Proactive Investors - Universal Music Group (EURONEXT:AS:UMG) can mostly recover lost revenue from TikTok by selling additional products and services to the social media platform’s competitors, analysts at UBS believe.
Since early February, the music group has been making TikTok remove songs written or co-written by artists signed to UMG from the social media platform after the two companies did not renew their music licensing agreement.
In a note to clients following a meeting with UMG Head of Investor Relations Erika Begun, the UBS analysts reiterated their ‘Buy’ rating on the stock.
They awarded UMG a €31.40 price target, representing about a 16% upside from its share price at the time of writing of €26.90.
They wrote that one of the main takeaways from their meeting with Begun is that UMG’s plans to launch a superfan offering with demand-side platforms (DSPs) are progressing, with the first steps possibly coming later in 2024, as the company also pursues its own vertical direct-to-consumer services.
Meanwhile, they noted that UMG continues to believe in operating leverage above its planned cost savings.
“The recent increase in artists costs as a proportion of sales reflects the faster growth in publishing versus recorded music, and the strength of Taylor Swift in 2022/23,” they wrote. “On an underlying basis, artists costs are flat as share of revenue.”
They also pointed out that, while UMG does expect to generate excess cash flow, it is not currently considering pursuing buybacks given a lack of current liquidity.
They expect UMG can deliver strong free cash flow growth to more than €2bn by 2025 based on momentum in paid streaming, cost savings, and limited spending on catalogue acquisitions.
For 2024, they forecast 12% growth in UMG organic subscription revenues, above the consensus of 11%.
“On our estimates, the group trades on an attractive 4% fiscal 2025 free cash flow yield for a company delivering mid to high single-digit topline growth,” they wrote.