The Short Report

This story features BOART LONGYEAR GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BLY

By Andrew Nelson

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly and monthly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX).

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Summary:

Period: Week to, and month to, May 15, 2013

Just four stocks saw their short positions increase by more than one percentage point (ppt) over the week to May 15, with materials stocks and builders taking three of the four top spots. Just one stock, a biotech, saw its short position pull back by one ppt or more.

Eleven stocks moved more than two ppt over the month to the fifteenth of May. ASIC shorts data shows that there were eight significant increases to short positions and just three decreases. Most of the action was still in resources and resources related sectors, with the flow through from the recent reporting season still being felt.

The Top 20 most shorted list was mostly unchanged except for a few very minor position swaps. There was one change to the composition of the list, with UGL ((UGL)) falling off the list from the number twenty spot to be replaced by GUD Holdings ((GUD)) in the same position.

Weekly Short Increases

Shorts in Boart Longyear ((BLY)) increased to 6.55% from 2.29%.

Macquarie cut its earnings forecasts for Boart Longyear last week, with FY13-14 earnings down by 22% and 24% respectively. The broker said the move was to better reflect a more challenging global outlook. The broker said it expects sentiment will stay negative in the near term, but with the stock trading at four-year lows and pricing in earnings downgrades and balance sheet risk, Macquarie thought the Outperform recommendation was still the right one. The FNArena Sentiment Indicator shows sentiment for the stock is positive.

Shorts in OZ Minerals ((OZL)) increased to 8.05% from 2.27%.

After a visit to Prominent Hill and Carrapateena, Deutsche Bank was still of the view the asset potential for OZ Minerals is yet to be defined. With the broker noting operational issues in 2013 and no clear path to earnings growth, the stock is no longer a preferred copper play. Deutsche Bank expects the company to meet revised copper and gold production guidance in 2013, but is cautious and assumes grades will stay low. JP Morgan also reviewed forecasts following the visit to Prominent Hill. Earnings downgrades were made, but the broker retained the Overweight call based on the expected rise in medium-term copper prices. The broker also expects a medium-term turnaround in operations. Sentiment for the stock is positive.

Shorts in Macquarie Atlas Roads ((MQA)) increased to 4.99% from 1.23%.

Macquarie downgraded its call to Neutral from Outperform a couple of weeks back after having reviewed assumptions around the Eiffarie refinancing. Macquarie said the value of the stock is becoming stretched and the recent rally has investors facing dividend downgrades in 2013 and 2014. Better dividend income is expected from the Eiffarie refinancing in 2015, thus patience is required. 2013 and 2014 earnings forecasts were lowered, reflecting higher fees. Macquarie said the underlying asset is weak but steady, while the debt environment is at its most favourable. The broker also said currency moves represent a potential for material change to the stock's valuation. Sentiment for the stock is neutral.

Shorts in Boral ((BLD)) increased to 5.28% from 1.02%.

BA-Merrill Lynch downgraded its recommendation to Neutral from Buy and JP Morgan upgraded to Neutral from Underweight a couple of weeks back. BA-Merrill Lynch noted Boral has been cutting headcount costs, but has still failed to stem the fall in earning. The Australian market has quite simply disappointed against the broker's expectations hence the downgrade, with earnings forecasts cut by 34% and 25% in FY13-14. An Underperform rating might have been on the cards but for the obvious housing recovery in the US and growth opportunities in Asian plasterboard, the broker pointed out.

JP Morgan noted Boral has started to have some serious issues with the weather after what was a fairly issue free 1H. The 3Q report unwound all of the good weather upside that was accumulated, with 3Q earnings falling $19m short of management’s expectations. The FY net profit guidance was pegged at $90-$105m, although stripping out the chaff shows an underlying net profit of just $19m. JP Morgan's FY13 net profit forecast was cut by 27%, with FY14-15 down around 10%. That being said, the broker still expects net profit to double in 2014 on the back of announced cost savings, the reversal of some one-offs and hopefully a still ongoing recovery in the US. Sentiment for the stock is positive.

Weekly Short Decreases

Shorts in Pharmaxis ((PXS)) decreased to 3.08% from 4.11%.

