ABSTRACT. In this study a market-based approach was adopted to investigate the valuation performance of 16 multiples over 28 sectors in the South African market. The market-based approach facilitates/enables an evaluation of the ability of multiples-based modeling to approximate actual share prices on the JSE Securities Exchange. In addition, this study employs principal component analysis-based biplots and correlation monoplots to illustrate the relative valuation performance amongst all 16 multiples over all 28 sectors. The evidence suggests the following: Firstly, none of the peer group variables offered evidence to suggest that they were the optimal choice across all 28 sectors, which implies that the optimal choice of peer group variable is sector-specific, i.e. each of the 28 sectors may have a different optimal peer group variable. Secondly, the superior valuation performance of multiples whose peer groups were based on a combination of valuation fundamentals, as suggested in the finance literature, does not hold on a per sector basis. Thirdly, it was established which multiples, whose construction was based on an optimal peer group variable, performed the most accurate equity valuations in each of the 28 sectors in the South African market. Lastly, to this end, a sector value chain was subsequently created, which ranked each of the 16 multiples according to the valuation precision they exhibited in each of the 28 sectors. The sector value chain, which reflects substantial potential precision gains, ranging from 43.27% to 218.33%, also presents a synopsis of the sector-specific optimal peer group variables to be used in each of the 28 sectors, and provides an empirical guide to analysts in this respect. pp. 25–54
JEL codes: D4; D52; E44; F16

Keywords: valuations; multiples; peer group variables; valuation precision; sector value chain; emerging market

How to cite: Nel, WS, and NJ le Roux (2017), “An Analyst’s Guide to Sector-Specific Optimal Peer Group Variables and Multiples in the South African Market,” Economics, Management, and Financial Markets 12(1): 25–54.

Received 28 October 2015 • Received in revised form 11 December 2015
Accepted 12 December 2015 • Available online 25 January 2016


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School of Accountancy,
Stellenbosch University
Department of Statistics and Actuarial Science,
Stellenbosch University

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