The Short Report

This story features THORN GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: TGA

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, June 18, 2013

Shorting activity on the Australian share market calmed down in the week to 18 June. There were just four changes greater than one percentage point (ppt) recorded over the weekly period. The score was even, two increases and two decreases, with mining and materials plays continuing to feature prominently on both sides of the ledger.

Monthly activity was nearly as light, with ASIC shorts data showing two increases to short positions greater than two ppt and five decreases of that size or more. Again, mining and related sector companies are hogging most of the spotlight on both the up and down sides.

Weekly Short Increases

Shorts in Thorn Group ((TGA)) increased to 1.53% from 0.08%.

The company reported its FY13 results at the end of May, Credit Suisse noting at the time that profit was in line with FY12, with revenue 8%. The broker said Radio Rentals put on a good show despite the weak retail trading environment, although growth continued to slow. While the broker continued to like the company on a number of fronts, the flat FY outcome confirmed Credit Suisse's expectations that the ongoing focus on growth across all divisions will likely continue to soften earnings in the short to medium term. Earnings were trimmed a little going forwards and the Neutral call was maintained.

Sentiment for the stock is neutral.

Shorts in Ramelius Resources ((RMS)) increased to 3.72% from 2.69%.

The company reported in early June that its Mt Magnet gold mine in central Western Australia reached a record 6,230 ounces in May, while total production for April and May was 11,747 ounces. The company also said quality had improved, with head grades for April and May increasing 20%. Back in February the company posted a $5.7m first-half loss, reversing the $16.14m interim net profit booked the previous year.

Weekly Short Decreases

Shorts in Boart Longyear Group ((BLY)) decreased to 8.43% from 10.87%.

Macquarie reported a couple of weeks back that global peers Major Drilling and Layne Christensen had reported weak quarterly results. Conversely, Boart Longyear revenue has held up better than its peers, but Macquarie said sentiment will still remain negative in the near term because of commodity price volatility and problems for junior miners obtaining funds. The stock was trading at 4-year lows, so an Outperform rating was retained.

Sentiment for the stock is positive.

Shorts in Virtus Health ((VRT)) decreased to 0.63% from 1.80%.

The fertility services company sold shares in an initial public offering last month and then rose 8.5% to $6.16 on debut on the June 10. The company raised $338m in what was Australia’s largest initial public offering of the year so far. Bloomberg reports the The company has 33 fertility clinics in Victoria, Queensland and New South Wales and provided 35% of the IVF treatment cycles performed last year in Australia.

Monthly Short Increases

Shorts in Ausdrill ((ASL)) increased to 3.20% from 1.13%.

Earlier this week CIMB downgraded its recommendation to Neutral after taking a fresh look to account for the continued softening in mining capex. FY13-15 earnings forecasts were pulled back by around 2%, with the broker noting its FY14 number was 12% below consensus. The broker said there is still valuation support and the potential for strong free cash flow, but with equipment hire and exploration drilling plans increasingly being shelved and the gold price tanking, the broker saw diminishing prospects for any share price upside. CIMB did note the valuation is still supportive for a more positive longer-term view.

Macquarie did the same thing a few weeks prior and also concluded the outlook for Ausdrill assumes further downside for the core contract businesses. Based on current forecasts the broker did think the company could survive the next two years without tapping equity markets. While Macquarie believes the company offers a well-managed exposure to mining services, the broker said consensus earnings will need to stabilise before the price can improve.

Sentiment for the stock is positive.

Shorts in Ramelius Resources ((RMS)) increased to 3.72% from 1.65%.

See above.

Monthly Short Decreases

Shorts in OZ Minerals ((OZL)) decreased to 3.30% from 7.06%.

UBS lowered its gold price forecasts to US$1440/oz in FY13 from 1600, 1325 from 1625 in FY14 and 1200 from 1500 in FY15. Forecast earnings on the broker's gold stocks under coverage fell by an average 31% in 2014 and 53% in 2015. Base metal companies with gold by-products saw an offset on a lower A$ forecast. OZL's target fell to $4.90 from $5.00 on the adjustments.

