SalvaRx Group plc (AIM:SALV), a GBP£10.67M small-cap, operates in the healthcare industry, which continues to be affected by the sustained economic uncertainty and structural trends, such as an aging population, impacting the sector globally. Healthcare analysts are forecasting for the entire industry, an extremely elevated growth of 32.43% in the upcoming year , and an enormous growth of 68.16% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether SALV is lagging or leading in the industry. Check out our latest analysis for SalvaRx Group
What’s the catalyst for SALV’s sector growth?
Data analytics and other technology-enabled approaches are creating opportunities for innovations, however, stakeholders have been challenged to keep abreast of this structural shift while under pressure to cut costs. In the past year, the industry delivered growth in the twenties, beating the UK market growth of 11.30%. SALV lags the pack with its negative growth rate of -26.10% over the past year, which indicates the company will be growing at a slower pace than its biotech peers. Moreover, the trend of below-industry growth rate is expected to continue in the future with SALV poised to deliver a -26.00% growth compared to the industry average growth rate of 32.43%.
Is SALV and the sector relatively cheap?
Biotech companies are typically trading at a PE of 27x, higher than the rest of the UK stock market PE of 19x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry did return a higher 14.91% compared to the market’s 12.78%, which may be indicative of past tailwinds. Since SALV’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge SALV’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? SALV is a biotech industry laggard in terms of its future growth outlook. If your initial investment thesis is around the growth prospects of SALV, there are other biotech companies that are expected to deliver higher growth in the future, and perhaps trading at a discount to the industry average. Consider how SALV fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If SALV has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth is expected to be lower than its biotech peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at SALV’s future cash flows in order to assess whether the stock is trading at a reasonable price.