The Short Report

This story features KINGSGATE CONSOLIDATED LIMITED, and other companies. For more info SHARE ANALYSIS: KCN

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 24, 2013

Shorting activity on the Australian market slowed over the week to 24 July. ASIC data show just one stock saw its short position increase by one percentage point (ppt) or more, while there were only two decreases of that size or greater.

As usual, there was a bit more going on when looking at changes over a one month period. Four stocks have seen their short position increase by two ppt or more over the month to 24 July, while four stocks also came off by that amount. The shorting was primarily in the materials and consumer sectors and so was the short covering for the most part.

Weekly Short Increases

Shorts in Billabong ((BBG)) increased to 4.75% from 3.55%.

The stock was upgraded to Hold By Deutsche Bank and to Buy, High Risk by Citi two weeks back on news the company had been thrown a life-line. BBG has secured a financing deal, an expensive one, but good enough to keep the doors open. Altamont will buy the company’s Dakine brand for $70m and provide a bridge facility of US$294m until the end of the year. The broker admitted the deal would probably lead to significant dilution for existing equity holders, but Deutsche Bank said it is still a positive outcome given it provides a debt reprieve and also demonstrates Altamont's faith in the value of the brands. Besides, the dilution will only come if the stock trades above current levels, said the broker.

Sentiment for the stock lifted to neutral on the upgrades.

Shorts in Kingsgate Consolidated ((KCN)) increased to 6.62% from 5.81%.

Macquarie downgraded its recommendation to Underperform from Neutral just yesterday noting Kingsgate had recently announced a new mine plan for its Challenger mine with a focus on higher grades. Macquarie downgraded the production profile by around 20,000 ozs per annum to 73,000 ozs, observing that, at current prices, the mine is not cash flow positive.

Sentiment for Kingsgate is negative.

Weekly Short Decreases

Shorts in APA Group ((APA)) decreased to 1.29% from 2.39%.

Macquarie downgraded its call to Neutral two weeks back on news the company is stitching together a merger with Envestra ((ENV)) for 0.1678 APA shares and a $0.03 dividend in August. The numbers added up to a bid price of $1.10 at the time of the offer. APA already owns around 33% of ENV, with CKI owning around 20%. The broker didn’t like the sound of the deal, first because it doesn’t need to be done given the company already has 33% stake and second because it already manages to company’s assets, therefore skimming much of the cream. The broker summed it up, saying the company is again using scrip for a dilutive takeover.

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

Shorts in Regis Resources ((RRL)) decreased to 3.10% from 4.14%.

It’s been a busy month for Regis and not in a good way. Both Deutsche Bank and Citi downgraded recommendation to Hold and Sell respectively at the beginning of the mo nth. They were joined by JP Morgan last week, the broker also downgrading to Neutral. JP Morgan admitted the company is facing creeping all-in costs, a stretched valuation and lower gold price forecasts, but the broker still sees the stock as a decent risk-hedge for investors that are less positive on gold prices.

Sentiment remains positive despite the downgrades.

Monthly Short Increases

Shorts in Ausdrill ((ASL)) increased to 6.79% from 3.75%.

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.

Broker sentiment for the stock is positive.

Shorts in Billabong ((BBG)) increased to 4.75% from 1.85%.

See above.

Shorts in Bradken ((BKN)) increased to 8.91% from 6.28%.

UBS noted last week that Bradken had reduced its FY13 earnings guidance to 4.5% below the broker's forecast. Given the challenges facing the industry, the broker has taken a conservative approach going forward and reduced FY14-15 forecasts by 11-14%. Challenges aside, UBS believes BKN is one of the best placed to cope with cyclicality, offering 65% of revenues from consumables used across a spectrum of commodities.

JP Morgan noted that while mining capex has dried up, mining volumes continue a-pace, providing Bradken with solid revenues from its consumables business. BKN is thus better placed than other contractors and boasts a strong balance sheet, said the broker.

Shorts in Kingsgate Consolidated ((KCN)) increased to 6.62% from 4.21%.

See above.

Monthly Short Decreases

Shorts in Troy Resources ((TRY)) decreased to 1.08% from 6.10%.

The company yesterday reported lower second-quarter output, mainly owing to the mining of a low-grade zone at the Casposo mine in Argentina. The company said the higher-grade Inca vein would be available in late August, when the current cutback would be complete. At that time, waste removal volumes were expected to drop with a corresponding reduction in mining costs.

Shorts in NRW Holdings ((NWH)) decreased to 7.62% from 10.13%.

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 DUET Group ((DUE)) decreased to 0.12% from 2.40%.

Macquarie, CIMB and JP Morgan all upgraded their recommends to Hold a few 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.

Shorts in CSR ((CSR)) decreased to 7.06% from 9.24%.

Deutsche Bank notes a couple weeks ago that AGM commentary confirmed the company's housing starts outlook, which was more pessimistic than the broker's own numbers, although NSW and WA were expected to grow by 5%-8%. The only other interesting point was that the hedging position was increased, which had a small impact on net profit numbers. Forecasts, the $2.21 price target and the Hold call were all maintained.

Macquarie's commodity team downgraded the forecasts for the Australian dollar versus the US dollar last week and moved on to review aluminium prices. The broker said that with the LME considering changes to reduce warehouse queues, moves to minimise queue length could have a profound effect on the base metals markets, particularly aluminium. These changes would also have a profound effect on CSR earnings if it were not for the softer Australian dollar. As a result, Macquarie made some marginal changes to forecasts, otherwise retaining a Neutral rating.

Sentiment for the stock is negative.

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	17106843	98947309	17.29
2	FXJ	393469580	2351955725	16.73
3	MYR	84281089	583594551	14.44
4	PDN	109963794	837187808	13.13
5	FLT	12298910	100426726	12.25
6	MND	10855863	90940258	11.94
7	DJS	59548949	535002401	11.13
8	LYC	210620302	1960801292	10.74
9	ILU	44417105	418700517	10.61
10	WSA	20265690	196843803	10.30
11	WTF	21793364	211736244	10.29
12	WHC	104107248	1025692710	10.15
13	CAB	11542329	120430683	9.58
14	ALQ	33196540	347494943	9.55
15	UGL	15384348	166511240	9.24
16	BKN	14856506	169240662	8.78
17	BLY	39196784	461163412	8.50
18	MTS	74397909	880704786	8.45
19	ANN	10974913	130617963	8.40
20	HVN	88822937	1062316784	8.36

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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