The Short Report

This story features CARDNO LIMITED, and other companies. For more info SHARE ANALYSIS: CDD

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 29, 2013

Shorting activity continued to slow on the Australian market over the month of May. The big difference was that short increases have finally started to lose out against short covering. The last week of May saw three stocks post bigger than one percentage point (ppt) increases, while five stocks decreased by one ppt or more.

Increases still outweighed decreases on a monthly basis, but less so than most reports recently. Over the month of May, six stocks saw their short position lift by two ppt or more, while only four pulled back by that amount.

The monthly moves, both upside and downside remain dominated by materials and industrial stocks. A quick look below will show that the weekly movers were pretty much the same as well.

Weekly Short Increases

Shorts in Bathurst Coal ((BTU)) increased to 6.79% from 5.01%.

At the beginning of May Credit Suisse reported the company’s 3Q production and sales both looked okay which saw the Outperform call, price target and forecasts maintained.

The FNArena Database shows broker sentiment for the stock is positive on straight Buys

Shorts in Cardno ((CDD)) increased to 6.38% from 5.25%.

UBS downgraded its recommendation to Neutral towards the end of May, noting the company said it expects an FY net profit of $73-$77m, with a final dividend of 18c. The broker suggested that delays to both private and government infrastructure spending and quickly tailing off in work from the US Gulf of Mexico have impacted margins. FY13-14 net profit forecasts were cut by 8% and 11% on the falling margins and a weakening outlook for the non-oil and gas sectors, although the broker did say it continues to see value for investors patient enough to wait for it.

CIMB stayed at Outperform, the broker saying the impact of the revised guidance is smaller than the broader deterioration in the mining sector would suggest. This highlights the company's diversity, in the broker's view. Cardno remains positively leveraged to improving US economic conditions and CIMB believes the US exposure will become increasingly significant if the US Federal Reserve and government commentary about the outlook eventuates. 58% of FY13 earnings is expected to be generated from North America.

Sentiment for the stock is positive.

Shorts in Drillsearch ((DLS)) increased to 4.53% from 3.43%.

Macquarie, at Outperform, took a look at the JV with BG in the Cooper Basin and noted the Cooper unconventional development is 5-6 years away from official sanction. To Macquarie, this raised the risk that Drillsearch and BG will be crowded out of the finite processing and export capacity in the basin. Macquarie maintained its Outperform rating on Drillsearch, with the ramp up of Western Flank crude exports remaining the key focus.

UBS, at Buy, advised in early May that March quarter production had come 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. The broker thinks the stock may soon break out of the doldrums it's been stuck in because of the delays in the Bauer to oil pipeline commissioning and a six month break in wet gas sales. UBS thinks increasing oil exploration activity and upcoming unconventional gas drilling will more than support the price.

Sentiment is positive.

Weekly Short Decreases

Shorts in Flight Centre ((FLT)) decreased to 11.62% from 14.19%.

Credit Suisse said cautioned last week to not become too excited about the falling AUD, as while it may be helpful, the real driver of International outbound travel is actually domestic income. Credit Suisse considers the stock a core portfolio holding, pointing out successful global expansion, a high return on capital and a strong record of earnings growth. The broker thinks the market is underestimating the upside from global expansion, while it also expects to see the dividend pay-out ratio lift from 56% currently towards 65%.

Sentiment is positive.

Shorts in Windimurra Vanadium ((WVL)) decreased to 0.11% from 2.43%.

Press reports from late May suggest the work on design issues within the CMB circuit remains on track to complete by this month. WVL is not covered in the FNArena database.

Shorts in Mincor Resources ((MCR)) decreased to 1.51% from 3.28%.

UBS said last month that March quarter production numbers were weak .The broker kept its Neutral recommendation based on valuation and an expectation of thin margins over the next 2-3 years. Mine life growth continues to present upside risk, but UBS said sentiment towards established nickel plays is weak and exploration potential is unlikely to be appreciated.

Sentiment for the stock is neutral.

Shorts in Fleetwood Corp ((FWD)) decreased to 3.92% from 5.22%.

UBS downgraded its recommendation to Sell at the latter end of May. The broker noted Fleetwood had become the latest resources services company at that stage to provide a weaker guidance for FY13. Fleetwood said it expects second half earnings will be marginally below the first half. This saw UBS reduce earnings estimates by 57% for FY13, by 11% for FY14 and by 36% for FY15. Besides the weakness in the resources sector, UBS also said it was concerned about the degree of structural weakness in Fleetwood's operations.

Macquarie, at Neutral, lowered it EPS forecasts a week after the profit downgrade. While the EPS changes were minor, the broker assumed no final dividend would be paid given the solid interim dividend, while the FY14 dividend estimate was cut to 25cps from 40cps. The fully franked yield of over 5% was expected to be maintained. The broker said it is waiting to see some new contract wins and more stable earnings and dividend forecasts.

Sentiment for the stock is negative.

Shorts in ARB Corp ((ARP)) decreased to 0.11% from 1.63%.

Citi, at Sell, reported mid-May that Thai imports had remained strong over the prior quarter and are now well and truly back to normal after the late 2011 flood generated supply disruptions. March total vehicle imports reached their highest level ever. The broker reminds that sales were flat in 2012 because of the disruptions, but 2013 is now expected to see 9% sales growth and 13% EPS growth now that things are back to normal. While it may all sound good, to explain its Sell call Citi pointed out that shares are trading at a 40% premium to their long term average and the Small Industrials.

