The valuation performance of mathematically-optimised, equity-based composite multiples

Soon Nel and Niël le Roux

Journal of Economics, Finance and Administrative Science, 2017, vol. 22, issue 43, 224-250

Abstract: Purpose - This paper aims to examine the valuation precision of composite models in each of six key industries in South Africa. The objective is to ascertain whether equity-based composite multiples models produce more accurate equity valuations than optimal equity-based, single-factor multiples models. Design/methodology/approach - This study applied principal component regression and various mathematical optimisation methods to test the valuation precision of equity-based composite multiples modelsvis-à-visequity-based, single-factor multiples models. Findings - The findings confirmed that equity-based composite multiples models consistently produced valuations that were substantially more accurate than those of single-factor multiples models for the period between 2001 and 2010. The research results indicated that composite models produced up to 67 per cent more accurate valuations than single-factor multiples models for the period between 2001 and 2010, which represents a substantial gain in valuation precision. Research implications - The evidence, therefore, suggests that equity-based composite modelling may offer substantial gains in valuation precision over single-factor multiples modelling. Practical implications - In light of the fact that analysts’ reports typically contain various different multiples, it seems prudent to consider the inclusion of composite models as a more accurate alternative. Originality/value - This study adds to the existing body of knowledge on the multiples-based approach to equity valuations by presenting composite modelling as a more accurate alternative to the conventional single-factor, multiples-based modelling approach.

Keywords: Emerging markets; Composite multiples; Equity multiples; Equity valuations; Valuation precision (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jefasp:jefas-02-2017-0042

DOI: 10.1108/JEFAS-02-2017-0042

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