Rain’s valuation and ARC’s share discount

Many investors discount Rain and TymeBank’s contribution to African Rainbow Capital Investments’ (ARCI’s) net asset value, resulting in its share price trading at a big discount.

Investors have been wondering why ARC’s share price has not tracked the increase in value of its investments.

The ARC fund, which holds ARCI’s investments, has an intrinsic net asset value of R16.03 billion. This translates into a new asset value per share of R11.15.

However, African Rainbow Capital Investments is currently trading at R5.44 per share, translating into a discount to NAV of over 50%.

The NAV per share represents the company’s asset value after subtracting all liabilities.

Even though ARC Investments is trading at a significant discount, investors are not piling into the share. The share price is 36% lower than when ARC was listed in 2017.

This discount is a challenge for ARC’s management, who said the market does not put enough value on their biggest assets, Rain and TymeBank.

ARC co-CEO Johan van Zyl previously explained that the market does not put much value on startup businesses like Rain and TymeBank.

These two businesses hold tremendous potential, but because of uncertainty, the market does not value them at the same level as ARC.

Van Zyl said they have even considered delisting from the JSE as the company’s significant trading discount shows no sign of narrowing.

“In the current environment, it remains prudent for management and the board to continue to consider whether there is value in being listed, should the discount remain excessive,” he said.

It raises the question of why investors and ARC management see Rain and TymeBank’s valuations so differently.

To try and find answers, MyBroadband delved into the numbers of the two companies.

Rain

Brandon Leigh, Rain CEO

Rain is the largest investment held in the ARC fund. Its 20.75% stake in Rain, valued at R4.516 billion, makes up 27.2% of the fund.

Rain’s R23.22 billion valuation, which is significantly higher than Telkom’s market cap, is a regular topic of discussion among industry players.

One of the complaints from investors is that very little financial or operational data is available about Rain.

ARC’s latest results point to around 1 million subscribers and earnings before interest tax depreciation and amortisation (EBITDA) of R1 billion.

ARC co-CEO Johan van Zyl commented that Rain has turned profitable at its most recent interim results presentation.

He also noted that Rain was on its way to reporting an EBITDA figure of more than R2.5 billion in its full-year results.

This growth sounds great. However, it is only around half of the EBITDA that Telkom generates in six months.

Despite regular questions around the issue, ARC has been reluctant to share any meaningful financial figures on Rain.

The low level of transparency around Rain’s operations and its finances gives investors little confidence in its R23 billion valuation.

Another thing bothering investors is whether Rain would be able to maintain its low capital expenditure model.

The cost associated with building and maintaining a network crushed Cell C, and the same can happen to Rain.

TymeBank

Coen Jonker, TymeBank CEO

Tyme Group, which owns TymeBank and Tyme Asia Holdings, has digital banking exposure in South Africa and the Philippines.

The group is experiencing strong growth, with 300,000 customers onboarded each month and a total customer base of 8.5 million users.

ARC’s shareholding in Tyme Group, valued at R3.987 billion, is the second-largest holding in the ARC fund, making up 20.3% of the fund.

TymeBank has seen impressive growth, increasing its net revenue from R50 million in 2019 to R531 million in 2023. It translates into a 61% compounded annual growth rate over five years.

TymeBank is currently valued in ARC fund’s books at a price-to-sales ratio of 15 times sales.

This is significantly higher than the price-to-sales ratios of ABSA (1.20), Nedbank (1.65), and Standard Bank (1.76)

Although TymeBank has experienced strong revenue growth, it has not yet been able to translate these figures into profit.

The bank has been able to decrease its losses, but it is still a long way from becoming profitable.

At the end of the 2018/19 financial year, TymeBank reported a total net loss of R1.6 billion. Five years later, TymeBank reported a net loss of R861 billion.

GoTyme, a joint venture between TymeBank and members of the Gokongwei Group, has also suffered a loss of R824 million over the last year.

There are also questions about growth. With a customer base of 8.5 million, many investors are wondering if there is much growth left for TymeBank.

Investor uncertainty around Rain and TymeBank

Johan van Zyl, ARC co-CEO

Uncertainty around Rain and TymeBank means many investors discount these investments to zero.

As the two largest investments in the ARC stable, they significantly impact the company’s share price.

Therefore, it is unsurprising that ARC’s share price is trading at a big discount to its net asset value.

Should Rain and TymeBank be as successful as ARC’s management expects, the share has great upside.

However, it can also happen that the two companies do not deliver the expected future profits. In that case, the share is fairly priced.