Jefferies upgrades Hipgnosis to 'buy'

Jefferies has upgraded Hipgnosis Songs Fund to ‘buy’, after the risk-reward dynamic for the music investment firm became ‘more favourable’.

In a note published on Tuesday, the broker - which previously had a ‘hold’ rating on the stock - said it saw potential for Hipgnosis to announce selective disposals, generating cash to repay debt and/or make share buybacks.

It continued: "To date, Hipgnosis has yet to make a single disposal. Relationships with the selling songwriters are clearly key, with the manager entrusted with the assets, rather than being a pure financial buyer.

"That said, the fund could still dispose of an institutional acquisition, like Kobalt Fund 1, consisting of 33,000 songs, acquired for $23m in 2020.

"Alternatively, [it] could potentially sell a minority strip of its entire portfolio, while maintaining control of its catalogues."

Jefferies concluded: "We see Hipgnosis’s risk-reward dynamic as having become more favourable ahead of forthcoming results and subsequent continuation vote.

"Hipgnosis could attempt to appease shareholders by announcing plans to make portfolio disposals, providing a catalyst to help narrow its current deep 46% discount to net asset value. As such, we upgrade to ‘buy’."

The firm is due to report final results on 31 July, following by an annual general meeting in the autumn, when its first continuation vote will be proposed.