Rain’s R13.1-billion valuation analysed

African Rainbow Capital (ARC) currently values Rain at R13.1 billion, but investors seem to be marking down the valuation, with a 64% share price decline since listing.

ARC was launched by billionaire Patrice Motsepe in 2016 and the company listed on the Johannesburg Stock Exchange (JSE) on 7 September 2017.

Motsepe appointed two highly respected business leaders to head up the company – Dr Johan van Zyl and Johan van der Merwe.

Armed with strong empowerment credentials and excellent leaders, ARC invested in a diverse range of companies in financial services, agriculture, property, telecoms, BPO, and mining.

ARC’s investment portfolio includes many prominent companies, like Alexander Forbes, A2X, TymeBank, EOH, Metrofibre, Rain, Afrimat, and Val de Vie.

In its financial results for the period ending December 2019, ARC valued its investment portfolio at R9.9 billion, with an intrinsic net asset value (NAV) of R9.52 million.

A big contributor to this valuation – 27.4% of ARC fund’s total value – is Rain, in which it has a 20.7% stake.

ARC values its 20.7% stake in Rain at R2.712 billion, which means it the mobile operator’s total valuation is R13.101 billion.

This valuation is creeping up all the time. The table below provides an overview of Rain’s valuation since ARC bought a 20% stake in the operator in July 2017.

Rain’s assets and valuation

In its latest presentation to shareholders, ARC said Rain aims to be a full-service mobile network operator, focused on data.

Rain’s key assets are spectrum licenses with an allocation in the 1,800MHz and 2,600Mhz bands, a rapidly expanding mobile network, and a growing subscriber base.

Rain had 5,500 active 4G and 447 active 5G sites in South Africa as of the end of April 2020, with plans to increase its footprint to 1,500 sites by December 2021.

The company is generating income through its roaming agreement with Vodacom, 4G fixed and mobile subscriptions, and 5G fixed subscriptions.

Rain is building a modern telecommunications company, and through its relationship with Vodacom, it is able to roll out its 4G and 5G networks faster and more affordably than its competitors.

Rain’s lack of legacy revenue streams places it in a great position for the future, and it definitely has many valuable assets.

There are, however, questions about its valuation in relation to its financial performance and subscriber growth.

Unlike other companies with investments in unlisted telecoms businesses, like Remgro with SEACOM and Blue Label with Cell C, ARC does not release Rain’s financials or subscriber numbers.

Without financial data or an asset register, it makes it impossible for analysts to accurately calculate the value of Rain.

This uncertainty has created speculation among industry players who spoke to MyBroadband that the operator is over-valued.

They highlighted that Liquid Telecom – which has more valuable spectrum assets, a national fibre network, and excellent corporate clients – was acquired for R6.55 billion in 2016.

Rain’s R13.1-billion valuation also puts it on par with Telkom’s current market cap which, in comparison, has some of the most valuable telecoms assets in South Africa.

Telkom’s assets include millions of subscribers, the country’s largest fibre network, and an extensive mobile network.

Telkom also has more spectrum than Rain, it owns properties across the country worth billions, and it has a strong foothold in the corporate telecoms market.

ARC is, however, not looking to change its reporting on Rain. It said it only holds a 20.7% interest in Rain, which means it is a minority shareholder.

“Coupled with the fact that Rain is a privately held company, it means ARC is not in a position to release information to the market at liberty,” ARC spokesperson Ainsley Moos told MyBroadband.

He added that they have released key information to market, which they have also agreed with the Rain leadership.

The table below provides an overview of the information provided by ARC about its Rain valuation.

Expert opinion

ARC has previously explained that it uses a discounted cash flow model with a discount rate of 16.4% to value Rain.

Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its future cash flows.

Richard Cheesman, a senior analyst at Protea Capital Management, told MyBroadband it is difficult to evaluate the Rain valuation due to the lack of disclosure around the asset.

“While we have some operating statistics, no financial metrics are disclosed,” Cheesman said.

“ARC values Rain using a DCF and some of the DCF assumptions are disclosed. The discount rate of almost 17% and the 3% terminal growth rate seem reasonable.”

He highlighted that DCF’s are, however, renowned for being very sensitive to any change in assumptions.

“We are told that Rain has generally performed in line or ahead of its business plan – this would support the valuation,” said Cheesman.

He further cautioned against directly comparing Telkom’s market cap with Rain’s valuation, highlighting that Telkom has its own issues and growth profile.

“That said, it would be tough to argue that all of Telkom’s assets are worth less than Rain’s assets,” said Cheesman.

“When comparing the companies, the liability side of the balance sheet also needs to be taken into account. An enterprise value comparison would, therefore, be more appropriate.”

ARC share price decline since listing

After ARC listed on the JSE in September 2017, the company traded at R8.40 per share.

Over the next three years, ARC’s share price steadily declined to the current level of around R3.00 per share.

This decline means ARC’s intrinsic net asset value of R9.52 million is far higher than its current market cap of just over R3 billion.

Sasfin Securities deputy chairman David Shapiro said in February he does not like where the ARC share price chart is pointing.

“Management might believe the share is trading at a big discount to underlying value, but the market is not buying the story,” said Shapiro.

Cheesman said it is tough to find a holding company that is not trading at a large discount to its net asset value.

However, he said, ARC’s discount is one of the largest, even after taking into account the fee structure.

“As ARC’s largest investment, it would seem that the market is already marking down the Rain valuation,” said Cheesman.

The chart below shows ARC’s share price since the company was listed in September 2017.

ARC explains

Moos told MyBroadband there is no concern on ARC’s part that the lack of financial and subscriber data creates the impression that it is trying to hide this information from the market and analysts.

“Investors in ARC Investments understand that we are minority shareholder in Rain. Given this position, we are not in a position to make statements on behalf of Rain,” Moos said.

Commenting on the decline in ARC’s share price, Moos said they cannot conclusively say what the reason is for the company’s shares trading at such a big discount.

He did, however, provide a few points which they learned from their engagements with shareholders.

• A significant percentage of the value of ARC’s investments are in early start-ups – TymeBank, Rain, and Kropz – and none of these investments are currently at the level where they generate significant and consistent profits.
• Some of their mature investments like Alexander Forbes, where one would expect predictably cash-flows and therefore profits, had management issues over the last three years which had weakened the business significantly. This is now being addressed and fixed.
• ARC Investments is a relatively newly listed company, having listed in September 2017. Therefore, they would require time to build a track record to demonstrate their ability to unlock value for shareholders.
• In the current economic climate, a large number of small and mid-cap companies are trading at significant discounts to NAV.

“It is clear that there are a number of factors that could potentially have led to the decline in the share price,” Moos said.

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