investment. “In the short-term, there has been a boost in the revenue and in the long-term I would think it will settle down somewhere close to where it was before,” he said.

Analysts estimate that Mr Young’s catalogue accounts for less than 0.25pc of Hipgnosis’ revenues and around 2.5pc of the net asset value (NAV). Given it is relatively small, Questor does not expect the dispute to have a material impact on NAV returns.

Hipgnosis’ prospects look positive.

Over the six months to the end of September 2021, its NAV grew by 4.6pc, while net revenue increased by 31pc to $74.1m (£54.5m), buoyed by higher-than-expected streaming rates and the team’s efforts to promote songs via licences for use in films, TV shows and adverts.

Platforms like TikTok and Peloton also provide a growing source of revenue, and we see the return of income from live events.

However, there is one aspect that Questor plans to monitor: the recent joint venture between Blackstone and Hipgnosis Song Management (HSM), the manager of the trust. This will see HSM invest up to $1bn on behalf of the private equity giant via a separate fund, while Blackstone has taken an undisclosed stake in HSM.

For the trust, this should provide access to a wider range of catalogues and the opportunity to take a 20pc stake in any investments presented to Blackstone.

Questor hopes the joint venture will not prove a distraction for HSM and, following a hiatus from fundraising, there will be a return to the high calibre of catalogue deals investors are used to.

We suggest holding on to Hipgnosis to benefit from its well-covered and growing dividend.

Questor says: hold

Ticker: SONG

Share price at close: 107.6p

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