An Optimal Peer Group Selection Strategy for Multiples-Based Modelling in the South African Equity Market

Abstract

Although peer group selection is a key consideration when performing multiples-based valuations, there is a lack of theoretical guidance on an optimal peer group selection strategy in emerging markets. Principal Component Analysis-based biplots and correlation monoplots are used to assess the valuation performance of multiples whose peer groups are based on either industry classification or valuation fundamentals. The evidence suggests that multiples whose peer groups are based on valuation fundamentals outperform multiples whose peer groups are based on industry classifications, with a combination of valuation fundamentals Rg and RoE emerging as the optimal peer group variable. The evidence suggests that an optimal choice of peer group variable could secure an increase in valuation precision of as much as 41.77%.

El sentimiento de los inversores sobre el tamaño en los múltiplos de valoración europeos

“…Lie and Lie (2002) established that the accuracy and bias of value estimates vary greatly by company size, profitability, and intangible value of the firm. Bhojraj and Lee (2002), Young and Zeng (2015) and Nel and Roux (2015) also found noticeable improvements of multiples valuation by selecting the peer group based on different economic and financial characteristics.…”

“…These internet searches collect investors' perceptions (subjective judgments), and perform better, explaining the ROE, financial variables and market valuation multiples. Nel and Roux (2015) also determined that a peer group of multiples, in emerging markets, based on a combination of economic variables, performs more accurate valuations than multiples whose peer group was selected on single valuation fundamentals or industry classifications.…”