Clearly, there are many stale bulls stuck in the stock and they will have used rallies to exit. It hasn’t helped matters that newsflow has been limited and there is a general lack of transparency, points I made when I downgraded my view in mid-June.
This explains why the shares are by far the worst performer in my 2013 Bargain share portfolio and are now rated on a 75 per cent discount to the company’s last reported net asset value per share of 31.3p. In fact, Polo’s market capitalisation of £21.6m is less than the $40.2m (£23.6m) of net cash, receivables and short-term liquid investments on its balance sheet at the last reporting date! In effect, investors are attributing no value whatsoever to its investment portfolio. One of the reasons for such an extreme valuation is a high-risk aversion by Aim investors to companies with more speculative foreign activities, and resource ones in particular.
The other point to make is that Polo has been using some of its cash pile to make some investments in a couple of Australian-listed companies on which the upside is fiendishly difficult to quantify. This includes an A$1.2m (£660,000) investment made earlier this year for a 12.7 per cent stake in Celamin Holdings NL (CNL:ASX), a company holding phosphate interests in Tunisia. This week Polo announced that it’s underwriting A$3m (£1.67m) of an A$8.8m equity raise by Celamin. The funds will be used to repay loans, cover the cost of the ongoing work on a Bankable Feasibility Study for the Chaketma Phosphate Project, and for general working capital. The Chaketma Project consists of six prospects covering a total area of 56 sq km located 210 km south-west of the Tunisian capital, Tunis. It has a total JORC Inferred Resource of 130 million tonnes at 20.5 per cent phosphorous pentoxide, which has been defined over two of the project's six prospects, and offers potential for an operating mine life of more than 35 years, based on the 2012 Scoping Study findings.
Frankly, it’s impossible to quantify the upside potential for Chaketma which again raises uncertainty in the minds of investors. That said, the key value creation for Polo shareholders still lies in its 42 per cent stake in Signet Petroleum. Following Signet’s farm-out deal with Shell in Namibia which led to a $23.6m cash payment to Polo, the remaining stake has a book value of $19.9m, or 4.6p per Polo share.
Signet holds the key
In my view, that valuation is still supported by Signet's remaining assets. These include an 80 per cent operated interest in the Mnazi Bay North licence offshore Tanzania where 2D and 3D seismic data indicates an up dip extension of the neighbouring BG/Ophir Chaza gas discovery; a 90 per cent operated interest in Block 03 offshore Benin; and a 87.5 per cent operated interest in Block C in Lake Tanganyika Burundi.
I would expect some newsflow at least from Polo at its full-year results next month on what progress Signet has been making with further farm-out deals, and for that matter the progress Regalis Petroleum has been making with regards to a farm-out for its 70 per cent interest in Block 2813B Namibia in the Orange Basin, nearby the Kudu discovery and the former Signet Petroleum block. Polo has a 8.32 per cent interest in Regalis Petroleum which has a book value of £5m, or the equivalent of 1.8p per Polo share.
Ultimately, for Polo’s share price to reverse this year’s price decline the board will have to show shareholders greater transparency on the timetable for realisations from the portfolio. A share buyback programme would not go amiss either with the company’s market value less than its cash pile! I would hope that the board of Polo take note and in particular chairman Michael Tang, who acquired 11.77 per cent of his company’s share capital at 40p a share in May 2013 through his investment vehicle, Mettiz Capital.
I await the release of the full-year figures next month and in the meantime maintain my hold recommendation.
Please note that I have published 40 investment columns since the start of October, including two today, all of which are available on my IC homepage...
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
