The Short Report

This story features TROY RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: TRY

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 25, 2013

Compared to the levels we’ve been seeing over the past few months, the Australian share market went a little short position crazy over the week to the 25^th of June. There were sixteen stocks whose short position increased by more than one ppt over the week and there were six short position covered by that much or more.

Materials and consumer stocks remain the most affected by the short increases, while miners also held most of the top spots on the short position decrease list as well. Monthly activity was a little slower than usual, with just three stocks seeing their short position lift by 2ppt or more, while there was just one that reduced by that amount.

Weekly Short Increases

Shorts in Beadell Resources ((BDR)) increased to 7.03% from 5.18%.

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

Macquarie also said mid-May it expected 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. At the time, Macquarie increased production forecasts to 226,000 ounces for 2013 at cash costs of US$486/oz.

Sentiment is positive on straight Buys in the FNArena Database.

Shorts in ASX ((ASX)) increased to 3.21% from 1.45%.

ASX announced mid-June it would be raising $553m via a 2-for-19 renounceable entitlement offer at $30 a share. The company also provided FY13 guidance, which was in line with Credit Suisse's estimates. Earnings per share were reduced by 5.5% in both FY14 and FY15 to reflect the offer. The broker noted the offer pre-empted more stringent capital requirements and reduced debt, but was still an overly cautious move. The Underperform rating was retained.

Deutsche Bank was not only surprised by the $553m equity raise, it was positively scratching its head. While the $200m lift in clearing capital for futures appeared unavoidable, the plan to replace $250m of clearing house debt with equity was very hard to understand. Sure, gearing would drop to zero, but full debt funding would have only lifted it to 18%, well under global peers at an average of 38% and would have had minimal EPS impact. An overly conservative and more dilutive capital option, said the broker. Maybe, hoped Deutsche Bank, the company is keeping its capital powder dry for future deals.

Sentiment for the stock is negative.

Shorts in UGL ((UGL)) increased to 8.72% from 7.07%.

Credit Suisse reported in mid-June that losses on underperforming power projects, delays in engineering project ramp-ups and cost cutting from miners were all behind a 39% downgrade to FY13 profit guidance. The broker's forecast earnings fell 34% and 15% in FY13-14 on the update. UGL appeared to have fared worse from industry cost cutting than the rest of the sector, the broker noted, suggesting the company's costing was either not competitive, or relationships with customers were breaking down. A divisional break-up would offer up two takeover opportunities, but in the meantime, the broker downgraded to Neutral.

UGL was the only downgrade in the broker’s mid-June sector update. Otherwise, Macquarie said the news highlighted the risk across the sector around big expectations for the second half. UBS was also put out by the news, but remained a fan of the company's high exposure to recurring and other maintenance work. Although, increasing the earnings risk and poor cashflow conversion were more than enough to make UBS forget about the 27% discount to the market.

Sentiment is neutral.

Shorts in Karoon Gas ((KAR)) increased to 2.76% from 1.16%.

UBS pointed out in mid-May the company had increased the size of the gross oil column intersected at the Bilby-1 exploration well in Brazil. The column was confirmed at 320 metres, against 200m previously. UBS noted the well does have a relatively low net to gross ratio and appraisal drilling is still required to delineate size and commercial potential, with the well yet to reach the primary Santonian target. A Buy rating was maintained and the price target raised, but as a high risk/reward play, UBS warned investors to expect significant volatility in the share price, particularly while drilling continues.

Sentiment for the stock is positive.

Shorts in Boart Longyear ((BLY)) increased to 9.98% from 8.43%.

The stock wore three downgrades yesterday. CIMB dropped to Hold, while both Citi and BA-Merrill Lynch cut to Sell.

Citi said two years of losses and no dividend is what it now on the cards for FY13-14. The broker noted Boart Longyear had downgraded its FY guidance by an effective 10% or so citing further deterioration in commodity prices and mining budgets. There were no numbers, just “below the bottom end of consensus”, and this had Citi bemoaning the continued lack of earnings visibility. The company has managed to restructure its bank debt, so at least there is increased covenant headroom, but Citi said that with demand still deteriorating, balance sheet risk remains high. FY13-15 earnings forecasts were cut between 30%-37% to better reflect the weaker demand outlook. And with demand still worsening, balance sheet risk elevated, and little in the way of near-term catalysts, Citi said it was time to downgrade to Sell.

The downgrades have pushed sentiment into negative territory.

Shorts in QBE Insurance ((QBE)) increased to 4.29% from 2.78%.

At the end of June, CIMB analysts were confident QBE would benefit from investment markets this half-year. The expectation was that the 1H result would be solid and in line with company guidance. A good and clean result in August may well prove to be the next catalyst for the shares, said CIMB. The only problem with the scenario above is that investors had already started pricing in the good prospects.

A few days prior, Macquarie made some adjustments to account for the lower A$, higher US interest rates, benefits from QBE's cost-out program and a more benign claims outlook. Forecasts were lifted, the price target pushed higher and this provided enough room to lift the recommendation to Outperform.

