{"id":560737,"date":"2024-09-16T16:37:19","date_gmt":"2024-09-16T14:37:19","guid":{"rendered":"https:\/\/mybroadband.co.za\/news\/?p=560737"},"modified":"2024-09-16T16:37:23","modified_gmt":"2024-09-16T14:37:23","slug":"rain-highly-overvalued","status":"publish","type":"post","link":"https:\/\/mybroadband.co.za\/news\/investing\/560737-rain-highly-overvalued.html","title":{"rendered":"Rain highly overvalued"},"content":{"rendered":"\n<p>Rain&#8217;s price-to-EBITDA ratio is completely out of sync with the rest of South Africa&#8217;s telecommunications industry, which points to a highly inflated valuation.<\/p>\n\n\n\n<p>EBITDA (earnings before interest, taxes, depreciation, and amortisation) is a popular equity valuation metric in the telecommunication industry because it excludes depreciation.<\/p>\n\n\n\n<p>Telecommunications companies invest billions in their networks annually, and this capital expenditure differs significantly from one company to another.<\/p>\n\n\n\n<p>Therefore, EBITDA allows for an easy way to compare telecommunications companies without depreciation.<\/p>\n\n\n\n<p>It is also important to note that EBITDA provides a measure of profitability but not of operating cash flow.<\/p>\n\n\n\n<p>Operating cash flow is a valuable measure if you want to keep track of a company&#8217;s working capital management.<\/p>\n\n\n\n<p>On Monday, 16 September 2024, African Rainbow Capital released its latest results, which showed that Rain&#8217;s valuation has ballooned to R24.95 billion.<\/p>\n\n\n\n<p>Two things have stood out about Rain&#8217;s valuation over the years.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>ARC refused to provide financial data about Rain, which would allow analysts to do their own objective valuation.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Rain&#8217;s valuation has increased from R9.46 billion in December 2017 to R24.95 billion in June 2024.<\/li>\n<\/ul>\n\n\n\n<p>Rain is the largest contributor to the ARC fund&#8217;s intrinsic net asset of R18.62 billion. As such, many questions were raised about the mobile operator&#8217;s numbers at a recent investor call.<\/p>\n\n\n\n<p>However, ARC co-chief executive Johan van Zyl aggressively dismissed these questions, arguing they were inappropriate.<\/p>\n\n\n\n<p>He told analysts and media that Rain is a private company and that hiding core numbers is one of its competitive advantages.<\/p>\n\n\n\n<p>Despite questions about capital expenditure, revenue, profit, and subscriber numbers, Van Zyl would not divulge anything about the mobile operator.<\/p>\n\n\n\n<p>He said the only figure they would divulge, and the only one appropriate at this stage, was EBITDA.<\/p>\n\n\n\n<p>This statement is questionable. Interest and depreciation are highly relevant to telecommunications companies.<\/p>\n\n\n\n<p>Cell C, for example, was destroyed by the interest costs associated with its debt burden, which was needed to create a network.<\/p>\n\n\n\n<p>The great investor Warren Buffet also highlighted that depreciation and amortisation are highly relevant when valuing a telecommunications company.<\/p>\n\n\n\n<p>An accurate valuation is impossible without metrics like subscriber growth, average revenue per user (ARPU), service revenue, and earnings.<\/p>\n\n\n\n<p>One can assume that most analysts feel the same, which is why ARC has traded at a significant discount for years.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Rain valuation comparison<\/strong><\/h2>\n\n\n\n<p>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.<\/p>\n\n\n\n<p>For this analysis, MyBroadband compared Rain&#8217;s price-to-EBITDA ratio with that of its main competitors \u2013 Vodacom, MTN, Telkom, and Cell C owner Blue Label Telecoms.<\/p>\n\n\n\n<p>It showed that Rain&#8217;s price-to-EBITDA ratio of 9.98 was significantly higher than that of all the other operators.<\/p>\n\n\n\n<p>Vodacom&#8217;s price-to-EBITDA ratio is 4.14, Blue Label&#8217;s is 3.63, MTN is 1.96, and Telkom is 1.39.<\/p>\n\n\n\n<p>One can assume that other valuation ratios, like price-to-sales and price-to-earnings, would also have much higher values for Rain.<\/p>\n\n\n\n<p>This shows that Rain is significantly overvalued compared to Vodacom, MTN, Telkom, and Blue Label (Cell C).<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"981\" height=\"556\" src=\"https:\/\/mybroadband.co.za\/news\/wp-content\/uploads\/2024\/09\/1-7.jpg\" alt=\"\" class=\"wp-image-560738\" srcset=\"https:\/\/mybroadband.co.za\/news\/wp-content\/uploads\/2024\/09\/1-7.jpg 981w, https:\/\/mybroadband.co.za\/news\/wp-content\/uploads\/2024\/09\/1-7-600x340.jpg 600w, https:\/\/mybroadband.co.za\/news\/wp-content\/uploads\/2024\/09\/1-7-768x435.jpg 768w\" sizes=\"(max-width: 981px) 100vw, 981px\" \/><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>Rain\u2019s price-to-EBITDA ratio is completely out of sync with the rest of South Africa\u2019s telecommunications industry, which points to a highly inflated valuation.<\/p>\n","protected":false},"author":23,"featured_media":558599,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sma_x_autopost_status":"idle","_sma_x_autopost_error":"","_sma_x_post_id":"","_sma_facebook_post_id":"","_sma_instagram_post_id":"","_sma_x_attempts":0,"footnotes":""},"categories":[80335],"tags":[355,65169,42,43716,109,41],"class_list":["post-560737","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-cell-c","tag-johan-van-zyl","tag-mtn","tag-rain","tag-telkom","tag-vodacom"],"_links":{"self":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts\/560737"}],"collection":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/users\/23"}],"replies":[{"embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/comments?post=560737"}],"version-history":[{"count":5,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts\/560737\/revisions"}],"predecessor-version":[{"id":560753,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/posts\/560737\/revisions\/560753"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/media\/558599"}],"wp:attachment":[{"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/media?parent=560737"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/categories?post=560737"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mybroadband.co.za\/news\/wp-json\/wp\/v2\/tags?post=560737"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}