Stakebuilding at Pilat Media
I remain convinced that we will eventually enjoy healthy gains from our holding in Aim-traded Pilat Media Global, a supplier of business management software to the media industry, even though the shares are still trading a third below the level I advised buying at last year.
For starters, the company's backlog of revenues accounts for a reassuring 80 per cent of last year's income, which was the highest Pilat has ever reported. The positive resolution of the Fox Television litigation is also positive news and it's worth noting that this was a one-off case and the only time Pilat has been in a lawsuit with any of its 60 clients.
Moreover, on an underlying basis the business is still very profitable and cash generative, with net cash increasing from £3.8m in December 2010 to £6.7m at end of 2011. That is a pretty significant sum for a company with a market value of £16.7m. It also means that the shares are trading 10 per cent below book value of 32p and 11p of these assets are net cash. Or, to put it another way, strip out net cash and a business generating operating profits of £2.4m is being valued at only £10m.
Pilat is also a company that continues to attract stakebuilding, with Eurocom Investments increasing its stake to 23.97 per cent at the end of April. Alex Rabinovitch, a non-executive director of Pilat, is a 49.99 per cent shareholder in Eurocom. He is not alone as Sinetec Media, a private company also engaged in the development of business management software for broadcasters, has an identical stake.
It may take time for this story to play out, but for the medium term the shares are worth tucking away at 28p.
Polo Resources share buying
I noted that Neil Herbert, co-chairman and managing director of resource investment company Polo Resources, upped his holding in the company last month, having purchased two million shares at 3.3p to take his stake to 83.4m shares, or 3.63 per cent of the share capital.
The purchase came only days after Polo announced that it had appointed Plinian Capital as operator of its Nimini gold project in Sierra Leone. Plinian has also taken a 10 per cent stake in Nimini for an investment of $2.5m, which in turn places a significantly higher valuation on the project than the $19m Polo has invested to date. There is the prospect of potentially positive news from the drilling programme in coming months.
True, it is difficult to quantify potential upside from a host of companies in Polo's portfolio, including the investment in Signet Petroluem, an independent oil exploration company focused on acquiring and developing high-impact exploration assets in Africa. Signet already owns assets in Benin, Burundi, Namibia and Tanzania. However, what can't be disputed is the great track record of Polo's management team when it comes to making and realising value from previous shrewd investments. As a result of realised gains, at the end of March Polo's net cash equated to 2p of its 4.16p net asset value. It also means that around two-thirds of the current valuation is backed by hard cash alone with the shares priced at 3.1p. This cash buffer not only limits the downside risk, but offers potential for the share price gap to net asset value to narrow as and when some of the recent investments start to pay off.
So, although it is incredibly frustrating to see Polo's shares make no progress at all since I advised buying them 15 months ago in my 2011 Bargain Share Portfolio at 3.2p (adjusted for a 2p a share special dividend last October), there is still value on offer here and I would be looking to buy on weakness for the medium term.
Victoria shares floored by rebel shareholders
I have to also admit a great degree of frustration with how events have unfolded at vinyl floor and carpet manufacturer Victoria after the company put its self up for sale in late December and received offers valuing the business significantly higher than at the start of the sale process. However, a sale of the company was ultimately thwarted by a consortium, led by former chairman Alexander Anton, controlling 46 per cent of the share capital. Subsequently two non-executive directors resigned and finance director Ian Davies is heading for the exit, too. He leaves the company in August.
As a result, Victoria's shares have dropped back to 275p from a high of 385p at the end of January, although that is still some way above the level you could have bought them 15 months ago when I first advised buying at 225p. Unfortunately, it doesn't seem likely that the shares are going to regain that lost ground any time soon as it appears that the main driver of profits in the last few years is faltering.
A trading statement at the end of April revealed that revenue in Australia declined almost 10 per cent in the last quarter of the financial year in local currency terms, although the strength of the Australian dollar means that it was only down 2.6 per cent in sterling terms. What alarmed me most was news "of a rapid and significant softening of market conditions in February and March 2012, as consumers saved more and reduced spending on discretionary items such as floor coverings". True, the UK business continues to recover and performed strongly in the fourth quarter with revenues up 12 per cent. The move into the domestic insurance replacement market is also paying off.
However, there is no getting away from the fact that "trading conditions in the UK and Australia are likely to remain very challenging" and I am belatedly heading for the exit, too.
**Simon will be presenting at the London Investor Seminar on 18 June - book your place today.**