Sentiment is positive

Shorts in St Barbara ((SBM)) increased to 4.73% from 3.28%.

A couple of months back Deutsche Bank noted that March quarter production was 4% below estimates. A disappointing quarter from Gwalia was partially offset by the first indication of an operational turnaround at the Pacific assets.

Sentiment otherwise remains positive.

Shorts in OZ Minerals ((OZL)) increased to 4.67% from 3.30%.

UBS lowered its gold price forecasts a couple of weeks back and this lead to lower earnings forecasts and a reduced price target.

Deutsche Bank noted late-May the company had pushed back the start of the exploration decline at Carrapateena by six months or more given it was looking like costs would come in higher than the $100m initially estimated. The broker pushed that $100m spend out to FY15, with first production out to 2020. The problem iss, Prominent Hill winds up in CY18, meaning there is a significant production gap, which increases funding risks. Still, the broker saw enough cash, maybe even enough for a sneaky acquisition. Citing value and a few cards up the company's sleeve, the Hold call was maintained.

Sentiment is positive.

Shorts in Monadelphous Group ((MND)) increased to 11.81% from 10.57%.

Macquarie just yesterday refreshed its view on Monadelphous. Unlike many others in the sector, the broker noted the company is on track to deliver on FY13 guidance, although cash collection has continued to be challenging. Macquarie lowered earnings forecasts for FY14 and FY15 by 20% and 23% respectively, reflecting a normalisation of activity levels from the FY13 peak. The broker also thought the recent share price decline was overdone relative to current earnings expectations. That said, the stock was at a 36% premium to peers, so Macquarie found it difficult to imagine any outperformance.

Sentiment for the stock is negative.

Shorts in Sims Metal Management ((SGM)) increased to 4.65% from 3.44%.

Credit Suisse noted Monday that US peers Schnitzer and CMC had reported May quarter results, with Schnitzer's effort adding up to weaker numbers and CMC a little stronger. Volumes were up for both, seeing the $50/t collapse in the ferrous price over the quarter take most of the downside blame. On the other hand, both reported rising US demand and that was a distinct positive for Sims.

CIMB noted a few weeks back that ferrous scrap prices had continued to soften and were down an average of 12% since the broker picked up coverage on the stock in March. This was 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 would likely take longer to flow through than in previous cycles.

Sentiment for the stock is positive.

Shorts in Toll Holdings ((TOL)) increased to 5.25% from 4.06%.

Deutsche Bank upgraded to Buy from Hold and pushed up its price target by 20c at the end of June. The broker cited three key reasons for the move. The stronger core business has offset the weakness in Global Forwarding, positioning the company better to leverage any cyclical recovery. There's also greater discipline with cost control/reduction and a strategy for improved returns, plus the shares were trading at a discount to the market and that was with only 3.4% underlying EBITA growth factored into the stockbroker's FY14 forecasts.

On the same day CIMB downgraded to Neutral, saying times are still tough for Toll, but at least management is making the hard decisions to restore freight forwarding to its former glory. The view was that Toll Holdings should prove to be a profitable investment with a horizon of at least 12 months, preferably longer. The key characteristic (and what should attract investors) was the company's exposure to an improvement in the broader domestic economy. The downgrade was a valuation call.

Sentiment is positive.

Shorts in Alacer Gold ((AQG)) increased to 2.36% from 1.22%.

Macquarie lowered its forecasts for the Aussie dollar and conducted a sector-wide update towards the end of last month. In the mining space this only led to one recommendation upgrade and the lucky beneficiary was Alacer Gold.

Sentiment remains positive.

Shorts in Kingsgate Consolidated ((KCN)) increased to 4.37% from 3.30%.

BA-Merrill Lynch confirmed its Underperform call on Monday, having noted the company was reviewing its high cost Challenger mine and looking for ways to reduce costs and to transition to high grade ore from Challenger West. The new mine plan is expected to lower production over the next 2-3 years. BA-Merrill Lynch expects total mined production of 250,000 ounces over the next three years against previous forecasts of 400,000 ozs over four years. Kingsgate was also planning to book a $300m non-cash impairment charge against the current carrying value of Challenger.

Sentiment is negative.

Shorts in Billabong ((BBG)) increased to 2.47% from 1.41%.

There were a number of downgrades at the beginning of June on news there would be no takeover. Deutsche Bank said there must be some value in the brands because of the continued interest in Billabong. The company's dire need for capital would allow the suitors to enjoy some benefits without assuming the equity risk. The worst case is that no deal is ever agreed upon and the best case is that the bidders would cherry pick best brands for a low price and offer debt financing with a coupon sufficient to compensate for their risk.