Sentiment is neutral.

Monthly Short Increases

Shorts in Boart Longyear ((BLY)) increased to 9.56% from 3.38%.

Two weeks back, Boart Longyear downgraded its outlook for FY13, citing the difficult operating environment. CIMB, at Outperform, does not expect the V-shaped recovery that occurred after the GFC, but suspects FY13 might represent the low point for the next few years. The Outperform recommendation was retained because the bad news has been priced in, with CIMB saying the FY13 outcome is unlikely to be as bad as the share price suggests.

UBS, at Sell, confirmed Boart Longyear expects 2013 earnings to be at the low end of consensus. UBS reduced 2013-15 earnings by 41-82% on the news, expecting the exploration outlook to continue deteriorating. The Sell rating was retained, with balance sheet risk now seen as a key issue.

Sentiment for the stock is positive.

Shorts in Drillsearch ((DLS)) increased to 4.53% from 1.66%.

JP Morgan initiated coverage of Drillsearch with an Overweight recommendation and price target of $1.54 a couple of weeks back. The broker said Drillsearch 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 was also seen as being less leveraged than its Cooper-focused peers to the success of Cooper unconventional exploration, which JP Morgan liked. Potential stock catalysts over the next 6-12 months include the ramp up of oil and wet gas production, and testing of unconventional acreage.

Sentiment is perfect on straight Buys in the FNArena database.

Shorts in NRW Holdings ((NWH)) increased to 9.76% from 7.10%.

Deutsche Bank downgraded to Hold from Buy early last month, although the broker did imply it's not the company's fault. The analysts acknowledged NRW Holding is well managed with a strong project delivery and execution track record. Alas, the company is also exposed to the slowing domestic iron ore sector and mining companies are focused on reducing costs; and they will continue to be so. Deutsche Bank predicted significant margin pressure will be the consequence. Earnings estimates for FY14 were been reined in, the price target tumbled to $1.50 from $2.25 and DPS forecasts were slashed.

Sentiment is still positive.

Shorts in Boral ((BLD)) increased to 5.73% from 3.10%.

BA-Merrill Lynch downgrade to Neutral from Buy early last month, noting the company has been cutting headcount costs, but has still failed to stem the fall in earnings. The Australian market has quite simply disappointed against the broker's expectations, hence a downgrade, with earnings forecasts cut by 34% and 25% in FY13-14. 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 pointed out. 

JP Morgan upgraded to Neutral from Underweight the same day, having 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. The FY net profit guidance was pegged at $90-$105m, although stripping out the chaff shows 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.

Sentiment remains positive.

Shorts in ALS ((ALQ)) increased to 8.19% from 5.68%.

Last week’s FY13 results were within guidance and CIMB was positively surprised by the margins for minerals and energy. The broker lowered its FY14 earnings forecasts to reflect reduced testing activity, but noted acquisitions are a possibility and are not included in forecasts.

FY net profit was also in line with Citi, although the broker said the headline number did look a bit weaker given some one-offs. It could have been worse was how Citi put it. The standouts were a lift in margins and a strong increase in operating cashflow. There was no formal financial guidance provided, but what the broker did hear was as expected. With Citi below consensus and outlook commentary in line with Citi, the broker expects consensus numbers will be revised lower.

Sentiment for the stock is negative.

Shorts in Bathurst Resources ((BTU)) increased to 6.79% from 4.78%.

See above

Monthly Short Decreases

Shorts in Kingsgate Consolidated ((KCN)) decreased to 3.97% from 7.61%.

Macquarie noted at the end of April that March quarter results were well below forecasts and the broker thought this would make FY13 production guidance a bit difficult to achieve. Challenger's production levels were well below expectations and there were lower recoveries at Chatree. Macquarie downgraded FY13 production forecasts to 197,000 ounces from 202,000 ozs. The price target was also cut on the lower grade profile at Chatree as well as lower carrying value of Nueva Esperanza.

Sentiment for the stock is negative.

Shorts in Perseus Mining ((PRU)) decreased to 2.94% from 5.23%.

BA-Merrill Lynch at Neutral and the only broker in the database not at Buy, noted a few weeks back that it was impressed by its trip out to Edikan and said it was feeling somewhat more comfortable the new crusher will resolve ongoing issues, with a target of 8mtpa achievable in the near term. They're close already, said BA-Merrill Lynch, just a little more consistency is needed. The problem the broker saw was that the higher throughput may result in lower recoveries. FY14-15 production forecasts were cut and this flowed through to 20% lower earnings.

Macquarie said the week prior that management seems confident crusher problems at Edikan have been dealt with and processing capacity is on track for 8mtpa on a consistent basis. Continued downside was still expected for the entire gold sector in the current environment, but the broker believes that with operational improvements at Edikan, there is upside potential for Perseus.

Sentiment is positive.

Shorts in The Reject Shop ((TRS)) decreased to 5.75% from 7.85%.

Macquarie re-commenced coverage early last month following the lifting of research restrictions. After the capital raising, Macquarie said the company is in a good position to grow new stores and market share, partly as a result of the administration of Retail Adventures. The company expects to open 40 new stores in FY14. FY15 is viewed as the first period when the advantages of the accelerated store roll-out will become apparent. Macquarie continued to believe in the strong medium-term growth outlook but retained a Neutral rating based on valuation.

Sentiment for the stock is negative.

Shorts in Fleetwood Corp ((FWD)) decreased to 3.92% from 5.96%.

See Above

Top 20 Largest Short Positions

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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