Reservoir Media: Streaming And Digital Platforms May Accelerate Sales Growth

Reservoir Media, Inc. (NASDAQ:RSVR) recently delivered double-digit quarterly revenue and offers an impressive portfolio of music rights. Considering the expected growth of the streaming market and the growth of digital platforms, RSVR could see impressive growth in the coming years. The total amount of debt may lower the amount of acquisitions seen in the past, however even considering these risks, Reservoir Media could trade at higher stock prices in my view.

Reservoir Media

With recent honors and awards, including its CEO being named BillBoard's Executive of the Year in 2022, Reservoir Media is one of the world's leading independent music companies.

From 2007 to the present, the company conducted an active acquisition strategy that allowed its continued growth. One of the most recognized acquisitions was that of the MTV station, a music channel with a large presence in the United States and throughout the West. The music industry has demonstrated growth trends in recent years, and independent companies have managed to take advantage of this while hiring new artists and managing their rights.

Reservoir has a music publishing business, a record label business, an artist management business, and a smaller rights representation business in the Middle East. These activities are divided into two operating segments: Publishing and Recording.

The company reports a massive portfolio, which includes more than 150k rights and 36k tracks under its ownership, from iconic artists such as Joni Mitchell and Sonny Rollins, as well as songs that have been performed by current brilliant artists such as Justin Bieber or Ariana Grande. I believe that these assets will most likely help the company deliver net sales in the coming years.

With that about the business model, I believe that it is a great time for reviewing closely the recent quarterly net revenue sales. In the three months ended June 30, 2023, the company reported net sales of $19 million, 38% more than that in the same period in 2022. International music publishing reported a quarterly revenue increase of 29% y/y, and total revenue increased by 31% y/y.

I Assumed That Successful Acquisition Of Rights To Songs Could Bring Further FCF Growth

The acquisition of rights to songs, tracks, and other companies that own them is essential for the growth of the company. The search in this sense is active and is the main axis of its growth strategy. In this framework, the expansion of its portfolio of artists and the expansion of its catalog to generate direct income are the company's short-term objectives. Under my best-case scenario, I assumed that Reservoir Media would successfully deliver net sales growth thanks to these objectives.

The Rise Of Digital, Streaming, And Monetization Platforms Will Most Likely Enhance Net Sales Growth

Innovation in digital proposals, the expansion of margins within these markets, and new licenses for home fitness platforms, such as Apple Fitness (AAPL) or Peloton (PTON), may also bring business growth.

With many years in the industry, I believe that it is fair to expect net sales growth close to the market growth of the music industry or even higher. In this regard, it is also worth noting that the music streaming market is expected to grow at close to 14% from 2023 to 2030. Besides, the music market may grow at about 8.54% from 2023 to 2028. Let's also keep in mind that the largest profit margin for the company comes from streaming, which is also one of the most profound transformations in the industry in recent years, and its market grew by 17% from 2021 to 2022. I also invite readers to have a look at the expectations of other well-known research players in the market, who issued beneficial notes about the music industry.

Music Streaming Market size was valued at $29.45 billion in 2021 and is poised to grow from $35.53 billion in 2022 to $103.07 billion by 2030, at a CAGR of 14.7% during the forecast period (2023-2030). Source: Music Streaming Market Size, Share, Growth Analysis, By Service, Platform, Content Type, End-Use

The Music Market size is expected to grow from $28.29 billion in 2023 to $42.62 billion by 2028, at a CAGR of 8.54% during the forecast period (2023-2028). Source: Music Market Size & Share Analysis

Management Noted A Deal Pipeline Worth Over $2 billion

With market expectations including FCF growth and net income growth, I believe that we could expect a decline in the debt levels in the coming years. Under this case scenario, I believe that Reservoir Media could deliver more M&A deals. Reservoir Media appears to have a strong track record of deals and recently reported a massive deal pipeline, which may interest the investment community. In my view, with further acquisition of intangibles or even other peers, both net sales growth and FCF growth could accelerate.

Balance Sheet: The Total Amount Of Debt Is Not Small

As of June 30, 2023, Reservoir Media reported cash and cash equivalents worth $12 million, accounts receivable of about $32 million, and total current assets of close to $61 million. The total amount of current liabilities is a bit below the current amount of assets, so I would not be concerned about liquidity issues in the near future.

The most significant assets are intangible assets worth close to $628 million, which consist of music catalogs recorded at fair value in a business combination and relative fair value in an asset acquisition. The company also reported royalty advances worth $57 million and total assets of close to $767 million.

