The Short Report

This story features FLIGHT CENTRE TRAVEL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: FLT

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 22, 2013

Shorting activity has started to accelerate on the Australian market. The changes to recommendations and forecasts generated through the quarterly reporting season just past are starting to flow through.

Another factor starting to be felt is the quickly depreciating Australian Dollar. Forecast and target price adjustments have started to come in thick and fast over the past couple of weeks, effectively shifting the equity return landscape.

Eight stocks saw their short position increase by more than one percentage point (ppt) over the week to 22 May, while there were five decreases. Eight stocks also posted a 2ppt rise in short position over the month, which was outweighed by nine significant short position decreases.

Weekly Short Increases

Shorts in Flight Centre ((FLT)) increased to 14.19% from 11.25%.

BA-Merrill Lynch (Buy) said earlier this month it remains confident that Flight Centre can sustain solid growth even with the depreciation of the Australian dollar. Analysis of outbound destination choices indicated that NZ, Indonesia, Thailand and Fiji alone constitute well over 50% of Flight Centre's international leisure business. These destinations show no meaningful relationship to currency movements and the broker said their appeal is structural. Moreover, BA-Merrill Lynch said US concerns are overplayed and manageable. US travel, increasing strongly from 2009, has dropped in importance as other destinations become more prominent.

UBS (Neutral) believes Flight Centre has the culture to succeed, witnessed by the turnaround in the US business, growth in UK share as well as continued consumer growth in Australia. It’s just that shares are fully valued.

The FNArena Database shows broker sentiment for the stock is positive.

Shorts in Boart Longyear ((BLY)) increased to 8.87% from 6.55%.

Last week, Boart Longyear downgraded its outlook for FY13, citing the difficult operating environment. CIMB (Outperform) does not expect the V-shaped recovery that occurred after the GFC, but suspects FY13 might represent the low point for the next few years. The Outperform recommendation was retained because the bad news has been priced in. CIMB believes the FY13 outcome is unlikely to be as bad as the share price suggests.

UBS (Sell) confirmed Boart Longyear expects 2013 earnings to be at the low end of consensus. UBS reduced 2013-15 earnings by 41%-82% on the news, expecting the exploration outlook to continue deteriorating. The Sell rating was retained, with balance sheet risk now seen as a key issue.

Sentiment for the stock is positive.

Shorts in Windimurra Vanadium ((WVL)) increased to 2.43% from 0.11%.

The company is working on resolving resolving plant issues to bring production back on line.

Shorts in Mincor Resources ((MCR)) increased to 3.28% from 1.79%.

UBS (Neutral) said last month that March quarter production numbers were weak .The broker kept its Neutral recommendation based on valuation and an expectation of thin margins over the next 2-3 years. Mine life growth continues to present upside risk, but UBS said sentiment towards established nickel plays is weak and exploration potential is unlikely to be appreciated.

Sentiment for the stock is neutral.

Shorts in Bradken ((BKN)) increased to 6.01% from 4.31%.

Macquarie (Sell) reviewed the outlook for Bradken last month following the opening of the company’s Chinese foundry and recent commentary from major original equipment manufacturer customers, Caterpillar and Joy Global. The broker acknowledged the softening outlook for both OEMs and traditional mining customers, but believed Bradken was inexpensive versus its peers. Citing a dividend yield around 8% that's seen as sustainable, given the strong cash generation in the business, Macquarie maintained its Outperform rating.

BA-Merrill Lynch (Underperform) didn't like the update, calling it vague and downgrading FY13-15 forecasts by 10%-15%. Why? Because the one thing the broker could see in the release was that we are still not at the bottom. With earnings pressure to remain, earnings risk to continue and just general poor disclosure, the broker expects the stock will continue to underperform the market.

Sentiment is positive.

Shorts in Emeco Holdings ((EHL)) increased to 3.85% from 2.47%.

CIMB (Neutral) said last week that Emeco operates in one of the toughest segments of a challenged domestic mining services sector. CIMB also said it does not think the stock is overwhelmingly cheap from an earnings multiple perspective. In the wake of that earnings update, CIMB cut FY13-15 forecasts by 11-29%. Normal circumstances would warrant a more positive view, said CIMB, but with visibility low, and doubts about the sustainability of pricing, the Neutral rating was maintained.

Sentiment is positive.

Shorts in ARB Corporation ((ARP)) increased to 1.63% from 0.30%.

Citi (Sell) noted a couple of weeks back that Thai imports had remained strong over the quarter and are now well and truly back to normal after the late 2011 flood generated supply disruptions. March total vehicle imports reached their highest level ever. The broker reminded that sales were flat in 2012 because of the disruptions, but 2013 is now expected to see 9% sales growth and 13% EPS growth now that things are back to normal. While it may all sound good, Citi pointed out shares are trading at a 40% premium to their long term average and the Small Industrials, hence the Sell call.

Sentiment is Neutral.

