Rain is far more than an extension of Vodacom and a big part of the company’s valuation comes from the future growth potential of its 4G and 5G products.
This is feedback from African Rainbow Capital (ARC) co-CEO Johan van Zyl, who was answering questions about Rain’s valuation during an investor call last week.
ARC’s latest financial results revealed that it now values Rain at R17.1 billion, up from R15.0 billion just six months ago.
The higher valuation is mainly a result of a spike in demand for data during the lockdown which resulted in increased roaming revenue from Vodacom and improved Rain 4G and 5G sales.
Even with this growth, there is still a view that Rain’s valuation, which is close to Telkom’s market cap of R22 billion, is inflated.
There is also a perception that Rain generates most of its revenue from its roaming agreement with Vodacom, and not from its own retail services.
Van Zyl admitted that a big part of the existing value which “you can put a price-to-earnings ratio (PE) on” comes from Vodacom.
However, Rain’s valuation is mostly based on the scope and future growth of Rain’s own products and are calculated using a discounted cash flow (DCF) model.
“If you look at the income statement a year or two ago, roaming revenue from Vodacom contributed around 80% of Rain’s valuation,” said Van Zyl.
“But as Rain developed its own retail footprint, and particularly moving into 5G, a bigger chunk of the business is coming from its own retail efforts.”
The big demand for Rain’s 4G and 5G products, its higher ARPU, and its growing footprint means the valuation is now more balanced between Vodacom roaming and Rain’s own retail business.
“In due course, with a fully functioning 5G network, it may even become the other way around [where 4G and 5G retail products contribute the most to Rain’s valuation],” said Van Zyl.
Telecommunications is a capital-intensive business and Cell C has shown how unforgiving this industry can be.
Rain is, however, upbeat about its prospects considering its business model and realistic targets.
Rain director and former CEO Willem Roos explained that Rain has a simple strategy to become profitable and return money to shareholders.
- Capture 2% market share – or 2 million SIMs – in the South African mobile data market with an average revenue per user (ARPU) of R250.
- Reach 350,000 5G customers after 5 years with an average revenue per user (ARPU) of R450.
He explained the agreement with Vodacom is not aimed at generating large amounts of revenue, but rather to enable them to rapidly roll out a 4G network without much debt.
Rain currently offers Vodacom roaming with inter-operator carrier aggregation which gives Vodacom subscribers a better data experience.
He said by June 2020 around 20% of all Vodacom data traffic flowed over Rain’s network. This shows how successful the arrangement is.
In return, Rain gets revenue from roaming and access to Vodacom’s towers and equipment which helps it to roll out its 4G network fast and affordably.
“Rain will make a moderate amount of money from the arrangement with Vodacom, but it gives Rain a capital-light way of building a significant 4G network,” he said.
Roos added that their 10-year agreement with Vodacom is unlikely to be influenced much when new spectrum is given to operators.
The agreement with Vodacom uses Rain’s valuable 1,800MHz spectrum which is particularly suitable for 4G services.
Because of the massive growth in Vodacom’s data use, Roos believes the demand for additional capacity from Vodacom will remain.
“Because we help Vodacom with its performance, we believe we have an economically sustainable long-term agreement,” he said.
With its agreement with Vodacom doing well, Rain has shifted its focus to growing its own product portfolio and subscriber base.
It has made significant progress in its goal to reach 2 million 4G subscribers. While Van Zyl would not divulge exact subscriber numbers, he said Rain is about halfway to reaching its target.
Its 5G growth is doing equally well. By June 2020 Rain had 25,000 5G subscribers – and growing fast.
January 2021 was Rain’s second-best month in terms of new subscriptions, which shows that demand for its 4G and 5G services remains strong.
This growth has helped Rain to become EBITDA (earnings before interest, taxes, depreciation, and amortization) positive nine months ahead of schedule.
Roos added that they have also been covering their 5G operational expenses from mid-2020.
Rain’s innovative business model of partnering with Vodacom to fund its rapid network rollout is clearly working.
It is also just scratching the surface of what its 5G network can offer. If they add smart cities, drone deliveries, enterprise services, and self-driving cars to the mix, they may well exceed their targets.
Whether Rain’s R17.1 billion valuation is justified is difficult to comment on as the company’s finances are not publicly available.
What is certain is that Rain is changing the local mobile environment with a rapidly growing 5G network and unlimited mobile data products.
This may be enough to secure its place as a significant player in the South African telecoms market.