This is the view of Sasfin Securities deputy chairman David Shapiro, who described the share price decline between 2017 and 2020 as a rich man’s ski slope.
ARC, which was launched by billionaire Patrice Motsepe in 2016, has many high-profile tech companies in its investment portfolio.
Its shareholdings include Rain, EOH, Metrofibre Networx, A2X, TymeBank, Santam, Alexander Forbes, Afrimat, and Val de Vie.
While ARC’s diverse portfolio and its focus on investing in companies which deliver “exceptional returns on equity” sound good, investors are not convinced.
Shapiro said he does not like where ARC’s share price chart is pointing, referring to the continued decline since listing.
“Management might believe the share is trading at a big discount to ARC’s underlying value, but the market is not buying the story,” Shapiro said.
Certain investors, however, believe ARC offers value at current levels. Chantal Marx, head of external research and content at FNB Wealth and Investments, is one of these people.
Marx said ARC trades at a 6% discount to its underlying net asset value, without a clear reason for its low share price.
“There is a fair chance that the company can deliver on its mandate and grow the portfolio, which should see this discount narrow over time,” she said.
The chart below shows the ARC share price since the company listed in September 2017.
Rain valuation questioned
A large part of ARC’s net asset value is based on Rain’s R12.2-billion valuation.
ARC’s 20.6% shareholding in the operator is therefore valued at R2.508 billion.
Rain has three main assets – spectrum, a growing 4G and 5G network, and a lucrative roaming agreement with Vodacom.
The roaming and facilities leasing agreement with Vodacom, which was recently extended to Vodacom’s full network, is core to Rain’s success.
Rain also generates revenue from its mobile, fixed-LTE, and 5G products, but it is nearly negligible when compared to the overall value which Vodacom brings.
Through the roaming and facilities leasing agreement, Vodacom is virtually paying for Rain’s network rollout to get access to its valuable LTE spectrum.
This partnership makes Rain more sustainable than Cell C, which had to fund its own network build and has been drowning in debt ever since.
Industry players told MyBroadband that, even when considering the Vodacom agreement, Rain’s R12.2-billion valuation is very high.
Telkom, for example, has a market cap of around R16 billion. Its assets include a big client base, the country’s largest fibre network, and a strong 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.
It is challenging to see how Rain’s valuation is close to that of Telkom when one does a side-by-side comparison of assets.
ARC defends the Rain valuation
Many people who questioned Rain’s valuation said ARC’s decision not to share the operator’s financial performance creates uncertainty.
ARC defended this decision, however, saying as a 20.6% shareholder in Rain it is not its prerogative to share this information with the market.
Commenting on its valuation of Rain, ARC said it used a discounted cash flow model, with a discount rate of 16.4%, to value Rain.
Discounted cash flow is a valuation method used to estimate the value of an investment based on its future cash flows.
“In our view, this is a very conservative approach to valuing our investment in Rain and we are comfortable with this approach,” ARC told MyBroadband.
ARC added that, as with all of its investments, the valuation of Rain is scrutinised by its auditors – who follow a thorough process to confirm or amend the valuation.