R18 billion worth of Rain

African Rainbow Capital Investments’ (ARCI’s) interim financial results for the six months ended 31 December 2022 revealed that it kept Rain’s valuation stable at R17.93 billion.

Rain is a data-first mobile network provider which offers wholesale services to Vodacom and 4G and 5G retail products directly to consumers.

Rain launched its uncapped 4G retail services in 2018 and Africa’s first 5G stand-alone network in 2019.

One of the operator’s most valuable assets is spectrum. When Rain launched, it used its 1,800MHz, 2,500MHz, and 3,500MHz spectrum to serve its wholesale and retail customers.

It bought additional spectrum – 2 x 10MHz of 700MHz and 20MHz of 2600MHz – for R1.43 billion at ICASA’s spectrum auction.

Rain now has a comprehensive and balanced portfolio of licensed spectrum that features both capacity and coverage bands.

It used this spectrum to roll out a national network which consists of around 9,000 sites, including 1,500 5G sites.

ARCI is a significant shareholder in Rain with a 20.3% shareholding. It is the biggest contributor to the value of the ARC Fund’s portfolio.

ARCI values this position at R4.75 billion but recognised the investment at R3.64 billion in its statements after applying discounts due to its minority position and liquidity constraints.

This puts Rain’s total valuation at about R17.93 billion when including the discounts taken from the valuation.

Rain’s valuation has been hotly debated over the years because very little financial or operational data is available on the company.

As an investment holding company, ARCI doesn’t need to consolidate its investment holdings into its financial statements.

All investment holdings are valued annually, and fair value gains or losses are added to ARCI’s income statement as unrealised gains or losses. It directly influences the company’s net income.

ARCI has recorded significant gains from Rain’s fair value adjustments over the years, which contributed significantly to its earnings.

In its latest trading update, ARCI said Rain is on course to generate R2 billion in EBITDA for its 2023 financial year ending February 2023.

Daily Investor asked ARC CEO Johan Van Zyl how many subscribers Rain has and what growth they have seen in these figures.

However, Van Zyl explained that they could not provide these figures due to Rain’s financial year not ending in the same period as ARCI’s.

Daily Investor also asked Van Zyl what Rain’s latest revenue and net income figures were.

Van Zyl explained that they preferred not to share this information as Rain may view it as competitor sensitive.

The lack of data makes it impossible for analysts to use their own models to value Rain, which may be one of the reasons for the big trading discount apparent in ARCI’s share price.

Daily Investor used the only official data available – Rain’s valuation and projected EBITDA – to compare it to its peers. We calculated the price-to-EBITDA for Rain, Vodacom, and MTN.

Rain has a price-to-EBITDA multiple of 9, significantly higher than Vodacom’s 5.8 and MTN’s 2.6.

Using this measure in isolation makes Rain look overvalued. However, as a growth company, the higher price-to-EBITDA may be justified.

A full analysis will only be possible when a full set of operational and financial data is made available for Rain.