Shorts in NRW Holdings ((NWH)) increased to 8.83% from 7.72%.

Deutsche Bank downgraded to Hold from Buy early this month, although the broker did imply it's not the company's fault. The analysts acknowledged NRW Holding is well managed with a strong project delivery and execution track record. Alas, the company is also exposed to the slowing domestic iron ore sector and mining companies are focused on reducing costs, and they will continue to be so. Deutsche Bank predicted significant margin pressure will be the consequence. Earnings estimates for FY14 were been reined in, the price target tumbled to $1.50 from $2.25 and DPS forecasts were slashed.

Sentiment is still positive.

Weekly Short Decreases

Shorts in OZ Minerals ((OZL)) decreased to 6.01% from 8.05%.

Deutsche Bank also downgraded OZ Minerals Hold from Buy a little earlier this month. The broker said after a visit to Prominent Hill and Carrapateena it is still of the view that the asset potential for OZ Minerals is yet to be defined. So, with operational issues in 2013 and no clear path to earnings growth, the stock is not a preferred copper play. Deutsche Bank said it expects the company to meet revised copper and gold production guidance in 2013, but is cautious, and assumes grades will stay low.

Sentiment is still positive.

Shorts in Monadelphous Group ((MND)) decreased to 10.17% from 11.79%.

Citi (Sell) noted earlier in the month that Australian Non-residential and Engineering work has fallen off sharply since late last year, as have forward indicators. That caused the broker to push out its recovery forecasts and revise its growth expectations. Forecasts for Non-residential and Engineering construction spending were cut and this saw FY13-15 net profit forecasts for Building Material stocks lowered by 0-5% and Contractors by 0-6%.

UBS (Sell) also believes Monadelphous' end markets have deteriorated and has predicted an earlier-than-expected decline in earnings, i.e. FY14 rather than FY16. The broker upgraded FY13 earnings forecasts by 1.5%, but reduced FY14-15 by 18%.

Sentiment for the stock is negative.

Shorts in Iluka ((ILU)) decreased to 12.80% from 14.22%.

CIMB (Neutral) yesterday increased 2013 and 2014 zircon price forecasts by 7% and 17% respectively, underpinned by more balanced supply-demand dynamics. Yet despite the more positive outlook, the broker said it believes the share price is already factoring in a material pick up in both core products – zircon and titanium dioxide.

Macquarie (Underperform) noted that titanium feedstocks remain weak. Thus despite the zircon recovery the broker sees little upside from current levels.

Sentiment for the stock is positive.

Shorts in Ansell ((ANN)) decreased to 7.24% from 8.29%.

Credit Suisse initiated coverage on Ansell with an Outperform rating and $19.05 price target last week. The broker believes the company's industrial division is undervalued by the market at what appears to be a weak point in the cycle. The FY13 earnings per share forecast of US107c is supported by recent economic data, in the broker's view. Moreover, Ansell is expected to be a low-risk play on the recovery in IP, with high free cash flow generation and historically non-volatile growth. The broker also believes, while risks exist, these are not new.

Sentiment for the stock is neutral.

Shorts in Kingsgate Consolidated ((NCN)) decreased to 4.96% from 5.97%.

Macquarie (Neutral) noted at the end of April that March quarter results were well below forecasts and the broker thought this will make FY13 production guidance a bit difficult to achieve. Challenger's production levels were well below expectations and there were lower recoveries at Chatree. Macquarie downgraded FY13 production forecasts to 197,000 ounces from 202,000 ozs. The price target was also cut on the lower grade profile at Chatree as well as lower carrying value of Nueva Esperanza.

Sentiment for the stock is negative.

Monthly Short Increases

Shorts in Boart Longyear ((BLY)) increased to 8.87% from 2.90%.

See above

Shorts in NRW Holdings ((NWH)) increased to 8.83% from 6.1%.

See above

Shorts in Boral ((BLD)) increased to 5.72% from 3.00%.

BA-Merrill Lynch downgrade to Neutral from Buy early this month, noting the company has been cutting headcount costs, but has still failed to stem the fall in earnings. The Australian market has quite simply disappointed against the broker's expectations, hence a 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 upgraded to Neutral from Underweight the same day, having 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. The FY net profit guidance was pegged at $90-$105m, although stripping out the chaff shows an underlying net profit of just $19m. That's how tough it is out there, said the broker. 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 remains positive.

Shorts in ALS ((ALQ)) increased to 7.73% from 5.15%.

Macquarie [Neutral] noted yesterday the FY13 result revealed a 7% increase in underlying profit, with an increased final dividend of 27c. Macquarie said ALS is a quality business that is navigating the resources downturn well. This is aided by geographical diversity. Further earnings-accretive acquisitions outside of minerals should also be a positive catalyst. Geochemical sample flows are expected to decline further, but Macquarie said it pleasing the rate of decline has not accelerated. The company is targeting $2bn in revenue by FY17 driven by both organic growth and acquisitions.

