Bridging the valuation gap

Valuation gaps rarely stem from a single cause. Instead, they tend to emerge from a complex mix of external pressures, sector dynamics and company-specific issues. 

On the broadest level, global market conditions set the backdrop.  

Macroeconomic uncertainty, geopolitical tensions and systemic shocks can shape investor sentiment across the board. These factors don’t usually target individual companies directly, but they influence how the market behaves. 

Take the telecom sector during the COVID-19 pandemic. Operationally, many telecom companies were well-positioned to benefit from the crisis. With remote work, digital schooling and increased demand for connectivity, their services became more essential than ever. Usage surged, networks held up and, in many cases, revenues remained stable or even grew. Yet despite this, their market capitalisations plunged in the early stages of the crisis. 

Why? Because the market was reacting to macro-level uncertainty. Investors were pulling back across sectors, reallocating capital toward perceived safe havens and bracing for systemic risk. The sell-off was indiscriminate. Even companies with strong fundamentals and crisis-resilient business models were caught in the wave. This illustrates how global factors, while not directly tied to company performance, can still distort valuation in the short term. 

Sector-specific dynamics can create more targeted valuation pressure.  

Sector trends are constantly evolving. At any given time, certain industries may benefit from favourable market sentiment, while others face structural challenges or investor scepticism. These dynamics can be driven by shifts in consumer behaviour, competitive intensity, supply chain disruptions, regulatory changes or technological innovation. Even companies with solid fundamentals can find themselves undervalued if their sector is out of favour or undergoing transition.  

An interesting example of sector dynamics impacting investors’ appetite is the insurance sector’s transition to IFRS 17. This new accounting framework fundamentally changed how insurers report revenue, profit and liabilities. While the change aimed to improve transparency and comparability, it also introduced complexity. Investors, especially those not deeply embedded in the sector, struggled at first to interpret the new metrics and understand how they reflected underlying business performance. 

As a result, many adopted a cautious stance. Rather than risk misjudging a company’s financial health, they chose to wait until the new reporting became familiar and widely understood. This “wait and see” approach contributed to more measured investor engagement, with insurance stocks showing positive but relatively muted performance compared to broader indices and other financial sectors during the transition period.

The valuation impact wasn’t driven by deteriorating performance, but by a temporary confidence gap. Investors didn’t doubt the business itself, they doubted their ability to assess it accurately. This illustrates how sector-level changes can create short-term valuation headwinds if companies don’t proactively guide the market through the transition.

On the most granular level, company-specific factors are often the most actionable.

These valuation drivers typically stem from a range of internal dynamics: strategic choices, operational performance, structural design and geographic exposure. Unlike global or sector-wide influences, these are areas where CFOs and leadership teams can take direct action to reshape perception and unlock value. 

For instance, underperforming or non-core business lines may dilute overall profitability and distract from the company’s strategic focus. When performance is uneven across divisions, investors may struggle to assess the company’s true potential, leading to a valuation discount. 

Geographic exposure can also play a role, particularly when operations are concentrated in politically sensitive regions. Companies with significant activity in markets affected by trade tensions or regulatory instability may be viewed as vulnerable, even if their fundamentals remain strong. This perceived risk can result in a lower valuation. 

Structural complexity is another factor. Conglomerates operating across unrelated sectors or geographies may be seen as lacking strategic coherence. If synergies between divisions are unclear or unconvincing, the market may apply a “holding discount”, valuing the group less than the sum of its parts. 

Finally, strategic ambiguity can undermine investor confidence. When companies fail to clearly articulate their capital deployment plans, geographic priorities or long-term growth strategy, the market may hesitate. Uncertainty around direction and decision-making can lead investors to undervalue the stock, even when performance metrics are solid. 

In most cases, undervaluation results from a combination of these factors. In order to address their undervaluation effectively, companies must first gain clarity on what’s driving the disconnect. That begins with a thorough and honest assessment of market sentiment to uncover how the company is truly perceived and what may be dampening investor interest. 

Once companies have identified that a valuation gap exists, the next step is to understand why. This requires moving beyond internal assumptions and taking a hard look at how the market actually perceives the business. CFOs can begin this process by leveraging two complementary tools.

The first is a deep dive into sell-side analyst models. These models, particularly those that use sum-of-the-parts valuation, can reveal how different segments of the business are assessed. This analysis helps pinpoint whether the undervaluation stems from specific business units, geographic exposures or the overall group structure. For example, it may highlight that certain divisions are being heavily discounted or that the market is applying a holding discount due to a perceived lack of synergies.

The second tool is a perception study. This involves engaging directly with analysts, current shareholders and, even more critically, investors who chose not to invest in the company. Their feedback can be especially revealing. If your company fits within their investment mandate but they opted for a peer, it signals that your equity story isn’t resonating. Understanding their rationale can uncover blind spots in your messaging, clarify misperceptions and highlight areas where investor confidence may be lacking.

