Why I love Universal Music Group and why you should too
I'm having a brat winter
NZ
ARV — Last on this, but you have to shake your head at the folks who are questioning the value of the $1.70 bid — yes, it’s below NTA (but all retirement village operators are trading below NTA). We’re in a high interest rate environment and we are at the end of a 25 year property bull market — a stock that was trading sub $1.00 receiving an offer for $1.70 is a good offer any way you put it — the board would be out of their minds not to recommend it. Cash in the hand is better than theoretical “it’ll be better next year” money…
Small/Mid-Caps — lots of positive response to y’day’s email … reality is you either need players stepping up and injecting capital into the market, otherwise you’re looking at a rapidly shrinking exchange (the board and management of the NZX don’t do themselves any favours in this respect — they have some extremely boring social media content, a boring podcast, and a motley collection of very good businesses (EBO, MFT, IFT) and things I wouldn’t touch with a ten foot barge pole. Capital markets need a jolt of fresh air…
MFT — Could be worth buying Mainfreight on weakness — fell down to earth y’day after the AGM. As always the address from Don was to the point and good — I didn’t make it to Eden Park (was stuck downtown!) — I thought the best line was about the Cook Straight Ferry, though —
It is regretful, if not appalling, in NZ where Mainfreight is the 4th largest customer of KiwiRail (behind coal, forestry and milk), that we are not included in the group making decisions for the future of the Cook Strait rail ferry services.
I am not a massive leftie, but you have to scratch your head when a “business-forward” government is not consulting our biggest freight company on the future of a crucial bit of infrastructure that they are the fourth biggest user of — then, perhaps, there’s an issue there? Cc’ing Luxon?
RAK — Noting strength in the stock here as all sellers appear to be cleared out. If you consider the chip situation — China/US — and a probable Trump presidency (he calls her “laffin’ Kamala”), then the value of Rakon as a chipmaker is fairly obvious … completely offshored (facilities in NZ, Fr and India) and increasingly important technology for data centres and low-orbit satellites.
UMG lost quarter of its market cap
UMG is the world’s biggest music group. They control roughly 33% of the industry, alongside WMG and Sony. You can read research on it here1.
I like investing in music companies for a lot of reasons. They’re not capital intensive — they reap royalties from songs many years into the future. The cost of recording “she loves you, yeah yeah yeah” by The Beatles (a UMG artist) was tiny; the streams of royalties years after the fact are huge. I also like that music is a basic human want — it is universal and the cheapest form of entertainment (Spotify or Apple Music is about half the cost of Netflix). I also like that UMG owns the source — Spotify or what have you is the middleman (margins get squeezed) — the source owner can, within reason, dictate their own price.
The stock fell from 28 euro to around 20 euro overnight. Complete overreaction by the market. Subscription revenue fell to mid single digits while streaming revenue fell 3.9%. I don’t think that’s cause to see a quarter of the company’s value be lopped off — feels like over enthusiastic pruning. Revenue was still €2.9bn, and EBITDA was still +€600mn — that’s not nothing.
Happy to be backing up the truck here — it always felt richly valued north of 30x earnings, but 30x and sub I can stomach (you’re paying for stability of cash flows). There’s a high total addressable market (more or less the whole world), a predictable product (music) and market dominance in the hands of three players — there are very few industries with so many “no brainer” attributes — when you can buy so many “no brainer” attributes together, you get a Lollapalooza effect — that’s what we have here.
Kering gets worse
Down +7.00% overnight — you know I get excited about things when they are down — you are getting a set of luxury houses at 11x current earnings. The entire market cap is +36bn. If you take Gucci, Balenciaga, Bottega, Saint Laurent, Creed (fragrances) and Alexander McQueen, the sum-of-the-parts valuation on those alone is surely more (napkin math: $20bn for Gucci (2x revenue), $10bn for Saint Laurent, $5bn for Bottega, $3bn for Balenciaga, $3bn for Creed…plus prime real estate owned by Kering in Milan, NY, Paris…)
My friend Dylan is like — “are you sure you want to own more of this?”, and I am like — you make all your money in the buying. I am sticking to that — I would much rather be wrong buying assets that are worth more than they are selling for than, say, invest in an AI company with no assets.
Misc
Really liked this piece about the Ack-man’s bid to raise a mega fund based on his social media followers. Link. There is a clear correlation between a subscriber base (mindshare + loyalty) and people following the creator — I suspect he will do do well.
When Yuppies ruled — someone get me a car phone STAT. Link
What great research!