Analysis of Equity Valuation Models and Target Price Accuracy: An Evidence From Analyst Reports in Indonesia

Budi Frensidy,Ryan Joshua Pelealu,Robiyanto Robiyanto

doi:10.1177/2158244020949507

Budi Frensidy, Ryan Joshua Pelealu + Show 1 more

Open Access

https://doi.org/10.1177/2158244020949507

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Abstract

This study examines whether investment analysts (sell-side) in Indonesia tend to prefer cash-flow-based valuation models over the accrual-based valuation model, how the accuracy of valuation models are used, and whether the use of both valuation models simultaneously for generating target prices can improve accuracy. The researchers conducted a comprehensive content analysis of 99 equity research reports for most companies listed in the LQ-45 index. The results show that in the accrual-based valuation model, in particular, the ratio of stock price to income (P/E) was the most popular valuation model that appeared in equity reports in all sectors. However, from the perspective of the valuation model as the producer of the target price (dominant valuation), discounted cash flow (DCF) was the most popular valuation model used. It was also found that the cash-flow-based valuation model gave the highest accuracy. In addition, the researchers also found significant results in the Chi-square test which showed the use of both valuation models simultaneously could improve the valuation results more precisely by the analysts. This was in line with the intuition that the accrual concept adds value to the relevance of the information to cash flow.

Highlights

Analysts are important intermediaries in the capital market because they provide estimated earnings, recommendations, and target price for their clients (Clatworthy & Lee, 2017), their presence considerable as one among many pillars in the efficient capital market (O’Brien et al, 2017)
This finding is consistent with previous research by Ashton et al (2011) and Penman and Sougannis (1998) who found that the residual income valuation model (RIVM) produced more accurate estimates of company value than the dividend discount model (DDM) and discounted cash flow (DCF)
This study compares the use and accuracy of valuation models to gain a better understanding of how the analysts value companies in the Indonesian capital market

Summary

Introduction

Analysts are important intermediaries in the capital market because they provide estimated earnings, recommendations, and target price for their clients (Clatworthy & Lee, 2017), their presence considerable as one among many pillars in the efficient capital market (O’Brien et al, 2017). The findings of Danbolt and Rees (2002) in six European countries (France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom) revealed that the book-value accounting model worked relatively well for companies in the financial sector, while valuations based on large profits were more relevant in countries such as the Netherlands, the United Kingdom, and Italy than the other three countries in their sample. This finding is supported by Schantl (2016) and Yin et al (2016). The researchers compare the use and accuracy of valuation models intending to gain a better understanding of how the analysts value companies in the Indonesian capital market

Literature Review

13. Trimegah Securities

Results and Analysis

Conclusion