That’s one reason why I still believe there is significant hidden value in the shares of Aim-traded resource investment company Polo Resources (POL: 22.25p), a company I selected as one of my Bargain shares of 2013. It has been frustrating holding to date as the share price discount to net asset value is as wide as ever. To put the extent of Polo's undervaluation into some perspective, at the end of June the company was sitting on short-term investments, cash and receivables of 6.4p a share, or 29 per cent of its current share price of 21.75p. Strip those liquid resources out from the company's book value of 36p a share, and assets worth 29.6p a share are in effect being valued at only 15.85p, or almost half their carrying value in Polo's latest accounts.
Now a discount of that magnitude would be in order if the company was not trying to realise the hidden value from its unlisted assets. But that is clearly not the case. In fact, Polo's board has just announced that it's "making good progress with a number of potential bidders" for farming out or even disposing of a major interest in one of its major holdings, Signet Petroleum, an African oil and gas explorer that has four prospective assets in Benin, Burundi, Namibia and Tanzania.
Signet's main investment is an 80 per cent interest in Hydrotanz, a company that has a production-sharing agreement with the United Republic of Tanzania and the Tanzania Petroleum Development Corporation on the offshore North Mnazi Bay Block. This prospect is adjacent to BG and Ophir Energy's offshore Chaza 1 gas discovery well, which is targeting a vast resource estimated at 12 trillion cubic feet of gas.
It’s a valuable holding too, as Polo’s 46.9 per cent stake in Signet is in its books at £28.1m, or the equivalent of 10.4p a share. First Energy Capital Corporation has been appointed by Signet to assess strategic alternatives for Mnazi Bay, including potential farm-out opportunities. True, progress here has taken longer than expected, but this par for the course in farm-out deals and asset disposals. The odds still favour a deal been done, and one at a favourable price to Polo’s shareholders. In fact, First Energy has received "a high level of participation from a broad spectrum of high quality potential bidders." Any deal can only highlight the hidden value in Polo's stake in Signet, not to mention a potentially large uplift on the carrying value of the investment.
Management incentivised
Importantly, there is every interest for Polo’s management team to obtain the best price possible. That’s because, earlier this year a new investor, Michael Tang, acquired 11.77 per cent of Polo's share capital at 40p a share - almost double the current share price and 11 per cent above book value of 36p a share - through his vehicle, Mettiz Capital, an investment company with corporate and financial experience in natural resources, power generation, manufacturing and real estate. He is now the company's largest single shareholder with a 14.55 per cent stake, so he clearly sees the potential in Polo's investment portfolio and in the Signet holding, in particular.
Mr Tang's confidence doesn’t look misplaced either as Polo's largest investment, the Nimini Komahun Gold Project in Sierra Leone, in which Polo holds a 90 per cent stake worth £33.4m, clearly has potential. The last resource estimate showed an indicated gold resource at the site of 550,000 ounces and another 330,000 inferred ounces of gold, bringing the total potential resource to 880,000 ounces. On that basis, the £33.4m carrying value on Polo's investment values the project at only $53m (£33.20m), or the equivalent of $60 an ounce. That's a third less than the valuations attributed to sector peers, so the resource is hardly being overvalued. As I have previously noted, we now have to await the release of the Preliminary Economic Assessment (PEA), the technical inputs for which were completed in August. The date of publication of the PEA is dependent on discussions with the government of Sierra Leone regarding the terms applicable to the project, the first large-scale underground gold mine in Sierra Leone. It is only realistic to expect a positive outcome.
Sum-of-the-parts valuation
No matter which way I look at Polo the shares are deeply undervalued. Combined, the holdings in Signet and Nimini are in the books for £62m which is not only less than Polo’s own market value of £59m, but leaves a further £35m of assets in the price for free. That’s without factoring in any valuation uplifts on the holding in Signet in light of the ongoing discussions on a farm-out and asset sales. Of these ‘free’ assets, cash and marketable investments are worth £17.2m, or 6.4p a share and interests in four other companies are worth a further £18m, or 6.9p a share.
So, with a potentially lucrative deal on Signet highly likely, I view the current low valuation of the company as a buying opportunity. On a bid-offer spread of 21p to 22.25p, Polo's shares rate a value buy and my fair value estimate remains 35p.
Medium-term value in Greenko
I noted with interest the first half trading statement from Greenko (GKO: 130p), the Indian developer, owner and operator of clean energy projects. It has proved a frustrating holding too and has yet to make progress towards my 200p-a-share fair value target, having advised buying at 138.5p ('Buy signal flashing green', 18 Mar 2013).
To recap, my interest was sparked by a £100m investment in Greenko Mauritius by an affiliate of the government of Singapore Investment Corporation (SIC), one of the world's leading sovereign wealth funds. The shares are convertible on a one-for-one basis into ordinary shares in Greenko, subject to final adjustment between 1 July 2015 and 30 June 2017.
The funds are being used to ramp up the construction of the company’s power portfolio and take advantage of the attractive power opportunities in India. Greenko is clearly making progress and has added six new run-of-river hydro projects totalling 425 megawatts (MW) to its active development pipeline. Two of these are additions to the existing hydro cluster in Himachal Pradesh and a further four projects will form a new regional cluster in Arunachal Pradesh, with site work expected to start late this year. With the £100m new funding in place, Greenko is now targeting approximately 2,000MW of operating capacity in 2018, double the target for 2015. The aim is to increase the fully commissioned asset base from 244 MW in March 2013 to over 500 MW by next March. At the end of September, the company had 412MW of installed capacity, but more than double that capacity including sites currently under construction, so is clearly making progress towards that 2,000MW target.
Greenko has also confirmed that the wind project at Balavenkatpuram is due to complete by the end of the monsoon season, and the site has been expanded to 200MW. This highlights the benefits of Greenko's policy of developing sites with incremental expansion opportunities. Moreover, it's the extra revenue and profit generated from the ramp-up in capacity that should drive a re-rating in the shares in time.
Strong earnings growth forecast
Following the pre-close trading update ahead of its half year results on Monday, 2 December., analyst Adam Forsyth at broking house Arden Partners forecasts that revenues will rise from €36m to €50m in the financial year to March 2014 to boost operating profits from €16.3m to €29.6m. Revenues and profits are forecast to increase to €91m and €60.5m the year after. On that basis, EPS rises from 5.4¢ in the 12 months to March 2013 to 15.4¢ in the 12 months to March 2015. If Greenko can hit these targets over the next two financial years, then it is only reasonable to assume that the share price will start to reflect the upside that the SIC sees in the revenue-generating potential of the power generation assets.
Target prices
Mr Forsyth values Greenko at 245p a share and notes that “there is considerable potential in the shares and the prospect of more project completions should drive newsflow in the remaining financial year." I completely agree, and priced on a bid-offer spread of 125p-130p, I am happy to continue recommending the shares for medium-term upside.
In the past week, I have published four other articles on the following companies or trading strategies:
■ Inland ('Property plays with foundations, 7 October 2013)
■ Terrace Hill ('Property plays with foundations, 7 October 2013)
■ Sanderson ('A smart tech share', 9 October 2013)
■ Pure Wafer ('Time to chip in', 10 October 2013)
■ US debt ceiling deadline looms ('Debt ceiling dilemma', 11 October 2013)
■ Air Partner ('Gaining altitude', 14 October 2013)
