Rain highly overvalued

Rain’s price-to-EBITDA ratio is completely out of sync with the rest of South Africa’s telecommunications industry, which points to a highly inflated valuation.

EBITDA (earnings before interest, taxes, depreciation, and amortisation) is a popular equity valuation metric in the telecommunication industry because it excludes depreciation.

Telecommunications companies invest billions in their networks annually, and this capital expenditure differs significantly from one company to another.

Therefore, EBITDA allows for an easy way to compare telecommunications companies without depreciation.

It is also important to note that EBITDA provides a measure of profitability but not of operating cash flow.

Operating cash flow is a valuable measure if you want to keep track of a company’s working capital management.

On Monday, 16 September 2024, African Rainbow Capital released its latest results, which showed that Rain’s valuation has ballooned to R24.95 billion.

Two things have stood out about Rain’s valuation over the years.

• ARC refused to provide financial data about Rain, which would allow analysts to do their own objective valuation.

• Rain’s valuation has increased from R9.46 billion in December 2017 to R24.95 billion in June 2024.

Rain is the largest contributor to the ARC fund’s intrinsic net asset of R18.62 billion. As such, many questions were raised about the mobile operator’s numbers at a recent investor call.

However, ARC co-chief executive Johan van Zyl aggressively dismissed these questions, arguing they were inappropriate.

He told analysts and media that Rain is a private company and that hiding core numbers is one of its competitive advantages.

Despite questions about capital expenditure, revenue, profit, and subscriber numbers, Van Zyl would not divulge anything about the mobile operator.

He said the only figure they would divulge, and the only one appropriate at this stage, was EBITDA.

This statement is questionable. Interest and depreciation are highly relevant to telecommunications companies.

Cell C, for example, was destroyed by the interest costs associated with its debt burden, which was needed to create a network.

The great investor Warren Buffet also highlighted that depreciation and amortisation are highly relevant when valuing a telecommunications company.

An accurate valuation is impossible without metrics like subscriber growth, average revenue per user (ARPU), service revenue, and earnings.

One can assume that most analysts feel the same, which is why ARC has traded at a significant discount for years.

Rain valuation comparison

As Van Zyl told investors that EBITDA is the most appropriate figure to value the company at this stage, MyBroadband performed a comparative market analysis.

For this analysis, MyBroadband compared Rain’s price-to-EBITDA ratio with that of its main competitors – Vodacom, MTN, Telkom, and Cell C owner Blue Label Telecoms.

It showed that Rain’s price-to-EBITDA ratio of 9.98 was significantly higher than that of all the other operators.

Vodacom’s price-to-EBITDA ratio is 4.14, Blue Label’s is 3.63, MTN is 1.96, and Telkom is 1.39.

One can assume that other valuation ratios, like price-to-sales and price-to-earnings, would also have much higher values for Rain.

This shows that Rain is significantly overvalued compared to Vodacom, MTN, Telkom, and Blue Label (Cell C).