The Short Report

This story features MINERAL RESOURCES LIMITED. For more info SHARE ANALYSIS: MIN

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, July 3, 2013

Shorting activity has started to pick back up across the Australian market and after sharing the limelight with an increasing number of sectors over the past few weeks, mining and related stocks have again claimed centre stage.

New Newscorp ((NNC)), which is old News Corp minus the entertainment division, has started off with a significant short position, rising 27 percentage points (ppt) to 28.45% shorted over the week to 3 July. Shares opened at $16.50 on the 28th of June and after dropping to $14.30 the next day, momentum has been haltingly higher since. Shorts reflect a preference post split for the spun off Twenty First Century Fox ((FOX)).

Other than New News, only five other stocks were shorted by 1ppt or more over the week, while five stocks were covered by 1ppt or more as well. A good indicator of recent momentum would be the short increases over the month to the third of July, with ASIC data showing nine increases of 2 ppt or more versus none of that magnitude on the short covering side of the monthly ledger.

Weekly Short Increases

Shorts in New Newscorp ((NNC)) increased to 28.45% from 0.67%.

Macquarie initiated coverage with an Underperform call and $15.10 price target towards the end of June, the broker noting risks exist in News & Information, which together generate US$6bn in revenue on only a 12% margin. Then there is the Education segment, for which a path to profitability is unclear. The broker did admit the company has a strong balance sheet and generates solid cash, but a cautious Macquarie decided to set its target at a 20% discount to sum-of-the-parts.

Deutsche Bank initiated with a Buy rating and $21.60 price target last week, saying early days are likely to be rough for investors, with lots of selling and limited near-term catalysts. Nevertheless, the broker said investors should be buying the shares at these levels. The stock was trading near a 40% discount to asset value and was viewed as too cheap to ignore. The challenges were clear: Falling circulation and advertising in Australian and UK newspapers, and the transformation may take more than a couple of quarters to pay off. Still, Deutsche Bank saw an investment opportunity for patient, value-oriented investors.

The stock currently shows a neutral sentiment read in the FNArena Database.

Shorts in Bradken ((BKN)) increased to 7.79% from 6.59%.

UBS, at Buy, noted at the end of June the company had reduced its FY13 earnings guidance to 4.5% below the broker's forecast. Given the challenges facing the industry the broker took a more conservative approach going forward, reducing FY14-15 forecasts by 11-14%. Challenges aside, the broker said BKN is one of the best placed to cope with cyclicality, offering 65% of revenues from consumables used across a spectrum of commodities.

The FY earnings guidance came in a little ahead of Deutsche Bank and a little shy of the market and while net profit was also in line with the broker, it was about 7% short of consensus. There will also be a $29m one-off for the Norcast case, although an appeal is lodged. There wasn't any outlook commentary or an update on order books, but the broker has its own opinions on the topic and they are not positive, with tough trading conditions expected for FY14. Forecasts were tweaked a little higher on the update, but with risks to FY14 consensus earnings abounding, the Hold call was maintained.

Sentiment for the stock is positive.

Shorts in Beadell Resources ((BDR)) increased to 8.11% from 7.03%.

UBS reported last week that management had released preliminary June quarter production numbers of 36,200 ounces, which was marginally below UBS' forecasts. Duckhead mining was expected to start this month, which should mean that the 2013 target of 200,000 ounces is achievable. A Buy rating was maintained based on valuation and for the successful commissioning of the Tucano project. The price target was unchanged at 80c.

Sentiment for the stock is perfect on straight Buys.

Shorts in Bathurst Resources New Zealand ((BRL)) increased to 6.09% from 5.01%.

The company listed on the ASX on the 20^th of June and reported a week later that an environmental ruling that had gone its way in New Zealand was being appealed.

Shorts in Charter Hall Retail ((CQR)) increased to 1.96% from 0.92%.

Credit Suisse upgraded its recommendation to Neutral yesterday on the back of recent share price weakness. The broker had also visited the company's properties in the Hunter region and noted the defensive nature of the convenience-based assets. The stock remained the broker’s preferred play in the convenience based retail space, as it offers the best potential for accretive acquisitions.

