Splitting the Value Gap How to Break Down Heineken’s Premium in M/B Multiple into Various Value Drivers

In this article we present a method to analyse the Market to book (M/B) ratio of a company. The difference between this ratio compared to M/B ratios of other companies in the industry (“value gap” or “value premium”) is analysed and broken down into several components. The first component is based on the value driver profitability and describes how much of the M/B ratio deviation can be ascribed to the fact that the companies' profitability deviates from the industry. Similarly we identify four other value drivers constituting a growth gap/premium, an asset quality gap/premium, a leverage gap/premium and an investor relations gap/premium. Essential for the analysis is the use of a valuation model which determines the value of the company based on the value drivers only. In order to do so we use a model which for the future assume that profitability and growth move in the direction of long term averages, but that this fade is incomplete. To illustrate the methodology we have applied it to the beer industry and present the results for Heineken. For Heineken it turns out that relatively high M/B multiples are explained by conservative accounting which is only partially offset by a relative low sales margin