There was an upgrade from UBS as well, the broker having noted both the Sycamore and Altamont consortiums had dropped their bids. The broker assumed the balance sheet risk, little in the way of asset backing and a less than positive earnings outlook all contributed. The job for management is to look for ways to cover the $400m that is due next July. It'll either be divestments or a dilutive capital raising along with new debt and neither paints a pretty picture. The broker cut its FY13-14 EPS forecasts by 34% and 42% on the above and a lowered earnings guidance from management. The funding will be secured, said UBS, who had confidence enough to lift its call to Neutral.

Sentiment is negative.

Shorts in Troy Resources ((TRY)) increased to 6.25% from 5.20%.

The company recently picked up $40m in funding from Investec Bank for general working capital purposes and to meet costs related to acquiring Azimuth Resources. Looks like that deal is happening fast, with the offer taken unconditional yesterday.

Shorts in Breville Group ((BRG)) increased to 4.32% from 3.32%.

JP Morgan initiated coverage on Breville with an Overweight rating and $7.90 price target in mid-June. The company has growth potential in both the domestic home appliances, as a relative growth market, and in the UK and North America, which present high margin opportunities in large markets, said the broker.

JP Morgan also did not believe the company's potential was fully reflected in the share price. Second half growth rates are forecast at 3% for Australia and 15% for the US, which the broker thought may be conservative. The UK is not included in forecasts. One of the fastest growing segments of retailing is the small domestic appliance. Domestic retailers are, hence, looking to expand in the space and this increases the channels by which Breville can make a mark.

Sentiment is positive.

Weekly Short Decreases

Shorts in Bathurst Resources ((BTU)) decreased to 0.46% from 5.34%.

Deutsche Bank downgrades its call to Neutral from Buy couple of weeks back on some significant changes to its AUD forecasts. Earnings forecasts and price targets were pretty much pushed higher across the sector, except in the case of BTU.

Sentiment remains positive.

Shorts in Ramelius Resources ((RMS)) decreased to 1.19% from 3.72%.

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 also 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.

Shorts in Gryphon Minerals ((GRY)) decreased to 3.48% from 5.56%.

The company reported last week that is was making good progress on securing a financing package for the development of the Banfora Gold Project in Burkina Faso.

Sentiment is positive.

Shorts in Thorn Group ((TGA)) decreased to 0.11% from 1.53%.

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 Mirabela Nickel ((MBN)) decreased to 1.74% from 2.92%.

The company provided updated guidance earlier this week, noting production is expected to come in between 17,000 to 18,500 tonnes of nickel in concentrate for 2013. Production is expected to be stronger in the second half of the year, the company pointing to improved access to higher quality South Pit ore. Otherwise, cash costs, capex and exploration plans were maintained.

Sentiment for the stock is positive.

Shorts in Maverick Drilling & Exploration ((MAD)) decreased to 1.86% from 2.86%.

MAD is not covered in the FNArena database.

Monthly Short Increases

Shorts in Transfield Services ((TSE)) increased to 4.80% from 2.18%.

Macquarie, and most other brokers, downgraded FY13 and FY14 earnings at the end of May after Transfield updated guidance. The broker noted current multiples were undemanding, but gearing levels were onerous and required fixing. Progress on asset sales and a renewal of confidence in the FY14 outlook were still required before the stock is likely to perform, said the broker.

Sentiment for the sock is neutral on five straight Holds.

Shorts in Silver Lake Resources ((SLR)) increased to 3.16% from 0.96%.

Deutsche Bank reported yesterday that 4Q production had come in a little ahead of its expectations. And with gold prices exceptionally soft, the broker noted the company is still reviewing capital plans. The Murchison ramp up now looks that much more important, but there are delays here as well, said Deutsche Bank. The broker also noted gold sales were running below forecast, with current work expected to lead to higher grades and production in the September quarter. Deutsche Bank continued to see plenty of options and potential for upside in the portfolio and is waiting to see what comes from the Mount Monger review. But despite the prospects, uncertainty reigns and that meant the Hold call was maintained.

Sentiment for the sock is positive.

Shorts in UGL ((UGL)) increased to 8.72% from 6.72%.

See above

Monthly Short Decreases

Shorts in Bathurst Resources ((BTU)) decreased to 0.46% from 5.57%.

See above

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	FXJ	405718587	2351955725	17.25
2	JBH	16069271	98947309	16.24
3	MYR	83673426	583594551	14.34
4	PDN	108975389	837187808	13.02
5	FLT	12177868	100422760	12.13
6	ILU	49468925	418700517	11.81
7	MND	10735971	90940258	11.81
8	WHC	110030431	1025635023	10.73
9	DJS	57374819	535002401	10.72
10	LYC	206125226	1960801292	10.51
11	NWH	28100773	278888011	10.08
12	BLY	46026451	461163412	9.98
13	CAB	11274286	120430683	9.36
14	WSA	18313437	196843803	9.30
15	CSR	46526919	506000315	9.20
16	WTF	19104782	211736244	9.02
17	UGL	14528017	166511240	8.72
18	ALQ	29362173	343556949	8.55
19	MTS	74295091	880704786	8.44
20	ANN	10956617	130617963	8.39

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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