Sentiment remains negative.

Shorts in Mineral Resources ((MIN)) increased to 5.18% from 4.18%.

JP Morgan initiated coverage with a Neutral rating last week, saying the company’s mining services exposure provides one of the strongest links to mine production levels but, in the broker's view, direct mine interests expose investors to volatility in iron ore prices and add complexity to the investment case. Near-term drivers include iron ore pricing, potential expansion of the OPF construction expertise, ramp up on CSI contracts, securing port capacity and potential sale of mining assets.

Sentiment for the stock is positive.

Weekly Short Decreases

Shorts in Duet Group ((DUE)) decreased to 0.45% from 2.37%.

Macquarie, CIMB and JP Morgan all upgraded their recommends to Hold last week. CIMB noted the company’s Victorian gas distribution business had a big win against AER after the government was denied in its attempt to exclude $30.5m of mostly IT-related capex from the company’s opening RAB position. The appeal saw Multinet’s allowed revenue lift by about $45m over the 2013-2017 period. The extra revenue saw earnings lifted by a percent or so and a few cents added to the price target. Given the stock had also come off by around 17% since mid-May, the broker thought the time right to lift its recommendation.

Sentiment for the stock is now positive.

Shorts in QBE Insurance ((QBE)) decreased to 2.51% from 4.29%.

UBS said last week it liked the progress on the transformation strategy and said it was being managed with a far greater emphasis on efficiency and accountability. While the latest update included a soft looking $90m upgrade for claims procurement savings, the headline $250m in expense savings that is planned by the end of FY15 was re-affirmed.

Credit Suisse also liked the company’s work on its plan to reduce costs by US$250m over the next three years. Given management was pretty positive about progress to date, the broker was emboldened to lift its price target a little. QBE remained the broker’s preferred pick in the sector, Credit Suisse citing resolved debt issues, a favourable macro environment and a business that is well set up for future growth.

Sentiment for the stock is positive.

Shorts in ASX ((ASX)) decreased to 1.50% from 3.21%.

Macquarie noted earlier this week that interest rate futures volumes were solid last month, driven by bond yield and yield curve volatility. Otherwise, macro conditions remained supportive for futures volumes and equity market trading volumes also look to have stabilised. Forecasts and the price target were tweaked a little higher, although with the stock trading at a 27% one year forward PE premium to the market, the Underperform call was maintained.

Citi was a tad disappointed, noting that while the finish for fiscal 2013 was stronger than expected, there was still no sign of an overall pick-up in velocity. Citi analysts blamed the absence of retail investors.

Sentiment for the stock is negative.

Shorts in OZ Minerals ((OZL)) decreased to 3.33% from 4.67%.

UBS lowered its gold price forecasts a few 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 was, 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 Karoon Gas ((KAR)) decreased to 1.57% from 2.76%.

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.

Monthly Short Increases

Shorts in Flight Centre ((FLT)) increased to 12.20% from 7.11%.

Credit Suisse notes last week the company had increased guidance for FY13 for the second time in two months, signalling to the broker likely profit growth of 23% in the second half. All countries in which Flight Centre operates were expected to deliver positive full year earnings contribution in FY13.

Deutsche Bank confirmed that the good trading conditions in May/June helped the company to lift its FY13 profit guidance. UBS was already close to the new mark, so revisions were minor, with EPS up between 2.5% to 3.0%.

CIMB called the guidance upgrade a testament to the strength of the brand and management’s ability to keep right on delivering despite the tough conditions. The broker responded by lifting FY13-14 EPS forecasts by 4% and 3% and pushing the price target higher. There was understandably no change to the Outperform call, the broker citing continued corporate market share gains and an attractive valuation.

Sentiment for the stock is positive.

Shorts in NRW Holdings ((NWH)) increased to 9.29% from 5.89%.

JP Morgan noted towards the end of last month that market conditions remain tough, but also that the company's ability to win work despite the conditions is confidence inspiring. The broker said the balance sheet retains the capacity to build and pay dividends and valuation support still exists despite weaker earnings forecasts.

