Rain’s incredible valuation per subscriber

Rain’s valuation per subscriber is 11 times higher than Vodacom, 15 times higher than Telkom, and 33 times higher than MTN. This was revealed in a recent analysis of the valuation per subscriber of South Africa’s main mobile operators.

African Rainbow Capital’s (ARC’s) interim financial results for the six months ended 31 December 2020 show that it values Rain at R17.1 billion.

ARC is a 20.4% shareholder in Rain. This shareholding, valued at R3.493 billion, contributes 27.3% to the ARC fund’s total invested assets.

Rain is therefore a core part of ARC’s success, and an accurate valuation is important to give the correct view of ARC’s portfolio.

The market, however, does not believe ARC’s valuations are accurate. ARC shares are trading at a discount of around 60% to net asset value.

Rain’s valuation, in particular, has come under scrutiny from industry players who feel it is far too high.

A concern is that ARC and Rain do not disclose any financial results, like revenue, EBITDA (earnings before interest, taxes, depreciation, and amortization), or profit.

ARC merely tells the market its valuation is conservative and audited, and that it is comfortable with the valuation of its shareholding in Rain.

“As a minority shareholder in a privately held company, ARC Investments is not at liberty to disclose detailed financial information on behalf of Rain,” ARC co-CEO Johan van Zyl told MyBroadband.

This is not a convincing excuse. Other holding companies like Remgro, for example, disclose the finances of companies in which they have a minority share.

ARC and Rain can easily remove uncertainty around the valuation by releasing the mobile operator’s financial information.

If the R17.1 billion valuation is conservative, like ARC claims, releasing this financial information can go a long way to close the large trading discount.

They prefer to keep this info secret, however. This can point to concerns from Rain and ARC that the valuation will be challenged by analysts if they get a look at the finances.

Another reason can be that Rain and Vodacom want to keep the finances behind their roaming agreement hidden.

One industry executive, who asked to remain anonymous because of his relationship with Rain, told MyBroadband it is easy to see whether Rain is overvalued.

He said you can look at a price-to-earnings ratio (P/E ratio) or how much they value a subscriber at, and compare it to Vodacom, MTN, and Telkom.

With Rain not disclosing its earnings, it is not possible to calculate its price-to-earnings ratio.

However, it is possible to calculate an estimate of Rain’s valuation-per-subscriber. This figure clearly shows why industry players think the operator is overvalued.

During ARC’s interim results for the six-month period ended 31 December 2020, it is estimated that Rain had around 750,000 subscribers.

This means Rain’s valuation per subscriber is R22,800. This is significantly higher than Vodacom’s R1,994, Telkom’s R1,492, and MTN’s R698.

The table below shows the valuation per subscriber, based on ARC’s valuation of Rain and the market cap of the other operators on Wednesday 2 June 2021.

It should be noted that valuation per subscriber is not a preferred measure for telecoms operators because it depends on numerous factors.

If an operator has a blend between mobile subscribers and high-paying business clients, for example, it will result in a much higher valuation per subscriber.

This is the case with Rain. The operator has a lucrative roaming agreement with Vodacom which generates a large portion of its revenue.

A large part of Rain’s valuation is based on its Vodacom partnership which skews its valuation per subscriber.

Van Zyl confirmed that a big part of Rain’s existing value which “you can put a price-to-earnings ratio (PE) on” comes from Vodacom.

He did, however, add that 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.

To see how this scenario will change Rain’s valuation per subscriber, one can look at the operator’s future plans.

Former Rain CEO Willem Roos said they want to reach 2 million mobile SIMs with an average revenue per user (ARPU) of R250, and 350,000 5G customers with an ARPU of R450.

If the valuation remains at R17.1 billion, the future subscriber numbers will drop Rain’s valuation per subscriber to R7,277. Although it is still higher than other mobile operators, there are reasons for the higher valuation.

Rain’s projected blended ARPU of R280 per month will much higher than other mobile operators.

Vodacom’s blended ARPU in South Africa, for example, is R86. In other countries where it operates it is even lower –R36 in Tanzania, R59 in Mozambique, R46 in the DRC, and R69 in Lesotho.

Telkom’s ARPU across its 15 million mobile subscribers is R104. The company’s fixed broadband ARPU is higher at R248 per month.

Apart from a higher ARPU, Rain’s agreement with Vodacom also helps it to build a 4G network faster and with less debt than other operators. This asset will be worth billions when completed.

It is therefore understandable that Rain’s valuation per subscriber should be higher than Vodacom, MTN, and Telkom.

Whether it is enough to justify its eye-watering R17.1 billion valuation will only be revealed when ARC and Rain release financial numbers in the future.

Now read: Rain’s big 5G plan – covering 5,000 new households each day in 2021