The Short Report

This story features ANDEAN SILVER LIMITED, and other companies. For more info SHARE ANALYSIS: ASL

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 10, 2013

After a burst of speed that showed up in last week’s short report, shorting activity on the Australian market has again come off a notch or two. There were just seven changes greater than one percentage point (ppt) reported over the week to 10 July. The count was three increases and four decreases.

There were fewer significant monthly moves, with just seven changes greater than 2ppt reported. Again, increases outweighed decreases, in this instance by a count of six to one. The bulk of the short changes, both up and down, were mining and resources related, although a few consumer stocks were also seen.

Weekly Short Increases

Shorts in Ausdrill ((ASL)) increased to 5.65% from 4.08%.

CIMB downgraded its call to Neutral at the end of June 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 is now 12% below consensus. The broker still saw 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 also saw diminishing prospects for any share price upside. CIMB did say the valuation is still supportive for a more positive longer-term view.

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

Shorts in Billabong ((BBG)) increased to 4.42% from 3.02%.

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 Kingsgate Consolidated ((KCN)) increased to 5.17% from 3.85%.

Citi pushed through lower gold price assumptions yesterday and it resulted in lower earnings and price targets across the sector. Kingsgate was also the odd man out, being the only stock downgraded as part of the process. FY13-14 EPS is was cut by 13% and 125%, pulling the price target lower.

Sentiment for the stock is negative.

Shorts in Medusa Mining ((MML)) increased to 2.23% from 1.20%.

Citi said last week it was disappointed by quarterly production, but not as much as it was disappointed by the downgrade to FY14 guidance that came with it. Narrower veins and delays to commissioning were blamed for the shortfall. There were no changes to the Buy call, forecasts or $5.00 price target, the broker said it was waiting until the mill is fully commissioned and numbers are released before it updates its estimates.

Sentiment for the stock is positive.

Weekly Short Decreases

Shorts in New Newscorp ((NNC)) decreased to 0.80% from 28.45%.

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 two weeks back, 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.

Views aside, the end of shorting for NNC will be related to trades carried across the split listing process.

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

Shorts in Troy Resources ((TRY)) decreased to 4.86% from 6.41%.

The company announced a couple of weeks back that its interest in Azimuth Resources had reached 93.97%, with any remaining shares now to be acquired by Troy under the provisions for compulsory acquisition. The acquisition process was expected to take around 4 to 6 weeks, although it could take longer, depending on circumstances. There was a so a press report at the end of June claiming the

Shorts in Charter Hall Retail ((CQR)) decreased to 0.96% from 1.96%.

Credit Suisse upgraded its recommendation to Neutral last week 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.

Monthly Short Increases

Shorts in Billabong ((BBG)) increased to 4.42% from 1.32%.

See above.

Shorts in Beadell Resources ((BDR)) increased to 8.20% from 5.48%.

UBS reported two weeks ago 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 Bradken ((BKN)) increased to 8.10% from 5.82%.

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 Papillon Resources ((PIR)) increased to 2.88% from 0.65%.

Deutsche Bank noted a few 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 Ausdrill ((ASL)) increased to 5.65% from 3.43%.

See above.

Monthly Short Decreases

Shorts in DUET Group ((DUE)) increased to 0.25% from 2.40%.

Macquarie, CIMB and JP Morgan all upgraded their recommends to Hold two weeks ago. 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 positive.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	FXJ	390342088	2351955725	16.60
2	JBH	16390584	98947309	16.56
3	MYR	82786156	583594551	14.19
4	PDN	107887298	837187808	12.89
5	FLT	12350593	100426726	12.30
6	DJS	63045427	535002401	11.78
7	MND	10662847	90940258	11.73
8	ILU	47881500	418700517	11.44
9	LYC	215782417	1960801292	11.00
10	WHC	108550060	1025692710	10.58
11	WSA	19784034	196843803	10.05
12	BLY	45385259	461163412	9.84
13	WTF	20045385	211736244	9.47
14	ALQ	32502133	347494943	9.35
15	CAB	11212879	120430683	9.31
16	CSR	46387914	506000315	9.17
17	BKN	15330582	169240662	9.06
18	NWH	24907014	278888011	8.93
19	MTS	77210193	880704786	8.77
20	UGL	14262554	166511240	8.57

 

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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