On the day when the UK competition watchdog has launched a probe into music streaming, UBS has issued a positive note on Universal Music Group.
The company, recently demerged from Vivendi, is expected to report a strong set of revenues and underlying earnings (EBITDA) driven by – you guessed it – streaming.
UBS is expecting a 16% like-for-like increase in streaming revenues, despite tough year-earlier comparatives and strong competing offerings from Sony (NYSE:SNE).
Revenue from physical products is expected to grow by 10% year-on-year driven by demand for good old vinyl in the US and demand in Japan for new releases from Taylor Swift and Prince.
“We see UMG as a core large-cap holding for investors (particularly in Europe) given its unique set of characteristics:
1) UMG is the No1 Global Music player (37% market share) with best-in-class management and an impressive track record of making and breaking artists (9.5 of the top 10 artists, 7 of the top 20 Global influencers);
2) the business model is predictable (67% of revenues are streaming and publishing) low risk and acyclical;
3) it offers structural growth with margin and capital management upside.”
UBS has a ‘buy’ recommendation on the stock and has increased its price target to EUR27 from EUR25, suggesting it is trading on an earnings multiple of 32 based on UBS’s forecasts; for comparison purposes, Warner Music Group trades on a multiple of 33.
Shares in Universal floated at EUR18.50 and now trade at around EUR25.
Earlier today the Competition and Markets Authority took the hint from the Digital, Culture, Media and Sport (DCMS) Select Committee and launched into an investigation into whether the music companies are making a fortune out of streaming at the expense of artists.
According to the Broken Record campaign, artists receive around 16% of the income from streams, record companies around 41% and streaming services such as Spotify around 29%.
Universal has an estimated 40% share of the music markets and its boss Sir Lucian Grainge said after the company’s initial public offering (IPO) that he saw the streaming business going from strength to strength as new avenues such as Tik Tok, electric vehicles and voice-controlled speakers increase in importance.
