Editing Sareum Holdings plc (section)

=Risks=

As with any investment, investing in Sareum carries a level of risk. Overall, based on the Sareum's adjusted beta (i.e. 0.25), the degree of risk associated with an investment in Sareum is 'low'.

Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'low' risk, it must have a beta value of less than 0.5. Further information about the beta ratings can be found in the appendix section of this report.

The key risks can be found below. For us, currently, the biggest risk to the valuation of the company relates to unfavourable outcomes from its clinical trials (i.e. clinical trials risk).

==Drug development risk==

1. Clinical Trials: The success of Sareum relies heavily on the results of clinical trials. Unfavorable outcomes can impact the company's value.

2. Regulatory Approval: There is no guarantee that Sareum's products will receive the necessary regulatory approvals, which are essential for commercialisation.

==Financial risk==

1. Funding Requirements: Sareum may require additional financing to continue its operations, which could dilute existing shareholders or lead to increased debt.

2. Revenue Dependence: As a biotech company, Sareum may have limited sources of revenue and could be heavily reliant on the success of a single product or a small portfolio of products.

==Market and competition risk==
1. Market Competition: Sareum operates in a highly competitive industry, and any advances by competitors can impact its market position.

2. Market Penetration: Successfully commercialising products requires effective marketing and sales strategies, which can be challenging for smaller companies.

==Intellectual property risk==

1. Patent Protection: The ability of Sareum to protect its intellectual property through patents and prevent infringement is crucial to its success.

2. Dependence on Licensing: Sareum's operations might depend on licenses from third parties, which could be subject to renegotiation or termination.

==Operational risk==

1. Management Team: Sareum's success is partly dependent on the expertise and experience of its management team. Any changes could disrupt operations.

2. Research and Development: The lengthy and uncertain R&D process in the biotech field poses significant operational risks.

==External risks==

1. Economic Conditions: Economic downturns can affect the availability of capital and the overall investment climate.

2. Regulatory Changes: Changes in healthcare laws, policies, and regulatory environment can pose compliance challenges and affect profitability.

==Valuation==

=== What's the expected return of an investment in the company? ===
The Stockhub users estimate that the expected return of an investment in the company over the next five years is ccc%, which equates to an annual return of ccc%. In other words, an £1,000 investment in the company is expected to return £ccc in five years time. The assumptions used to estimate the return figure can be found in the table below.

=== What are the assumptions used to estimate the return? ===
{| class="wikitable"
|+Key inputs
!Description
!Value
!Commentary
|-
|Which valuation model do you want to use?
|Discounted cash flow
|Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the discounted cash flow approach, so that's the approach that he Stockhub users suggest to use here; nevertheless, for completeness purposes, separately, the valuation of the company is also estimated using the using the relative valuation approach (the valuation based on the relative approach can be found in the appendix of this report).
|-
|Which financial forecasts to use?
|Stockhub
|The only available long-term forecasts (i.e. >15 years) are the ones that are supplied by the Stockhub users (the forecasts can be found in the financials section of this report), so the Stockhub users suggest using those.
|-
|Discount rate (%)
|5.98%
|There are two key risk parameters for a firm that need to be estimated: its cost of equity and its cost of debt. A key way to estimate the cost of equity is by looking at the beta (or betas) of the company in question, the cost of debt from a measure of default risk (an actual or synthetic rating) and apply the market value weights for debt and equity to come up with the cost of capital.
|-
|What's the current value of the company?
|£25.65 million
|As at 24th February 2024, the current value of its company at £25.65 million.
|-
|Which time period do you want to use to estimate the expected return?
|Between now and five years time
|Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years.<ref>https://www.newyorkfed.org/mediabrary/media/medialibrary/media/research/staff_reports/research_papers/9809.pdf</ref> Accordingly, Stockhub suggests that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time.
|}

