Rain Mobile (or Rain) is a South African mobile internet service provider and is 20% owned by African Rainbow Capital (or ARC).
In its 2019 annual report, ARC valued 100% of Rain at R12.5 billion.
I wanted to see for myself whether or not Rain was overvalued by optimistic directors.
These are my findings.
Rain’s main assets
are its 2.6 and 3.6 Gigahertz (GHz) frequency spectrum allocations.
Frequency spectrum is a licence to provide mobile network connectivity service.
Spectrum works just like radio stations.
Under South African law, you get allocated a certain frequency and can only use that.
Rain uses its 2.6 GHz frequency to provide 4G and the 3.6 GHz for 5G service.
Rain generates revenue
(1) selling internet data and (2) leasing its spectrum.
We don’t have the financial figures on Rain’s internet data revenue as they are not publicized, this text will focus on the company’s leasing business.
Rain leases to Vodacom parts of its spectrum payments of over R1 billion per annum.
As part of the deal, Rain also gets to use parts of Vodacom’s network.
Spectrum is a limited resource
As of 10 October 2019, Rain is the only South African telecommunications company with 2.6 GHz spectrum allocated.
Rain has loads of unused spectrum and can expand coverage of its network without having to erect a lot of cell phone towers.
This is a significant competitive advantage for Rain as MTN and Vodacom have already used up their spectrum allocations and can only expand their networks through building more cell phone towers.
This is the problem facing MTN and Vodacom.
The demand for internet data from their customers exceeds what they can provide with their allocated spectrum.
They have had to build more cell phone towers (very expensive) and recycle some of their old 2G and 3G networks into 4G.
The higher input costs for the two companies to build cell phone towers and equipment has in turn led to the current high data costs.
A simple solution would be for the state authorities to allocate more spectrum to the network companies.
The National ministry of communications and ICASA have been slow in implementing this.
We have mentioned the roaming agreement above that allows Vodacom to use Rain’s network.
By inspecting Vodacom’s audited financials, we know that Vodacom has paid Rain
R1.7 billion in 2018,
R1.2 billion in 2019 and
Will pay R1.1 billion for its 2020 financial year.
So back to the pressing question...
Is Rain worth R12.5 billion?
By guessing that Rain can net R200 million from its roaming income stream, that’s after maintaining its existing infrastructure, and paying its operating expenses and taxes.
This would give Rain a Price earnings of 62 which is quite high (but usual for tech start-ups) and would make the company appear overvalued.
*The R200 million after tax cash earnings is a GUESS (could actually be way higher).
Please note that internet data revenues do not form part of my guesswork above as the information is not publicly available.
Nor is this blog post is not meant to discredit ARC’s valuation of Rain.
So Is Rain really worth R12 billion?
I don’t know.
There is not enough information in the public domain.
My one question has left me with more questions like:
How many regular monthly customers do they have for their R250/pm internet package?
Can we get a copy of the Rain’s audited financials?
What is African Rainbow Capital’s valuation based on? Actual figures achieved or what they expect Rain will perform?
Why did the discount rate used to value Rain reduce by 1.9%? A lower discount rate obviously results in higher asset values
Tides seem to be changing though…
For the 2019 State of the Nation Address, President Cyril Ramaphosa spoke of increasing spectrum allocation to mobile networks.
If spectrum is opened up in the next few months for Vodacom and MTN, Rain could be in trouble.
They stand to lose the Vodacom roaming agreement contract and over R1 billion in annual revenues.
Having more spectrum will result in significantly reduced costs for MTN and Vodacom.
Vodacom CEO Shameel Joosub has previously stated that if the government gave it more spectrum, it could cut mobile data prices in half.
MTN and Vodacom would therefore be able to reduce their data prices and price similar data packages around the R250 per month Rain currently charges.
Loads of help with this article obtained from MyBroadband (Grazie mille)