Equity Valuation Using Multiples: Controlling for Differences Between Firms

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

“…It is of interest to note that the concurrence of the South African results with that of the developed market literature is independent of the methodology applied. As alluded to in Section 2, authors who applied different methodologies to the one applied in this study, obtained similar results (Henschke & Homburg, 2009;Schreiner, 2007;Bhojraj & Lee, 2002). However, the allure of the methodology employed in this study is that, unlike most theoretical models that are based on simplified realities, it is a realistic, if not near exact, reflection of how multiples are applied in practice.…”

“…The construction of multiples based on a target company's industry classification is a common phenomenon (Nel et al, 2013a;Nel, 2009a;2009b;Goedhart et al, 2005;Liu, Nissim and Thomas, 2002a;Fernández, 2001;Barker, 1999). So, too, is a multiples-based valuation approach where peer groups are based on valuation fundamentals (Henschke and Homburg, 2009;Dittmann and Weiner, 2005;Goedhart et al, 2005;Herrmann and Richter, 2003;Bhojraj and Lee, 2002). The methodology applied in this paper is largely adopted from Nel et al (2013a, b).…”

“…The search for the most effective basis for peer group selection is not a new phenomenon. Evidence from the developed market literature suggests that the valuation precision of multiples increases when their peer groups are based on more narrowly defined industry classifications vis-à-vis more widely defined industry classifications (Alford, 1992;Damodaran, 2006a;Schreiner, 2007;Henschke and Homburg, 2009). The obvious conclusion drawn from these results is that a more narrowly defined peer group contains more homogeneous companies vis-à-vis a more widely defined peer group, which will contain more heterogeneous companies.…”

“…Initial research findings published in the developed market literature by Alford (1992) suggested that peer group selection based on valuation fundamentals failed to result in an increase in valuation precision vis-à-vis peer group selection based on industry classification. However, subsequent studies by Henschke and Homburg (2009); Dittmann and Weiner (2005); Goedhart et al (2005); Herrmann and Richter (2003); Bhojraj and Lee (2002) and Cheng and McNamara (2000) found that peer group selection based on valuation fundamentals offered substantial improvements in valuation precision over peer group selection based on industry classifications. Although the evidence, therefore, suggests that multiples whose peer group selection is based on valuation fundamentals offers superior explanatory power vis-àvis multiples whose peer group selection is based on industry classification, these findings emanate from studies that focused on the relatively deeply traded and liquid markets of developed countries.…”

Multiples for Valuation Estimates of Companies in the Technology Sector of Emerging Markets

“…According to the authors, the relative accuracy of the valuation based on a small number of comparable firms depends heavily on the similarities of comparable firms with the objective firm. Henschke & Homburg (2009) examine the problem of the differences between firms and impact on valuations based on multiples. They believe that the differences between firms lead to systematic errors in the value estimates of different multiples.…”