By: Oliver Schmitz, MD Brand Finance Africa and Annie Brown, GM Brand Finance
In the dynamic world of investing, understanding why a company’s shares trade at a discount compared to key benchmarks such as comparable company multiples, analyst target prices, or Net Asset Value (NAV) is essential for making well-informed decisions. Several factors contribute to these discounts, and brand valuation, coupled with assessing intangible assets, plays a crucial role in addressing these complexities.
Brand valuation entails evaluating and assigning a financial worth to a company’s trademarks and associated intellectual property. Robust brand valuations incorporate marketing insights, including data on brand health tracking, alongside strategic plans and financial projections across various products and markets in which the brand operates.
This comprehensive assessment establishes a quantifiable financial value for the brand, providing actionable insights not just for improving the brand itself, but also for optimising overall business strategies.
Here, we outline eight challenges that brand owners commonly encounter and demonstrate how brand valuation can provide solutions to unlock sustainable value.
1. Market sentiment
Investor sentiment plays a crucial role in influencing stock prices. When negative sentiment arises due to issues with a company’s reputation, business performance, or broader economic uncertainties, investors may hesitate to pay a premium for its shares.
Solution: Brand valuation serves as a tool to identify critical brand and reputation indicators that impact the company’s ability to attract and retain profitable customers, influencing its medium-term business performance. It also functions as an early-warning system, flagging potential challenges and guiding strategic decisions to enhance future value.
By demonstrating the strength of the brand relative to its competitors, it provides reassurance to investors and stakeholders, especially in challenging sectors. Our analysis indicates that companies with robust brands achieve growth rates 1.7 times higher than the overall market.
2. Poor performance or financials
When a company experiences financial struggles, declining revenues, or operational difficulties, investors may become hesitant to pay a premium for its shares, resulting in a discount to its Net Asset Value (NAV). Analysts may also lower the company’s target price based on these issues and the prospects for recovery.
Solution: Brand valuation identifies specific areas where a company’s brand and reputation are weaker compared to its competitors, directly influencing its business performance. This analysis offers actionable insights for stakeholders to address financial challenges through enhanced marketing strategies and improved brand management.
Research indicates that a one-point increase in brand consideration can lead to a sales increase of 0.5% to 1%. Moreover, brand valuation uncovers opportunities to generate cash, such as through brand licencing in new markets or product categories.
3. Leadership and governance issues
Problems with leadership, such as lack of confidence or concerns about corporate governance, can cause the market value of shares to trade at a discount relative to value indicators.
Solution: Brand valuation goes beyond assessing leadership issues to provide insights that reassure stakeholders about the overall health of the business and mitigate the short-term impacts of leadership deficiencies on the company’s reputation and brand.
In cases where leadership challenges persist, brand valuation offers a clearer assessment of their long-term implications for the business, supporting proactive governance and risk management efforts. It also quantifies the potential financial impact of poor governance.
For instance, in the case of Nissan, despite its CEO being fined $37m for financial misconduct, the overall reputation damage was estimated at $9bn, resulting in a decline in brand value from $19bn in 2018 to $10bn in 2023.
4. Market conditions
General market conditions and economic factors exert significant influence on stock prices. During a bear market or economic downturn, investors often seek greater discounts to compensate for perceived risks, resulting in shares trading below their actual value.
Solution: In such challenging market environments, highlighting the value of intangible assets and brand strength positions a business strategically. This approach ensures the company is well prepared to capitalise on favourable market shift by showcasing its competitive advantages, which promise long-term returns beyond short-lived market fluctuations.
Strong brands also mitigate risk, leading to lower financing costs and reduced valuation discounts. Research indicates that companies with strong brands can secure financing at an average of 2.4% lower interest rates when compared to their peers with weaker brands.
5. Market mispricing
Shares occasionally trade at a discount due to market mispricing, which can stem from temporary inefficiencies or a misunderstanding of the company’s actual value.
Solution: To address this, brand valuation compares the business’s value against market and analyst targets, identifying opportunities and providing insights to correct mispricing.
6. Asset composition
The composition of a company’s assets can impact the discount applied to its Net Asset Value (NAV). For example, if a substantial portion of assets is illiquid or difficult to value, analysts and investors may apply a discount to the NAV to reflect this uncertainty.
Solution: To mitigate such discounts, accurately valuing brands and intangible assets, often undervalued due to misunderstandings, removes third-party estimations and improves the perception of overall assets. Including the value of intangible assets in the notes to financial
statements, particularly brand value, mitigates concerns and enhances analyst and shareholder confidence.
7. Liquidity concerns
Concerns about asset liquidity can drive down share prices.
Solution: The growing market for acquiring brands and related intangible assets, such as websites, relies on having reliable valuations of these assets.
8. Distribution policies
Choosing to retain earnings rather than distributing dividends can potentially reduce share values.
Solution: Brand valuation, alongside the valuation of intangible assets, demonstrates how strategic reinvestment of retained earnings can create asset value over time, ultimately delivering long-term benefits to shareholders.
