Rain more valuable than Telkom

Mobile network operator Rain’s valuation has climbed to R25.91 billion according to the estimates of African Rainbow Capital Investments (ARCI), dwarfing Telkom’s market cap of R17.79 billion.

According to ARCI’s half-year results released last week, Rain’s valuation grew by nearly R1 billion between 31 June and 31 December 2024.

This was after the fund invested a further R172 million in Rain, bringing its total shareholding in the mobile operator to 21.76%. It values its stake at R5.639 billion.

At 27.2% of the fund, Rain is the single largest investment held by ARCI, where South African billionaire Patrice Motsepe is a shareholder and chairman.

In under eight years, Rain’s valuation has surged by R16.45 billion, growing from R9.46 billion in December 2017.

Because of these outsized gains, Rain’s valuation is a regular topic of discussion among industry players.

Telkom is a logical point of comparison, as ARCI is effectively saying that Rain is more valuable than South Africa’s oldest network infrastructure provider.

Telkom is a telecommunications giant that spent most of its life as a state-protected monopoly. It has amassed significant assets, including over 170,000km of national, regional, and last-mile fibre infrastructure.

Its total fibre network footprint dwarfs every other player in the market, even though Vumatel’s network connects more homes than Telkom’s Openserve.

In addition to its fixed-line infrastructure business, Telkom has a mobile network operator that competes directly against Vodacom, MTN, and Rain. Telkom also has a consumer Internet service provider and an enterprise IT division.

For these and other reasons, Rain’s valuation raises eyebrows in the industry.

One of the complaints from investors is that very little financial or operational data is available about Rain.

Despite regular questions around the issue, ARC has been reluctant to share any meaningful financial figures on Rain.

The low level of transparency around Rain’s operations and its finances gives investors little confidence in its valuation.

Another thing bothering investors was whether Rain would be able to maintain its low capital expenditure model.

The cost associated with building and maintaining a network crushed Cell C, and the same could happen to Rain.

Last year, the only detail ARC co-CEO Johan van Zyl was willing to divulge was Rain’s earnings before interest, taxation, depreciation, and amortisation (Ebitda) — R2.5 billion as of 30 June 2024.

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.”

However, even when limiting the comparison to only Ebitda, Rain’s valuation remains questionable.

Telkom reported Ebitda of R10 billion in its annual results for the period ended 31 March 2024 — quadruple Rain’s.

In its latest quarterly trading update, Telkom also reported the Ebitda of its mobile division for the past four quarters.

Combined with data from its Q3 2024 trading update last year, it is possible to calculate an annual Ebitda for Telkom Mobile that lines up exactly with Rain’s reporting period.

Telkom Mobile’s annual Ebitda on 30 June 2024 was R5.3 billion — more than double Rain’s.

ARCI’s delisting plan

Following years of investor criticism about how ARCI values its underlying assets, the company has announced a plan to delist from the Johannesburg Stock Exchange (JSE). It will also be re-domiciled from Mauritius to South Africa.

“To facilitate the delisting of ARCI, ARC and ARC SPV have offered to acquire all the issued ordinary shares in ARCI not already owned by ARC and ARC SPV,” the company stated.

ARC and ARC SPV have offered to buy out shareholders at a price of R9.75 in cash.

In its notice to shareholders, ARC said the offer represents a 12.6% premium on the previous closing price of R8.66 per share and a 21% premium over the 30-day volume-weighted average price of R8.06 per share.

It also noted that this was a discount of 22.8% to the net asset value per share as set out in the ARCI interim results announcement published last week.

“The public shareholding in ARCI is limited, as all or almost all of the shareholders are South African and there is limited liquidity in the ARCI shares,” the company explained in its rationale for the move.

“The ARCI share price also does not reflect the true value of the investment in the ARC Fund and trades at a discount to the net asset value of the ARC Fund, meaning that investors in ARCI are not receiving the true value of their investment.”