With regard to the total amount of assets, I believe that the most relevant is the secure line of credit worth $325 million. Assuming an EBITDA of close to $51 million, the total amount of debt appears significant. In my view, reductions in the net debt would most likely lead to more interest from investors.

The asset/liability ratio stands at close to 2x, so I think that what matters the most is the total amount of debt. The total amount of liabilities does not seem worrying.

Market Expectations And My Conservative Case Scenario

Under my conservative case scenario, I used net sales growth of close to 7%-5% with a profit margin of about 2.4% from 2024 to 2027. Taking into account previous figures and market expectations, my figures do seem quite conservative. Note that market expectations include an average net sales growth of about 10% with an average net margin of close to 6%. It is also worth noting that market expectations include EBITDA growth in 2024, 2025, and 2026.

My forecasts include 2027 net sales of close to $170.1 million, with net sales growth of around 5%, and net income close to $4.08 million, with a profit margin of about 2.4%. Also, with amortization of intangible assets of about $34 million and depreciation of property, plant, and equipment close to $0.17 million, I assumed share-based compensation of $3.2 million.

Taking into account changes in accounts receivable of -$6.04 million, changes in inventory and prepaid expenses of -$0.19 million, and changes in accounts payable and accrued liabilities of $44 million, 2027 CFO would be $72 million. Besides, with a capex of -$1.22 million, 2027 FCF would be close to $71 million.

Using a conservative cost of capital of 7%, the NPV of future FCFs would be close to $221 million. Additionally, considering the sector median EV/EBITDA of 9.2x and Price/Cash flow of 7x, I believed that EV/FCF would make sense. With this assumption, the NPV of the terminal value would be close to $499 million. Finally, adding cash in hand and subtracting debt, the implied equity would be $408 million, and the implied price would stand at close to $6 per share.

Best-Case Scenario

Under my best-case scenario, I assumed net sales growth close to 10% from 2025 to 2027 and net margin of 5%, which is closer to market expectations. My expectations under this case scenario include 2027 net sales of $178.2 million, with net sales growth of 5%, 2027 net income of $8.91 million, and net margin of 2.4%. I also believe that amortization of intangible assets of close to $34 million, share-based compensation of $3.2 million, and deferred income taxes of close to $5.25059 million would make sense.

Besides, with changes in accounts receivable close to -$6.04 million, inventory and prepaid expenses of -$0.199 million, royalty advances of -$9.9 million, and accounts payable and accrued liabilities worth $44 million, I obtained a forecast CFO of close to $77 million. Finally, with a capex of about -$1.2 million, 2027 FCF would be close to $76 million.

By using a cost of capital of 5% and an EV/FCF close to 12.5x, I obtained a total enterprise value close to $992 million and an equity valuation of $678 million. Finally, the fair price would stand at about $10 per share. Even considering that this is my best-case scenario, I believe that these figures are likely.

Competitors

The business market of the publication of music is highly concentrated in a few companies. Warner (WBD), Universal (UVV), and Sony (SONY) retained approximately 60% of the entire industry's revenue in 2022. In addition to these historical firms within the market, there are a large number of independent production companies, however, few have achieved growth and recognition like Reservoir. Among all these participants, they captured the remaining 40% and 30%, demonstrating the high degree of competition within the industry.

Risks

These competitive factors of course mean direct risks for the company and mean that decisions about signing contracts with artists or purchasing and transferring rights have high risk margins in each operation. The strategy towards the markets must be carried out carefully in order to sustain the current competitive position, and the acquisition strategy, which in turn entails a series of intrinsic risks.

The company's operational decisions in relation to its position within the streaming market and the projections on which they are based to make these decisions imply a risk. Nobody can really foresee perfectly the evolution of the digital business environment within the music industry.

The financial debt situation reported by the company also generates many risks. In addition, the company may not allocate funds for the payment of dividends in the short term. As a result, investors may sell shares, which may have a negative impact on the stock price.

My Takeaway

Reservoir Media delivers invaluable assets including 150k rights and 36k tracks, which will most likely allow the company to deliver net sales growth in the coming years. I also believe that management knows well how to acquire new records, and the growth of the streaming marketing and the digital platform may bring further growth to Reservoir Media. Yes, I think that there is a lot of risk coming from the total amount of debt, and failed new projects could occur. However, under both of my case scenarios, the shares seem undervalued.