Credit Suisse noted at the end of May that the AGM revealed the decision to defer the Carrapateena decline by 6-12 months. This meant a delay to the start of the project. A positive spin for the broker was that capital is deferred until the project is further de-risked.

Deutsche Bank, at Hold, pushed the $100m spend out to FY15, with first production now out to 2020. The problem was, Prominent Hill winds up in CY18, meaning there is now a significant production gap, which increases funding risks. Still, the broker saw enough cash, maybe even enough for a sneaky acquisition.

Sentiment is positive for the stock.

Shorts in Sims Metal Management ((SGM)) decreased to 3.44% from 6.37%.

CIMB confirmed last week that ferrous scrap prices have continued to soften and are down average of 12% since the broker picked up coverage on the stock in March. This is putting even more pressure on what was an already tight volume environment. This had the broker double guessing its FY forecasts, thinking the benefits of a US upturn will likely take longer to flow through than in previous cycles. The current demand weakness saw FY13-15 net profit estimates cut by 45%, 16% and 9%, bringing about a lower target price.

Credit Suisse noted around a month back that Sims' scrap margins in the UK had halved from their peak. This was due to stiff competition, forcing the company to make further write-downs for the SRS business. Second half write-downs were totalling $115m and the broker was not backward in coming forward to suggest the loss of shareholder value is the result of poor practices or wrong decision making, and overestimation of UK opportunities in general. The broker suggested SGM's price was looking full and retained its Neutral call.

Sentiment is positive for the stock.

Shorts in Kingsgate Consolidated ((KCN)) decreased to 3.30% from 5.78%.

Macquarie, at Neutral, said back in May that the March quarter results were well below its forecasts and the broker thought this would 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 target price was cut on the lower grade profile at Chatree as well as a lower carrying value for Nueva Esperanza.

Sentiment for the stock is negative.

Shorts in Fleetwood Corp ((FWD)) decreased to 3.48% from 5.84%.

EPS forecasts were lowered a little by Macquarie at the end of May following the company’s profit downgrade. While the EPS changes were minor, the broker assumes no final dividend will be paid given the solid interim dividend, while the FY14 dividend estimate is cut to 25cps from 40cps. A fully franked yield of over 5% is expected to be maintained.

JP Morgan was a little more downbeat, saying the trading update put the share price under significant pressure. The broker said there's more pain to come and thus cut its margin estimates at the time as well.

Sentiment for the stock is negative.

Shorts in Iluka Resources ((ILU)) decreased to 11.46% from 13.68%.

At the end of May CIMB increased 2013 and 2014 zircon price forecasts by 7% and 17% respectively, underpinned by more balanced supply-demand dynamics. Despite the more positive outlook, the broker still believed the share price was already factoring in a material pick up in both core products – zircon and titanium dioxide. The Neutral rating was thus retained, although the price target was raised to $10.45 from $9.20.

Sentiment for the stock is positive.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	FXJ	423028529	2351955725	17.99
2	JBH	16800070	98947309	16.98
3	MYR	82740565	583594551	14.18
4	PDN	105579633	837187808	12.61
5	MND	10499351	90940258	11.55
6	FLT	11560210	100422760	11.51
7	ILU	47622083	418700517	11.37
8	DJS	57692127	535002401	10.78
9	LYC	207258030	1960801292	10.57
10	WHC	107156840	1025635023	10.45
11	BLY	46690566	461163412	10.12
12	NWH	27796786	278888011	9.97
13	CSR	48827838	506000315	9.65
14	CAB	11300432	120430683	9.38
15	WTF	18647330	211736244	8.81
16	WSA	17140521	196843803	8.71
17	MTS	74695341	880704786	8.48
18	GUD	5941456	71341319	8.33
19	HVN	88075779	1062316784	8.29
20	ALQ	28104372	343556949	8.18

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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