The Short Report

This story features BORAL LIMITED, and other companies. For more info SHARE ANALYSIS: BLD

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, May 7, 2013

Revisions to short position, either up or down, were seemingly the last thing investors were thinking about last week. Instead, the market watched as more quarterly reports, especially production reports from miners, rolled in.

Unsurprisingly, miners and resources-related stocks dominated the lists, with Short Report regular Myer the only exception on a weekly basis. When the dust had settled, there were only three stocks for which short position shifted by one percentage point (ppt) or more, two higher and one lower. There were ten moves of over 2ppt over the month, eight of those were increases.

Weekly Short Increases (+/- 1ppt)

Shorts in Beadell Resources ((BDR)) increased to 2.92% from 1.30%.

Macquarie noted yesterday the current macro environment is presenting ongoing downside for the gold sector. Despite this, Beadell remains the broker’s key pick in the space because of its high grade profile, low cash costs and cash flow. Macquarie increased production forecasts to 226,000 ounces for 2013 at cash costs of US$486/oz and maintained its Outperform rating. UBS noted three weeks ago March quarter production came in short of expectations, but this did not overly concern UBS, as the focus is on the ramp up at Tucano. Final approvals for Duckhead are still pending and this was viewed as a potential catalyst for the share price along with commissioning of the magnetic separation plant to produce the first iron ore concentrate for sale. Buy/Hold/Sell (B/H/S) ratio: 4/0/0

Shorts in Boral ((BLD)) increased to 4.26% from 3.24%.

The company reported 3Q numbers last week and the reception was mixed, with BA-Merrill Lynch downgrading to Hold and JP Morgan upgrading to Hold. Merrills noted Boral had been cutting headcount costs, but still failed to stem the fall in earnings. The Australian market has quite simply disappointed against the broker's expectations hence the downgrade. An Underperform rating might have been on the cards but for the obvious housing recovery in the US and growth opportunities in Asian plasterboard, the broker said.

JP Morgan noted Boral has started to have some serious issues with the weather after what was a fairly issue-free 1H. The 3Q report unwound all of the good weather upside that was accumulated, with 3Q earnings falling $19m short of management’s expectations. The FY net profit guidance was pegged at $90-$105m, although stripping out the chaff showed an underlying net profit of just $19m. That's how tough it is out there, said the broker. JP Morgan's FY13 net profit forecast was cut by 27%, with FY14-15 down around 10%. That being said, the broker still expects net profit to double in 2014 on the back of announced cost savings, the reversal of some one-offs and hopefully a still ongoing recovery in the US. In short, the broker saw only minor prospective valuation downside and a number of catalysts that are skewed to the upside. B/H/S: 3/4/1

Weekly Short Decreases(+/- 1ppt)

Shorts in Myer ((MYR)) decreased to 13.66% from15.21%.

The last big word on the stock came from Deutsche Bank at the end of April when it upgraded its recommendation to Buy from Hold. The broker suggested that while discretionary retailers have outperformed the market so far this year, the market still seems to have an appetite for these stocks. In this case, Myer represents the best opportunity given a reasonable valuation and strong free cash flow. The company is also delivering like-for-like sales growth and is addressing structural issues, noted Deutsche Bank. B/H/S: 2/3/3

Monthly Short Increases(+/- 2ppt)

Shorts in NRW Holdings ((NWH)) increased to 7.66% from 4.26%.

Deutsche Bank said last week the best way to summarise its decision to downgrade to Hold from Buy is “it's not the company's fault”. The analysts acknowledge NRW Holding is well managed with a strong project delivery and execution track record. Alas, the company is exposed to the slowing domestic iron ore sector and mining companies are focused on reducing costs; and they will continue to do so. Deutsche Bank predicted significant margin pressure will be the consequence. Earnings estimates for FY14 have were reined in, the price target cut and DPS forecasts slashed. B/H/S: 4/2/1

Shorts in Troy Resources ((TRY)) increased to 4.17% from 0.80%.

The Bidder's Statement and Target's Statement for the takeover of Azimuth Resources ((AZH)) were mailed out to both sets of shareholders last week.

Shorts in Drillsearch ((DLS)) increased to 3.91% from 0.70%.