Sentiment for the stock is positive.

Shorts in Beadell Resources ((BDR)) increased to 8.11% from 5.31%.

See above.

Shorts in Lynas Corp ((LYC)) increased to 10.91% from 8.18%.

Macquarie downgraded to Neutral in mid-June, noting that while the rare earth market remains subdued, Lynas is optimising production at the phase 1 capacity level until higher prices are seen. While this may sound all well and good, Macquarie said time will tell whether it is successful. The lack of visibility on when prices may improve is what resulted in the broker downgrading the recommendation.

Sentiment is neutral.

Shorts in Mesoblast ((MSB)) increased to 4.77% from 2.22%.

The Australian reported a few weeks back that the Mesoblast's stem cell technology is the most likely alternative to bone grafts, which require removing material from the hips. With cash of $372m, the paper noted Mesoblast has leeway in terms of pursuing spinal fusion remedies over treatment for degenerative spine disease.

Sentiment is positive.

Shorts in Transfield ((TSE)) increased to 5.17% from 2.66%.

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.

Shorts in Papillon Resources ((PIR)) increased to 2.71% from 0.57%.

Deutsche Bank noted a couple weeks back that the new pre-feasibility study on the Fekola Gold Project pretty much confirmed what was reported in the scoping study last year. Annual gold output actually came in a bit higher, while low cash costs paint a pretty picture for margins in the current low price environment. The broker also thought the 9-year life of the mine can be extended. In short, Deutsche Bank said this is the now best undeveloped gold asset in the entire Australian gold sector, so development funding should be easy despite the challenging market and scarce funds. The broker’s Buy call and $1.90 price target were maintained.

Sentiment for the stock is positive.

Shorts in Bradken ((BKN)) increased to 7.79% from 5.71%.

See above.

Shorts in Bathurst Resources (New Zealand) ((BRL)) increased to 4.91% from 2.83%.

See above.

Monthly Short Decreases

Shorts in Macquarie Atlas Roads Gas ((MQA)) decreased to 3.93% from 5.12%.

At the end of June both JP Morgan and Macquarie upgraded their recommendations to Overweight/Outperform. Macquarie said that with 100% of MQA sales sourced in euro, the toll roads group is a logical beneficiary (or victim) of FX movements. As Macquarie had substantially lowered its AUD estimates for the two years ahead, there should be a straightforward positive impact. Also, lowered EUR projections should, on Macquarie's assessment, translate into double-digit boosts to dividend payouts. The valuation impact is immediate, stated the analysts, and they raised the price target to $2.40 from $2.16 to prove it. In addition, the refinancing of the Eiffarie debt and potential for a concession extension were both seen as additional sources of value.

Then last week CIMB downgraded its call to Underperform saying on one hand it does not like this stock given it offers the lowest yield in the space and the expectation of ongoing traffic weakness from the group’s core asset, the APRR in France. On the other hand, the falling AUD has provided a significant valuation tailwind over the past few months, with the stock outperforming the S&P/ASX 200 by 28% since the beginning of April. The former trumped the latter seeing the recommendation cut.

Sentiment for the stock is positive.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	NNCLV	2770166	11158110	24.83
2	JBH	16797983	98947309	16.98
3	FXJ	398573835	2351955725	16.95
4	MYR	79313875	583594551	13.59
5	PDN	106731579	837187808	12.75
6	FLT	12326058	100426726	12.27
7	MND	10706274	90940258	11.77
8	ILU	47905871	418700517	11.44
9	DJS	59569941	535002401	11.13
10	WHC	113585616	1025635023	11.07
11	LYC	212323273	1960801292	10.83
12	BLY	46618311	461163412	10.11
13	NWH	27140824	278888011	9.73
14	WSA	19114371	196843803	9.71
15	CAB	11406717	120430683	9.47
16	WTF	19811959	211736244	9.36
17	ALQ	31693441	343556949	9.23
18	CSR	44933149	506000315	8.88
19	MTS	76526469	880704786	8.69
20	GUD	5989372	71341319	8.40

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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