FY net profit was in line with Citi (Neutral), although the headline numbers did look a bit weaker given some one-offs. It could have been worse was how Citi put it.

Sentiment is negative.

Shorts in Flight Centre ((FLT)) increased to 14.19% from 11.62%.

See above

Shorts in Emeco Holdings ((EHL)) increased to 3.85% from 1.46%.

See above

Shorts in Windimurra Vanadium ((WVL)) increased to 2.43% from 0.11%.

See above

Shorts in Drillsearch ((DLS)) increased to 3.43% from 1.22%.

JP Morgan initiated coverage of Drillsearch with an Overweight recommendation and price target of $1.54 a couple of weeks back. The broker said Drillsearch offers exposure to the Cooper Basin, particularly conventional oil, and the wet gas is becoming more valuable in the broker's view, thanks to east coast gas market dynamics. Drillsearch was also seen as being 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 perfect on straight Buys in the FNArena database.

Monthly Short Decreases

Shorts in Kingsgate Consolidated ((NCN)) decreased to 4.96% from 8.17%.

See above

Shorts in The Reject Shop ((TRS)) decreased to 5.79% from 8.54%.

Macquarie re-commenced coverage earlier this month following the lifting of research restrictions. After the capital raising, Macquarie said 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. FY15 is viewed as the first period when the advantages of the accelerated store roll-out will become apparent. Macquarie continued to believe in the strong medium-term growth outlook but retained a Neutral rating based on valuation.

Sentiment for the stock is negative.

Shorts in Acrux ((ACR)) decreased to 4.62% from 7.06%.

Macquarie upgraded to Neutral at the end of last month, having noted Eli Lilly appears to be gaining traction with Axiron and rebates have moved to 54% from 68%. Macquarie did not think rebates will move below what established competitors offer, given the lack of differentiation in the market and that Axiron is a newer arrival. Nevertheless, the reduction in rebate suggested to the broker that Lilly is getting pricing traction with insurers. This alleviated some concerns for Macquarie, although the broker did see a risk of earnings growth slowing given the flat trend recently and the cycling of tough comparatives.

Sentiment for the stock is neutral.

Shorts in Metcash ((MTS)) decreased to 8.32% from 10.7%.

UBS (Neutral) 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 few numbers announced, the broker expected 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 said it is waiting for more detail before is amends its numbers, although UBS said it remains concerned about the structural pressures facing the company and the sustainability of the dividend.

Sentiment is neutral.

Shorts in Pharmaxis ((PXS)) decreased to 3.01% from 4.88%.

CIMB (Neutral) noted earlier this month than the company's phase 3 trial for Bronchitol in patients with bronchiectasis did not met its primary endpoint. Very disappointing, which the broker noted must have been obvious given the negative share price reaction to the news. The broker dropped coverage on Pharmaxis at that point, thinking more informal coverage would be sufficient.

Deutsche Bank said a few weeks before that is was 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. The Sell rating was retained and the price target reduced.

Sentiment is neutral.

Shorts in Fortescue Metals ((FMG)) decreased to 4.62% from 6.04%.

BA-Merrill Lynch reported a couple of weeks back that the 155mt target is on track for the end of 2013 and the TPI divestment process is progressing well.

Sentiment is positive.

Shorts in Perseus Mining ((PRU)) decreased to 3.76% from 5.14%.

BA-Merrill Lynch (Neutral), the only broker in the database not at Buy, noted last week that it was impressed by its trip out to Edikan and said it was feeling somewhat more comfortable the new crusher will resolve ongoing issues, with a target of 8mtpa achievable in the near term. They're close already, said BA-Merrill Lynch, just a little more consistency is needed. The problem the broker saw was that the higher throughput may result in lower recoveries. FY14-15 production forecasts were cut and this flowed through to 20% lower earnings.

Sentiment is positive.

Shorts in Iluka ((ILU)) decreased to 12.80% from 14.16%.

See above

Shorts in JB HiFi ((JBH)) decreased to 16.98% from 18.12%.

CIMB upgraded to Outperform earlier this month, upbeat about the profit guidance increase, especially the fact that it is sales driven. CIMB said it hopes the return of like for like sales growth will be just the thing to give investors some confidence in the business model and the consumer demand for the company's product mix. The new guidance saw the broker lift its EPS forecasts and the recommendation.

Citi (Sell) had a different take, having said that while strong sales may have seen the company upgrade its guidance a little, but the broker warned the electronics market is very competitive as evidenced by the fact incremental sales have only contributed at an 11.5% earnings margin. Thus while it may have been a few months of fairly decent trading, the tough market will likely sort that out sooner rather than later. Computer games continue to migrate towards digital delivery, CD and DVD sales will continue to shrink and this year will probably mark the peak of the tablet category. Thus while FY13 should see a 12% lift in net profit, the broker predicted FY14 will be down 2% and FY15 down 10%.

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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