Reservoir Media: No Buying Opportunity

Reservoir Media (NASDAQ:RSVR) works as a music publishing company. They operate in two segments: Recorded music and Music publishing. In the Recorded music segment, they engage in the marketing and licensing of the music catalogs and the discovery and development of recording artists. In the music publishing segment, they acquire interests in music catalogs and sign songwriters. RSVR recently announced its FY23 and Q4 FY23 results. In this report, I will do its technical and financial analysis. I believe it is highly overvalued, and its share price is very volatile. Hence I assign a hold rating on RSVR.

Financial Analysis

RSVR recently posted its FY23 and Q4 FY23 results. The revenues for Q4 FY23 were $34.8 million, a decline of 1% compared to Q4 FY22. I believe the decline was mainly due to poor performance in its music publishing segment. The revenues from the music publishing segment declined by 8% in Q4 FY23 compared to Q4 FY22. I believe a decline in its performance and synchronization revenue was the main reason behind the revenue decline in its music publishing segment. In addition, its Q4 FY22 consisted of revenues from the Dubai Expo event, which did not happen in FY23, which was also one of the reasons behind the revenue decline. The net income for Q4 FY23 was $2.3 million compared to a net income of $8.8 million in Q4 FY22. I believe the major reason behind the decline was a loss in the fair value of swaps.

The revenues for FY23 were $122.2 million, a rise of 13.4% compared to FY22. I believe the revenue surge in its music publishing and recorded music segments was the main reason behind the rise. The revenues from the music publishing segment grew by 9% in FY23 compared to FY22. I believe an increase in its digital, synchronization, and mechanical revenue streams, which grew by 18%, 18%, and 9% in FY23 compared to FY22, was the main reason behind its outperformance in its music publishing segment. The revenues from the recorded music segment grew by 18% in FY23 compared to FY22. I believe a 25% increase in digital revenue due to the rise in music streaming across global platforms and a 45% rise in neighboring rights revenue was the major reason behind the revenue increase in the recorded music segment. The net income for FY23 was $2.7 million compared to a net income of $13.1 in FY22. I believe a decline in gains on the fair value of swaps and a tax charge associated with a change in the UK tax rate was responsible for the decline in the net income. I think there wasn’t nothing noteworthy about its FY23 results; the growth was modest, and its Q4 FY23 results showed weakness.

Technical Analysis

RSVR is trading at the $6.5 level. There is a saying in the stock market don’t try to catch a falling knife, and it implies perfectly over here. Since January 2021, the stock has fallen more than 35%, and the stock has been forming lower highs and lower lows. I believe it is best to stay from the stock because the price action it has been forming is bearish, and there is a high chance that it might fall down further. For the past three months, it has been trading between the range of $6-$6.5, so if it breaks the $6 level, the stock might fall to the $5 level. So, I believe there is no buying opportunity in RSVR for now.

Should One Invest In RSVR?

First, talking about the company's valuation. I will use EV / EBITDA and Price / Cash Flow ratios to judge its valuation. One can calculate EV/ EBITDA ratio by dividing a firm's enterprise value by its EBITDA, and the Price / Cash Flow ratio can be calculated by dividing a firm's share price by the firm's cash flow from operations. RSVR has an EV / EBITDA (fwd) ratio of 14.31x compared to the sector ratio of 8.33x and has a Price / Cash Flow (ttm) ratio of 13.38x compared to the sector ratio of 7.56x. After looking at both ratios, I believe RSVR is highly overvalued. I believe the overvaluation might be the reason the stock has corrected more than 35% in the last one year.

In addition, with a market capitalization of $417.5 million, they ended FY23 with a net debt of $296.6 million which is huge and a matter of concern. Their net debt grew by 17.6% in FY23 compared to FY22 and looking at its moderate growth rate, I believe debt becomes a challenge and is a big red flag, and after looking at the valuation, I believe the stock might correct even further because the stock is trading at a high premium level.

The shareholding pattern of RSVR is also unattractive. The institutions own just a 23.8% stake in the company, which according to me, is quite less. I believe a firm where institutions own less than 60% of shares is comparatively unsafe to invest in, and we generally see more volatility in its share price fluctuations, and it is very much evident that the share price of RSVR is quite volatile.

So after looking at its modest growth rate, weak technical chart, and high valuation, I think it is best not to make any new positions and stay away from this company. Hence I assign a hold rating on RSVR.

Risk

A significant percentage of its income is derived from the distribution of music, which is potentially vulnerable to illicit consumer copying and massive digital dissemination without an economic benefit to them, including as a result of "stream-ripping." The IFPI surveyed 44,000 people for its Engaging with Music 2022 report to learn more about how music consumers between the ages of 16 and 64 interacted with recorded music in 22 nations. 30% of those polled admitted using unlawful or unauthorized means to stream or download music, while 17% admitted using an unlicensed mobile app. Organized industrial piracy could also result in lower sales. Although it is difficult to measure how digital piracy affects genuine music sales and subscriptions, I think that activities like unlawful file sharing and stream manipulation have a significant detrimental effect on music sales, and it is a big challenge for the company.

Bottom Line

RSVR has no attractive traits, so one can invest in it. It has a huge debt and weak technicals, and I believe it is overvalued. I think the stock might correct further, looking at its technical chart. Hence I assign a hold rating on RSVR.