Why Rain’s valuation dropped by R791 million

Rain’s valuation dropped by R791 million in six months because of challenging economic conditions, increased forecasted network investments, and increased employee cost.

African Rainbow Capital’s (ARC’s) financial statements for the year ended 30 June 2021 revealed that it values Rain at R16.357 billion.

This valuation is down from R17.148 billion at the end of December 2020 and was the first time Rain’s value has declined.

The valuation decline came despite Rain exceeding its subscriber targets in both the 4G and the 5G market.

Speaking to investors this week, ARC co-CEO Johan van Zyl said the big change in Rain’s modelling and valuation is the way the South African economy is going.

“We have been doing so well in the short term, particularly during the Covid-19 pandemic, that we had a re-think on where the economy is going in the longer term,” he said.

“While we have moved quite a bit of the benefits of doing well forward, we think the possibility of what we can do in the future has been diminished by a sluggish economy.”

Van Zyl added that they expect things to take longer than initially anticipated to get back to normal.

Another reason for the valuation decline is an increased forecasted Capex spend in the near future and increased employee costs relating to customer service.

“Despite a bigger footprint with more customers, we have kept the customers constant due to the economic realities we are facing,” ARC said.

The table below provides an overview of Rain’s valuation over the last four years.

Rain Valuation by ARC
Date ARC Shareholding in Rain ARC’s Shareholding Value Rain’s Valuation
December 2017 20.0% R1.892 billion R9.460 billion
June 2018 20.0% R2.114 billion R10.570 billion
December 2018 20.0% R2.330 billion R11.650 billion
June 2019 20.6% R2.508 billion R12.175 billion
December 2019 20.7% R2.712 billion R13.101 billion
June 2020 20.7% R3.111 billion R15.029 billion
December 2020 20.37% R3.493 billion R17.148 billion
June 2021 20.26% R3.314 billion R16.357 billion

Rain’s valuation, which is in line with Telkom’s market cap, has been a hotly debated issue.

Commenting on this issue, Van Zyl said they are conservative in their valuation of Rain and remain very bullish on the future of the operator.

“I know there are many doubters out there, but we are now moving territory where we can start using traditional metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization),” he said.

Van Zyl said Rain has been profitable in 2021 and is set to generate R1 billion in EBITDA this year.

Van Zyl said these traditional metrics would produce a valuation in line with ARC’s current valuation of Rain on its books.

Now read: Rain’s valuation takes a hit — but it is still over R16 billion

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Why Rain’s valuation dropped by R791 million