Hipgnosis Songs (SONG ) vied to change the mood music around its $2.7bn royalties portfolio today with annual results showing stronger-than-expected growth from streaming, while forecasting a big contribution from video-sharing platform TikTok and improved performance revenues from bars, clubs and concert halls reopening after the pandemic.

Shares in the investment company reversed some of this year’s slide, rising 2.6% to 111p as founder and chief executive Merck Mercuriadis lauded the ‘utility-like’ income songs produced and spoke in glowing terms about the ‘very attractive market conditions’ it faced.

But macroeconomic forces are weighing on the fund, with higher interest rates pushing up the cost of its $600m debt and the board looking at how to reduce borrowing from its level of 25.4% of net assets. 

With the shares down 12% this year trading at up to a 30% discount below analysts’ latest asset value estimates, the company is unable to raise money from issuing shares and may have to resort to selling some song catalogues, analysts at broker Jefferies suggested. 

Reflecting the financial pressure, the 5%-yielder left its dividend target for this year unchanged at 5.25p per share. The quarterly payouts were covered by cashflow in the financial year just gone.

Overall returns were good though, with operative net asset value (NAV), the company’s preferred measurement of its performance, growing 9.9% in the year to 31 March to $1.8491 (140.79p), backed by 19.4% growth in royalty payments from streaming services such as Spotify.

Gross revenue jumped 24.7% to $200.4m from $160.7m reflecting the purchase of eight song catalogues from the likes of Red Hot Chilli Peppers and Christine McVie of Fleetwood Mac. The four-year-old fund now owns 146 catalogues of 65,42 songs.

Pro forma annual revenues (PFAR) fell 5.3% from the impact of Covid restrictions to $114.9m, but in the second half of the year they recovered 11.6%. This was down to the re-opening of venues combined with the acceleration of streaming income, with the company claiming its ‘iconic’ songs had outpaced a rapidly growing market.

Into a postive groove

Mercuriadis was upbeat on the investment company’s outlook, anticipating a ‘material’ contribution in the current financial year from TikTok’s 1 billion users.

The former Sanctuary record label boss believed the recent endorsement by the US Copyright Board of an increase in mechanical and performance royalties would be be followed by further rises as songwriters were rightfully elevated to the top of the ‘economic equation’.

He said Spotify’s reporting its first increase in average revenue per user in five years showed the streaming platforms had pricing power and offered ‘an extremely attractive’ service consumers wanted to retain even as their incomes were squeezed by inflation.

This underpinned SONG’s ability to deliver income and growth that was uncorrelated to the economy and stock market. ‘This period’s operative NAV growth is an important step on that journey, which will be fully delivered as paid-for subscriptions continue to grow and the utility-like income becomes recognised and valued by investors globally.’

Analysts mostly agreed. Numis Securities’ Andrew Rees said the popularity of streaming ‘should help insulate the company’s revenues from the wider macroeconomic environment’, while Liberum’s Conor Finn said ‘the robust outlook for streaming and the sector’s uncorrelated revenues remain attractive’.

Jefferies’ Matthew Hose was more critical: ‘The results highlight a strong fair value movement in H2 but, as ever, with limited disclosure. Elsewhere, higher near-term financing costs under the revolving credit facility may bring to a head the fund’s current difficulties in refinancing this debt with equity.’