Together, these diagnostics often lead to actionable insights. A holding discount may suggest the need to simplify or spin off parts of the business. Negative sentiment around a particular market or business line could prompt a strategic exit. And if the company’s growth story feels too long-term or speculative, a well-timed acquisition could help accelerate the timeline and make the investment case more tangible.

That said, market perception should inform strategy, not dictate it. Investors may have short-term horizons or views that diverge from the company’s long-term vision. In such cases, the challenge is not the strategy itself, but how effectively it is communicated.

This is where the equity story becomes critical. It forms the foundation of a company’s investment case and answers a critical question: “Why should investors choose this stock over others?”. In a competitive capital market, where attention is limited and alternatives are abundant, the equity story must do more than inform, it must persuade.

To resonate with investors, the narrative should be built around five essential pillars: clarity, conciseness, compelling differentiation, credibility and responsiveness to concerns.

Clarity ensures accessibility. The narrative should avoid jargon and overly technical language, using straightforward explanations and visual aids where appropriate. This makes the story understandable not only to sector specialists but also to generalist investors, broadening its reach and impact.

Conciseness is equally important. Investors are exposed to numerous investment cases and the ability to communicate the core value proposition quickly and effectively is crucial. The focus should remain on the segments and markets that materially drive performance, avoiding unnecessary detail that could dilute the message.

Compelling differentiation sets the company apart. The equity story should clearly articulate the business model and competitive advantages, explaining how they translate into financial returns. Key performance indicators should be selected to reflect strategic priorities, whether capital returns, long-term growth or profitability. These metrics should be aligned with industry benchmarks where possible and any proprietary KPIs must be simple, transparent and consistently applied.

Credibility is built through evidence. Historical performance should support future projections and transparency around risks and challenges is essential. Investors value realism and want to see how management plans to navigate uncertainty, not just avoid it.

Finally, the equity story should be responsive to market concerns. Anticipating and addressing potential investor questions demonstrates control and builds trust. 

Together, these elements should form a strategic narrative that can shape investor perception and build confidence. However, even the most well-crafted story will fall short if it is not delivered in a way that resonates with its audience. 

While the equity story should remain consistent in its core message, its delivery must be adapted to the audience. Different investor profiles come with distinct priorities, time horizons and decision-making criteria. Recognising and responding to these differences is essential to ensure the message resonates.

For example, pension funds and other institutional investors typically seek long-term stability, predictable returns and strong governance frameworks. Their focus is often on sustainable growth and risk mitigation. In contrast, hedge funds may prioritise short-term performance, market catalysts and opportunities to outperform benchmarks. Their appetite for risk and speed of decision-making can be markedly different.

Understanding the investment mandate, strategy and portfolio composition of each audience allows companies to emphasise the most relevant aspects of their equity story. This preparation not only sharpens the message but also increases its impact. Tailoring the communication approach helps build engagement across a diverse investor base.

Tailoring communication to different investor profiles strengthens engagement, but long-term success also depends on the composition of the shareholder base itself. Building a resilient and well-diversified shareholder base is a strategic priority for companies seeking stability, flexibility and sustained market confidence.

A diversified base reduces dependency on a few large holders, mitigates volatility and broadens access to capital. It also enhances resilience during periods of uncertainty, as a balanced mix of investor types can help absorb market shocks and maintain support through strategic transitions.

Establishing this base requires a dual approach. First, companies must actively engage with existing investors. Regular updates, transparent dialogue and responsiveness to feedback help reinforce trust and ensure continued alignment. These relationships are not static, they must be nurtured to remain strong.

Second, outreach to new investors should be intentional and strategic. Companies should reflect on what they aim to achieve (whether it’s increased liquidity through retail participation, long-term stability via institutional partners or enhanced visibility in specific markets) and tailor their targeting accordingly.

Investor interactions should be viewed as two-way conversations. Beyond presenting the investment case, companies can gain valuable insights from investors who often have deep knowledge of the industry and competitive landscape. Their perspectives can help refine strategy, challenge assumptions and identify emerging risks or opportunities. This is also important as when investors feel heard and valued, they are more likely to remain supportive during critical moments, such as a crisis, a takeover bid or shareholder activism.

Closing the gap between market cap and intrinsic value requires more than operational excellence, it demands strategic communication and investor alignment. While external forces and sector dynamics play a role, companies have more influence than they often realise. Through a clear understanding of market perception, a well-structured equity story and tailored, consistent engagement, CFOs and leadership teams can actively shape how their company is valued.

Investor relations is no longer a reactive function. It is a forward-looking, strategic lever that can build trust, unlock value and secure long-term support from the market. In an environment where perception drives capital flows, those who communicate with clarity, credibility and intent will be best positioned to close the valuation gap.