CIMB reported earlier this month the company's phase 3 trials for Bronchitol in patients with bronchiectasis did not meet its primary endpoint. Very disappointing, which the broker notes must have been obvious given the negative share price reaction to the news. The broker dropped coverage on Pharmaxis, saying more informal coverage will be sufficient at this point. Deutsche Bank noted the same issues and said at the end of April it is concerned that competitor Vertex is progressing cystic fibrosis treatment quite rapidly and the opportunity for Pharmaxis may be significantly diminished by the time its product is ready for market. Sentiment is neutral.

Monthly Short Increases

Shorts in Boart Longyear ((BLY)) increased to 6.55% from 3.08%.

See above

Shorts in Troy Resources ((TRY)) increased to 4.94% from 1.99%.

The Bidder's Statement and Target's Statement for the takeover of Azimuth Resources ((AZH)) were mailed out to both sets of shareholders a couple of weeks back.

Shorts in Drillsearch ((DLS)) increased to 4.10% from 1.16%.

JP Morgan initiated coverage of Drillsearch two weeks back with an Overweight recommendation, noting the stock offers exposure to the Cooper Basin, particularly conventional oil. The wet gas is becoming more valuable in the broker's view, thanks to east coast gas market dynamics. Drillsearch was said to be less leveraged than its Cooper-focused peers to the success of Cooper unconventional exploration, which JP Morgan liked. Potential stock catalysts over the next 6-12 months include the ramp up of oil and wet gas production, and testing of unconventional acreage. Sentiment is positive.

Shorts in NRW Holdings ((NWH)) increased to 7.72% from 4.84%.

Deutsche Bank said a couple of weeks back the best way to summarise its decision to downgrade to Hold from Buy is “it's not the company's fault”. The analysts acknowledge NRW Holding is well managed with a strong project delivery and execution track record. Alas, the company is exposed to the slowing domestic iron ore sector and mining companies are focused on reducing costs, and they will continue to do so. Deutsche Bank predicted significant margin pressure will be the consequence. Earnings estimates for FY14 have were reined in, the price target cut and DPS forecasts slashed. Sentiment is positive.

Shorts in Beadell Resources ((BDR)) increased to 5.22% from 2.54%.

Macquarie said last week it sees continued downside for the gold sector. That said, Beadell remained the broker’s key pick in the ASX space because of its high grade profile, low cash costs and cash flow. Macquarie increased production forecasts to 226,000 ounces for 2013 at cash costs of US$486/oz. Sentiment is positive.

Shorts in Boral ((BLD)) increased to 5.28% from 2.83%.

See above

Shorts in OZ Minerals ((OZL)) increased to 8.05% from 5.69%.

See above

Shorts in ALS ((ALQ)) increased to 6.80% from 4.46%.

CIMB reported two weeks back it had reviewed the sector and thought ALS unlikely to surprise the market when results are furnished at the end of May. A slower-than-expected recovery in exploration activity led to a downgrade of FY14 earnings forecasts by 20%, which suggested an FY14 earnings contraction of 11% on FY13. Macquarie said yesterday that after some strong 1H numbers a few months back, it expects to see signs of a 2H slowdown in Minerals that will likely more than offset any strength there was in the non-Minerals segment of the business. FY14-15 EPS forecasts were cut by 7% on the tougher outlook for both the Minerals and Coal testing businesses. The price target was lowered on the new earnings and also because of slightly lower global peer multiples. Sentiment for the stock is negative.

Monthly Short Decreases

Shorts in Metcash ((MTS)) decreased to 8.46% from 11.31%.

UBS noted last week the company had bought Australian Truck and Auto Parts Group for $84m in cash, with UBS expecting the deal to close by the end of the month. While there were few numbers announced, the broker expects Metcash paid a slight premium. Still, the deal should be better than 2% EPS accretive in FY14 excluding whatever synergies can be created. The broker is waiting for more detail before it amends its numbers. The Neutral call was maintained, although UBS remained concerned about the structural pressures facing the company and the sustainability of the dividend. Sentiment for the stock is neutral.

