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Picture: 123RF
Picture: 123RF

Oscar Wilde famously once said: “Nowadays people know the price of everything and the value of nothing.”

That tallies with how we have traditionally viewed companies. Go back 30 years or so, and 80%-90% of the value of a company was determined by its tangible assets — think buildings and machinery — with the balance dismissively known as intangibles and considered of little financial value. Fast-forward to today, and the global value of intangibles is 45%.

Intangibles can fall into three categories:

  • Rights, including leases, agreements and contracts;
  • Relationships, including a trained workforce; and
  • Intellectual property such as brands, patents and copyright.

London-based consultancy Brand Finance has spent the past 25 years monitoring the rise in the value of intangibles. Through its Global Intangible Finance Tracker (GIFT™) we know that in the past 12 months alone the value of intangible assets has risen 8%, from $57.3-trillion to $61.9-trillion. This figure is significant — almost three times the value of the GDP of the US.

Apple is the most valuable public company, with intangible assets valued at $2.7-trillion; it is also up 8% on the year. This demonstrates the continued and growing importance of intangible assets, specifically brands and innovative technology. 

Historically there has been the challenge of the low disclosure of intangible assets and the difficulties this creates for efficient fund allocation and growth support. Most intangible assets aren’t mentioned on balance sheets due to the limitations set by the accounting standards boards, which state that internally generated assets such as brands cannot be disclosed while acquired brands can. That means Diageo, the largest alcoholic drinks company in the world, can talk of Smirnoff Vodka, as an acquired brand, but not of Johnnie Walker, which is home-grown.

This ruling may finally be about to change. For a start, the International Accounting Standards Board (IASB) has added intangible assets to its official agenda. And the intellectual property office of Singapore broke ranks and this year released an intangibles disclosure framework — the first of its kind.

As the IASB pivots to face the reality of today — something not unique just to the world of accounting — company managements will also need to recalibrate. We suggest a first step would be to identify all intangibles, both home-grown and acquired, then put a value on them and monitor the factors affecting them. 

We estimate that companies on the JSE are potentially undervalued by a staggering $147bn

The local picture

In South Africa there are significant companies that trade at a considerable discount to their NAV on the JSE, with little or no attention given to their intangible value.

Some seem to forget that this country is part of the greater world. Therefore, to look at the global data and compare ourselves can provide fascinating insights into how we are performing.

The report card of the local economy over the past decade or so is not pretty. Brand Finance estimates that the value of companies listed on the JSE is $384bn, down 18.5% over the year.

For context, and taking into account the mix of companies listed on the bourse, consider that 24% of the listing value is intangible, compared with the global average of 45%. The sectors with the largest proportion of intangible value are pharma (63%), leisure and gaming (50%) and health care (50%). Sectors we consider undervalued are retail and chemicals. Banking is the only sector outperforming the average global percentage of intangible value that contributes to business value.

As a result, we estimate that companies on the JSE are potentially undervalued by a staggering $147bn. 

Warren Buffett once said: “If you gave me $100bn and said: ‘Take away the soft drink leadership of Coca-Cola in the world’, I’d give it back to you and say it can’t be done.” Buffett long ago understood that on many occasions brands are the most valuable asset a company owns and, when nurtured and invested in, provide above-average long-term returns.

Some years ago I was asked to put a price on the Nelson Mandela brand. I said it was not possible, as a brand has to be infinite, but that Mandela’s value to South Africa was immense. Pushed for an answer, I finally said the Mandela brand was “priceless”. And so it is to this day. 

* Sampson is chair of Brand Finance Africa. Additional data from Annie Brown and Oliver Schmitz 

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