UBS reported at the beginning of the month that March quarter production came in well ahead on the back of a faster than expected ramp up in Bauer oil production. Sales revenue was strong, not only on the higher production volumes, but also on a better than expected realised price. JP Morgan initiated coverage last week with an Overweight recommendation, noting the company offers exposure to the Cooper Basin, particularly conventional oil, and the wet gas is becoming more valuable in the broker's view, thanks to east coast gas market dynamics. Drillsearch is less leveraged than its Cooper-focused peers to the success of Cooper unconventional exploration, which JP Morgan also likes. Potential stock catalysts over the next 6-12 months include the ramp up of oil and wet gas production, and testing of unconventional acreage. B/H/S: 4/0/0

Shorts in Whitehaven Coal ((WHC)) increased to 10.13% from 7.04%.

BA-Merrill Lynch confirmed at the beginning of the month that March quarter production was in line with expectations. The company's FY13 production guidance is for 9m tonnes of ROM coal. On the broker's estimates this equates to a 4% reduction in guidance since the first half result. The company has indicated that weak coal markets are continuing to impact on performance. Meanwhile, Deutsche Bank said it might have been a weak quarter, but the broker thought it was still pretty good given the difficulties faced over the period. On the other hand, FY13 production has been downgraded and realised price expectations have been lowered. On the upside, Narrabri is showing some good signs of progress and the broker is also confident the moisture issues will be sorted after the first long-wall change in June. The broker also sees compelling value at current levels. B/H/S: 6/2/0

Shorts in Beadell Resources ((BDR)) increased to 5.16% from 2.46%.

See above.

Shorts in Monadelphous ((MND)) increased to 12.11% from 9.58%.

UBS reported last week that it believes Monadelphous' end markets have deteriorated, predicting an earlier-than-expected decline in earnings, i.e. FY14 rather than FY16. The broker upgraded FY13 earnings forecasts by 1.5%, but reduced FY14-15 by 18%. B/H/S: 1/1/5

Shorts in SAI Global ((SAI)) increased to 6.86% from 4.37%.

JP Morgan noted last month the company had reiterated FY13 guidance, but reduced the medium term margin outlook for the Compliance division. The broker also cut its earnings margin estimates to 35% for the Compliance division in FY15 and beyond. JP Morgan is cautious, as SAI Global has made many downgrades to guidance in the recent past. B/H/S: 2/5/1

Shorts in ALS ((ALQ)) increased to 6.58% from 4.26%.

CIMB reported last week it had reviewed the sector and thinks ALS is unlikely to surprise the market when results are furnished at the end of May. A slower-than-expected recovery in exploration activity led to a downgrade in the FY14 earnings forecasts by 20%, which suggests FY14 earnings contraction of 11% on FY13. B/H/S: 2/3/3

Monthly Short Decreases(+/- 2ppt)

Shorts in Syrah Resources ((SYR)) decreased to 0.24% from 4.83%.

The company reported last month it is set to resume diamond drilling at its Balama Graphite and Vanadium Project in north Mozambique this month, which is likely to be highly anticipated given the claim results have been impressive to date. In 2012, Syrah defined a tier 1 deposit of graphite in terms of quality and size.

Shorts in Metcash ((MTS)) decreased to 8.33% from 11.29%. B/H/S: 1/6/1

 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	JBH	17346774	98947309	17.53
2	FXJ	401782925	2351955725	17.08
3	ILU	61107621	418700517	14.59
4	MYR	79693901	583594551	13.66
5	PDN	111776486	837187808	13.35
6	MND	11011196	90940258	12.11
7	FLT	11587009	100418807	11.54
8	DJS	57046183	531788775	10.73
9	LYC	203711878	1960801292	10.39
10	WHC	103860346	1025635023	10.13
11	CSR	50687002	506000315	10.02
12	ANN	11453826	130841339	8.75
13	MTS	73319521	880704786	8.33
14	HVN	84966676	1062316784	8.00
15	WSA	15704254	196843803	7.98
16	NWH	21917849	278888011	7.86
17	WTF	16084656	211736244	7.60
18	COH	4301106	57040932	7.54
19	CAB	8886723	120430683	7.38
20	UGL	11706009	166511240	7.03

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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