Shorts in The Reject Shop ((TRS)) decreased to 5.93% from 8.64%.

Macquarie re-commenced coverage on the stock a couple of weeks back having noted that after the capital raising, the company is in a good position to grow new stores and market share, partly as a result of the administration of Retail Adventures. The company expects to open 40 new stores in FY14. The broker said it sees FY15 as the first period when the advantages of the accelerated store roll-out will become apparent. Sentiment for the stock is negative.

Shorts in Kingsgate Consolidated ((KCN)) decreased to 5.97% from 8.32%.

Macquarie reported at the end of April that March quarter results were well below forecasts and the broker though this would make FY13 production guidance difficult to achieve. Challenger's production levels were well below expectations and there were lower recoveries at Chatree. Macquarie went on to downgrade FY13 production forecasts to 197,000 ounces from 202,000 ozs. March quarter production was also worse than BA-Merrill Lynch expected and production forecasts were reduced for the next two years. This resulted in a significant downgrade to earnings forecasts and the valuation. Sentiment is negative.
 

Top 20 Largest Short Positions

To see the full Short Report, please go to this link

IMPORTANT INFORMATION ABOUT THIS REPORT

The above information is sourced from daily reports published by the Australian Investment & Securities Commission (ASIC) and is provided by FNArena unqualified as a service to subscribers. FNArena would like to make it very clear that immediate assumptions cannot be drawn from the numbers alone.

It is wrong to assume that short percentages published by ASIC simply imply negative market positions held by fund managers or others looking to profit from a fall in respective share prices. While all or part of certain short percentages may indeed imply such, there are also a myriad of other reasons why a short position might be held which does not render that position “naked” given offsetting positions held elsewhere. Whatever balance of percentages truly is a “short” position would suggest there are negative views on a stock held by some in the market and also would suggest that were the news flow on that stock to turn suddenly positive, “short covering” may spark a short, sharp rally in that share price. However short positions held as an offset against another position may prove merely benign.

Often large short positions can be attributable to a listed hybrid security on the same stock where traders look to “strip out” the option value of the hybrid with offsetting listed option and stock positions. Short positions may form part of a short stock portfolio offsetting a long share price index (SPI) futures portfolio – a popular trade which seeks to exploit windows of opportunity when the SPI price trades at an overextended discount to fair value. Short positions may be held as a hedge by a broking house providing dividend reinvestment plan (DRP) underwriting services or other similar services. Short positions will occasionally need to be adopted by market makers in listed equity exchange traded fund products (EFT). All of the above are just some of the reasons why a short position may be held in a stock but can be considered benign in share price direction terms due to offsets.

Market makers in stock and stock index options will also hedge their portfolios using short positions where necessary. These delta hedges often form the other side of a client's long stock-long put option protection trade, or perhaps long stock-short call option (“buy-write”) position. In a clear example of how published short percentages can be misleading, an options market maker may hold a short position below the implied delta hedge level and that actually implies a “long” position in that stock.

Another popular trading strategy is that of “pairs trading” in which one stock is held short against a long position in another stock. Such positions look to exploit perceived imbalances in the valuations of two stocks and imply a “net neutral” market position.

Aside from all the above reasons as to why it would be a potential misconception to draw simply conclusions on short percentages, there are even wider issues to consider. ASIC itself will admit that short position data is not an exact science given the onus on market participants to declare to their broker when positions truly are “short”. Without any suggestion of deceit, there are always participants who are ignorant of the regulations. Discrepancies can also arise when short positions are held by a large investment banking operation offering multiple stock market services as well as proprietary trading activities. Such activity can introduce the possibility of either non-counting or double-counting when custodians are involved and beneficial ownership issues become unclear.

Finally, a simple fact is that the Australian Securities Exchange also keeps its own register of short positions. The figures provided by ASIC and by the ASX at any point do not necessarily correlate.

FNArena has offered this qualified explanation of the vagaries of short stock positions as a warning to subscribers not to jump to any conclusions or to make investment decisions based solely on these unqualified numbers. FNArena strongly suggests investors seek advice from their stock broker or financial adviser before acting upon any of the information provided herein.

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