Patrice Motsepe’s investment arm, African Rainbow Capital, says it is working on convincing investors that its strategy of investing in start-ups - including TymeBank, stock exchange A2X and mobile operator Rain - is a sound one that will soon pay off.
Updating shareholders and analysts on its activities and performance of its investments up to the end of November 2019, ARC co-CEO Johan van der Merwe said the feedback the company received was that investors needed to see that these new ventures could deliver the cash flows they were promising.
ARC's shares were trading at R4.15 when the JSE closed on Friday. This was more than R5 discount to its net asset value (NAV) per ordinary share of R9.45 that the company reported at the end of its financial year in June. The share price at which the companies trade on the JSE shows what investors are willing to pay for it. But NAV reflects the true value of those shares based on the company's underlying assets and cash.
Companies usually trade at a discount to their NAV when investors are not sure about their prospects. However, investment holding companies, like ARC, almost always trade at a discount in SA. Van der Merwe said ARC’s discount is, however, bigger than that of its peers and the company is taking steps to address this.
"Investment holding companies do trade at discount but ours is actually quite exacerbated and that is a concern to us. Some of the criticism that we've heard out of the market is that some of our big investments are startups, Rain, TymeBank. It does not matter how confident we are about them. It's sometimes difficult for investors to see the feasibility of cash flows," he said during a conference call with analysts.
These startups make up a large portion of ARC's net asset value. But even some its more established investments, like Alexander Forbes and EOH have been going through their roughest patches recently.
Van der Merwe said the other criticism they've received from investors is that ARC is too diverse. Its interests range from stakes in different field of financial services to telecommunications companies, property, mining ventures and agriculture.
As for the startups, van der Merwe said ARC expects TymeBank to start generating profit in the second quarter of 2021 if all its assumptions, like number of customers and additional products sold through the bank, are met. The bank attracted 1-million customers since it launched in April this year, with 40% of those active and transacting regularly. It is targeting an additional 2-million in 2020.
For Rain, he said the mobile operator has not been able to aggressively acquire customers because it is still rolling out its infrastructure. At present, the mobile operator has installed its 4G equipment on 3 200 cellphone towers around the country while its target is to have 5 500, minimum. Rain also launched a 5G network in September.
ARC said it has since rolled out 250 5G towers and aims to roll out 700 by December 2020, and ultimately 2 000 in the long-term. Currently, Rain sells about 13 000 to 16 000 contracts a month, said van der Merwe.
"There will come a point in time when we can much more aggressively market this product which is actually a fantastic product. The problem is; the last thing you want is to be sold a Rain contract and then Rain doesn't have coverage across South Africa," said van der Merwe.
*This article was updated at 13:00 on Sunday December 8, 2019 to correctly attribute quotes to Johan van der Merwe, a previous version attributed quotes to Johan van Zyl.