Rain valuation excessively optimistic

Rain’s R25 billion valuation, based on R2.5 billion EBITDA (earnings before interest, taxes, depreciation, and amortisation), is highly inflated compared to the rest of the market.

Rain’s latest valuation was revealed in African Rainbow Capital Investments’ (ARC’s) announcement of its full-year financial results.

ARC revealed that it invested an additional R160 million in Rain in August 2024, bringing its shareholding to 21.0%.

This 21% shareholding in Rain contributes 26% to the fund’s value, making it the most important investment in the ARC stable.

The value of ARC’s stake in Rain increased from R4.516 billion on 30 June 2023 to R5.240 billion on 30 June 2024.

It means that Rain’s valuation increased from R22.30 billion to R24.95 billion over the last financial year.

Even more striking is that Rain’s valuation increased by R7 billion – from R17.95 billion to R24.95 billion – over the last eighteen months.

One would have expected ARC to make a big announcement regarding Rain’s rapid valuation increase, something like huge subscriber growth or a big margin increase.

However, quite the inverse happened. When analysts and journalists asked for numbers, ACR co-CEO Johan van Zyl aggressively dismissed these questions.

He would not provide any information about revenue, profit, capital expenditure, or subscriber numbers.

Trying to explain why he would not divulge subscriber numbers, he said the average revenue per user (ARPU) for mobile phone subscribers is much less than their broadband subscribers.

“To come with subscriber numbers here and there and just lump them all together will not make sense,” he said.

However, he would not give a breakdown of mobile phone and broadband subscribers or their ARPUs.

“We have to get away from those kind of metrics. The EBITDA number is an all-encompassing number at this moment in time,” he said.

“It tells you where we are. We have grown it very nicely from last year, and we expect to add another 25% to it this year.”

It raises the question of whether Rain’s R2.5 billion EBITDA aligns with the R25 billion valuation ARC has provided to the market.

To answer this question, one must calculate a price-to-EBITDA ratio, which measures a company’s value in relation to earnings before interest, taxes, depreciation, and amortisation.

It shows that Rain’s price-to-EBITDA ratio of 9.98 is significantly higher than that of its main competitors. Vodacom’s ratio is 4.14, MTN is 1.96, and Telkom is 1.39.

Rain’s price-to-EBITDA ratio is four times higher than the industry average, pointing to a highly inflated valuation.

If Rain was valued at the industry average price-to-EBITDA ratio, it would be worth R6.24 billion, a far cry from its current R25 billion valuation.

The chart below shows Rain’s price-to-EBITDA ratio compared to Vodacom, MTN, and Telkom.

Rain’s changing operations

Rain’s origins date back to November 2015, when MultiSource acquired WBS and its spectrum assets. WBS owned iBurst.

In June 2017, the company rebranded as Rain and launched affordable fixed-4G broadband packages.

However, that was not its main revenue stream. It signed a lucrative roaming deal with Vodacom, which was spectrum-starved at the time.

Simply put, Vodacom helped Rain build a 4G network, allowing its subscribers to roam on it and alleviating congestion.

Rain got a great deal. Through its roaming agreement and other favourable terms, it essentially got a network for free.

Its fixed-4G products were not a big play. Unsurprisingly, the product was cancelled not long after it was launched.

Rain generated most of its revenue through Vodacom roaming. It was capex light, and it had a big wholesale customer.

However, things changed significantly since then. There was a spectrum auction, which made Vodacom less reliant on Rain’s roaming.

Rain also started to build its own 5G network, which is capital-intensive, and moved away from its data-only mobile products.

The operator has become a fully-fledged mobile network supporting regular voice calls and SMSs. It signed a roaming agreement with Vodacom to ensure country-wide coverage.

So, Rain is no longer a scrappy startup with a few data-only products on its own network and Vodacom as a cash cow.

It is now a full mobile operator with significant network expenses, roaming agreements, interconnect fees, and debt.

It is also significant that Rain is South Africa’s fifth mobile operator. Third and fourth mobile operators typically struggle to survive. Being fifth is no easier.

Wayne McCurrie from FNB Wealth and Investments said there is no space for smaller operators in the market.

He explained that telecommunications require tremendous investments and scale, favouring large players like Vodacom and MTN.

“There is huge capital expenditure, fierce competition, and enormous regulatory pressure. Data prices continue to decline, putting pressure on mobile operators,” he said.

“The smaller platers – Telkom and Cell C – cannot compete effectively and made a good return on their money.”

This was clearly seen in Rain’s latest mobile product, which replaced its previous unlimited options.

Rain Mobile’s 2GB of data and 100 voice calls for R165 per month are more expensive than many competitors. It shows that it faces margin pressure.

Considering all these factors, Rain’s valuation seems excessively optimistic. There are no obvious reasons why it should be valued much higher than Telkom.

Rain can ease market concerns by releasing financial data like revenue, earnings, and subscriber numbers.

However, ARC and Rain have become more secretive about these numbers, which raises concerns about the mobile operator’s valuation rather than easing them.