== Appendix ==

=== Sareum Holdings adjusted beta calculation ===
{| class="wikitable"
|+
!Date
!iShares MSCI World ETF unit price (USD)
!Sareum share price (GBP)
!iShares MSCI World ETF unit price change (%)
!Sareum share price change (%)
|-
|01/03/2019
|88.79
|38.75
|
|
|-
|01/04/2019
|92.09
|37.5
|3.72%
| -3.23%
|-
|01/05/2019
|86.76
|29.75
| -5.79%
| -20.67%
|-
|01/06/2019
|91.02
|21.75
|4.91%
| -26.89%
|-
|01/07/2019
|91.86
|20.5
|0.92%
| -5.75%
|-
|01/08/2019
|89.84
|17
| -2.20%
| -17.07%
|-
|01/09/2019
|91.78
|19.25
|2.16%
|13.24%
|-
|01/10/2019
|94.12
|17
|2.55%
| -11.69%
|-
|01/11/2019
|96.76
|18.25
|2.80%
|7.35%
|-
|01/12/2019
|98.78
|17.75
|2.09%
| -2.74%
|-
|01/01/2020
|97.73
|20.5
| -1.06%
|15.49%
|-
|01/02/2020
|89.67
|15.75
| -8.25%
| -23.17%
|-
|01/03/2020
|77.93
|19
| -13.09%
|20.63%
|-
|01/04/2020
|86.36
|43.25
|10.82%
|127.63%
|-
|01/05/2020
|90.7
|34.75
|5.03%
| -19.65%
|-
|01/06/2020
|92.14
|26.25
|1.59%
| -24.46%
|-
|01/07/2020
|96.65
|46.75
|4.89%
|78.10%
|-
|01/08/2020
|102.96
|44.25
|6.53%
| -5.35%
|-
|01/09/2020
|99.52
|40.25
| -3.34%
| -9.04%
|-
|01/10/2020
|96.53
|110
| -3.00%
|173.29%
|-
|01/11/2020
|108.94
|75
|12.86%
| -31.82%
|-
|01/12/2020
|112.41
|121.25
|3.19%
|61.67%
|-
|01/01/2021
|111.49
|93.75
| -0.82%
| -22.68%
|-
|01/02/2021
|114.27
|87.5
|2.49%
| -6.67%
|-
|01/03/2021
|118.49
|88.75
|3.69%
|1.43%
|-
|01/04/2021
|123.61
|112.5
|4.32%
|26.76%
|-
|01/05/2021
|125.6
|130
|1.61%
|15.56%
|-
|01/06/2021
|126.57
|287.5
|0.77%
|121.15%
|-
|01/07/2021
|128.83
|435
|1.79%
|51.30%
|-
|01/08/2021
|132.02
|367.5
|2.48%
| -15.52%
|-
|01/09/2021
|126.46
|327.5
| -4.21%
| -10.88%
|-
|01/10/2021
|133.84
|320
|5.84%
| -2.29%
|-
|01/11/2021
|131.1
|305
| -2.05%
| -4.69%
|-
|01/12/2021
|135.32
|245
|3.22%
| -19.67%
|-
|01/01/2022
|128.32
|200
| -5.17%
| -18.37%
|-
|01/02/2022
|124.58
|167.5
| -2.91%
| -16.25%
|-
|01/03/2022
|128.16
|120
|2.87%
| -28.36%
|-
|01/04/2022
|117.42
|220
| -8.38%
|83.33%
|-
|01/05/2022
|117.94
|217.5
|0.44%
| -1.14%
|-
|01/06/2022
|106.88
|202.5
| -9.38%
| -6.90%
|-
|01/07/2022
|115.57
|190
|8.13%
| -6.17%
|-
|01/08/2022
|110.28
|167.5
| -4.58%
| -11.84%
|-
|01/09/2022
|99.95
|192.5
| -9.37%
|14.93%
|-
|01/10/2022
|107.42
|142.5
|7.47%
| -25.97%
|-
|01/11/2022
|115.44
|87.5
|7.47%
| -38.60%
|-
|01/12/2022
|109.25
|82.5
| -5.36%
| -5.71%
|-
|01/01/2023
|117.01
|105
|7.10%
|27.27%
|-
|01/02/2023
|113.98
|100
| -2.59%
| -4.76%
|-
|01/03/2023
|117.67
|87.5
|3.24%
| -12.50%
|-
|01/04/2023
|119.79
|114.5
|1.80%
|30.86%
|-
|01/05/2023
|118.6
|115
| -0.99%
|0.44%
|-
|01/06/2023
|124.52
|125
|4.99%
|8.70%
|-
|01/07/2023
|128.54
|105
|3.23%
| -16.00%
|-
|01/08/2023
|125.7
|72.5
| -2.21%
| -30.95%
|-
|01/09/2023
|120.17
|80
| -4.40%
|10.34%
|-
|01/10/2023
|117.11
|62.5
| -2.55%
| -21.88%
|-
|01/11/2023
|127.78
|62.5
|9.11%
|0.00%
|-
|01/12/2023
|133.02
|59.5
|4.10%
| -4.80%
|-
|01/01/2024
|134.2
|46.5
|0.89%
| -21.85%
|-
|01/02/2024
|140.33
|37.5
|4.57%
| -19.35%
|-
|23/02/2024
|140.33
|37.5
|0.00%
|0.00%
|}
{| class="wikitable"
|+Peel Hunt beta and adjusted beta value
!
!Beta
!Adjusted beta
!Comment(s)
|-
|Consistent (monthly) intervals between data points
|<nowiki>-0.12416</nowiki>
|0.25056
|
|}

=== Cost of equity ===
{| class="wikitable"
|+Cost of equity (%)
!Input
!Input value
!Additional information
|-
|Risk-free rate (%)
|4.371%
|Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 25th February 2024. Research suggests that for the risk-free rate, it's best to use one that has the same or similar maturity to the estimated remaining lifespan of the company. Here, we have assumed that the estimated lifespan of the company is 50 years, so we have used the longest maturity, which is 30 years.
|-
|Beta
|0.25056
|Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.
|-
|Equity risk premium (%)
|6.41%
|Here, the equity risk premium is in relation to the global region, and is calculated as at 5th January 2024. Research suggests that for the region of equity risk premium, it's best to use one that is the same or similar to the region of the beta market portfolio. Here, the region of the beta market portfolio is the world/global, so we have used the world/global region for the equity risk premium.
|-
|Cost of equity (%)
|5.98%
|Cost of equity = Risk-free rate + Beta x Equity risk premium.
|}

=== Beta risk profile ===
{| class="wikitable"
|+
!Beta value
!Risk rating
|-
|style="background: green; color: white;" |0 to 0.50
|style="background: green; color: white;" | Low
|-
|style="background: orange; color: white;" | 0.50 to 1.50
|style="background: orange; color: white;" | Medium
|-
|style="background: red; color: white;" | 1.50 to 3.00
|style="background: red; color: white;" | High
|-
|style="background: purple; color: white;" | 3.00 and above
|style="background: purple; color: white;" | Extremely high
|}

== References and notes == 
[[Category:Thesis]]
__INDEX__