The Short Report

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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, June 4, 2013

Shorting activity picked up over the week to the fourth of June, with discretionary stocks taking much of the heat. There was some short covering going on as well, the falling AUD taking some of the pressure off of resources stocks. All told, there were eight increases to short positions greater than one percentage point and four decreases of that amount or more.

There were also a number of short position changes of greater than two percentage points over the month to the fourth of June. There were three increases and six decreases reported. Discretionary and industrial stocks maintained many of the top positions amongst the increases, while the decrease side was again dominated by resources plays.

Weekly Short Increases

Shorts in Fairfax Media ((FXJ)) increased to 17.77% from 14.92%.

Citi, at Neutral, noted FY13 earnings guidance from the recent investor day came in a little short of the market, but still 2% better than Citi was expecting. Revenues are continuing to soften, so management also unveiled an increased cost-out plan as well. The broker was a bit disappointed that its positive outlook for Domain was offset by even more weakness in print. Citi said asset sales could certainly simplify the story. In the meantime, FY13-14 EPS forecasts are up 2% and 4%, the price target also pushed a little higher and the Neutral call was maintained. Fairfax doesn't have an audience problem, said Citi, it has a structural print to online transition while keeping earnings up problem.

CIMB, at Outperform, said the briefing confirmed revenue remains weak, but it also showed the company is having success in reducing the cost base and the broker said there are a number of valuable online assets that are generating strong growth and are being materially undervalued. CIMB noted net debt is low and there is the potential for capital management, particularly if the operating environment improves. The stock was viewed as being cheap on a price to earnings ratio of 10 times FY13 forecasts and a 13% free cash flow yield.

Despite CIMB’s positive stance, sentiment for the stock remains negative.

Shorts in Seek ((SEK)) increased to 6.79% from 4.30%.

Last week it seemed BA-Merrill Lynch shifted from being optimistic about job ads, seeing a recovery through CY14 to being a lot more pessimistic after the drop in sentiment seen through April and May. The broker moved from calling the bottom to seeing further softness. FX changes saw FY13-15 EPS forecasts lifted by 2%-4% and a higher price target. Otherwise, BA-Merrill Lynch said it sees distinct downside risks to its FY14-15 estimates and noted that were unemployment to hit 7%, FY14-15 consensus estimates would need to be cut by 10% and 16%. Thus while the current valuation looked reasonable, just think 7% unemployment, said the broker.

Sentiment is negative

Shorts in Mesoblast ((MSB)) increased to 4.92% from 3.23%.

Credit Suisse noted back at the end of April that some promising Phase 2 results were released from the company's testing of allogeneic Mesenchymal Precursor Cells to treat intervertebral disc disease. It was early stages, so CS made no changes, but CS did point out this could be important, as intervertebral disc disease represents 14% of the broker's product valuation.

Sentiment for the stock is positive.

Shorts in Metcash ((MTS)) increased to 8.48% from 7.01%.

Last week Credit Suisse noted the company's Mitre 10 business had put together a formal buying alliance up with buying group Natbuild. The broker said the market is underestimating the home improvement and automotive accessories markets. Credit Suisse sees a good chance of some decent near-term upside from wholesaling in the combined categories, although this upside is easily offset by the legacy issues ongoing at Franklins. Citing an attractive yield and valuation, the Neutral call was maintained, which could be moved higher once Franklins issues are put to bed.

Sentiment for the stock is neutral.

Shorts in Myer ((MYR)) increased to 14.49% from 13.24%.

CIMB downgraded to Neutral at the end of May, having moderated its viewpoint. The broker said it saw a risk that full year expectations will not be met. The company believes the industry is slightly overstocked, specifically in heavy winter apparel. Myer has planned an up-weighted stocktake clearance to counteract this. Myer remains one of the broker's preferred cyclical exposures and a more positive stance is likely when confidence in the trading environment improves.

Conversely, Credit Suisse upgraded to Outperform from Neutral, noting third quarter sales were better than expected. Warm autumn weather did not have the impact that had been feared and there was relatively stronger sales growth in cosmetics and clothing. Myer indicated there was no price inflation in the quarter and there appeared to be no company-specific inventory issues. Adjustments were made to the broker's FY14 estimates because of the timing of refurbishments, which resulted in pushing out some earnings to FY15. Nevertheless, the stock is expected to benefit from improving confidence after the federal election, while interest rate reductions will likely lift household spending over time.

Sentiment for the stock is neutral.

Shorts in ALS ((ALQ)) increased to 8.33% from 7.08%.

UBS reported last week that the 1Q result for peer Bureau Veritas fell 2% short of expectations, with the company subsequently lowering guidance a little. The company's marine and mining businesses were blamed for the miss. The company said minerals exploration in Australia and Canada were especially soft, although a pickup in the 2H is hoped for. The read through for Alesco was clear, growing earnings pressure due to weakness in minerals could pose downside risk to peer group multiples. Thus the Sell call was maintained despite UBS liking the company's track record and balance sheet.

Sentiment for the stock is negative.

Shorts in Cabcharge ((CAB)) increased to 9.60% from 8.57%.

Deutsche Bank downgraded to Sell from Hold at the end of May, having noted the Victorian Government has made its ruling on the taxi industry enquiry and its findings represent the worst possible outcome for Cabcharge. Aside from direct earnings losses, the broker envisages a much more competitive market in the future, one in which Cabcharge will hold a decreasing share. What's even worse, other states could follow, said the broker. Earnings forecasts from FY14 onwards were cut, the price target dropped and the recommendation was downgraded. Maybe the changes will have a limited impact on incumbents and maybe they won't even be implemented. Maybe.

Sentiment for the stock is negative.

Weekly Short Decreases

Shorts in OzMinerals ((OZL)) decreased to 2.91% from 6.13%.

Credit Suisse noted at the end of May that the AGM revealed the decision to defer the Carrapateena decline by 6-12 months This meant a delay to the start of the project. A positive spin for the broker was that capital is deferred until the project is further de-risked.

Deutsche Bank, at Hold, pushed the $100m spend out to FY15, with first production now out to 2020. The problem was, Prominent Hill winds up in CY18, meaning there is now a significant production gap, which increases funding risks. Still, the broker saw enough cash, maybe even enough for a sneaky acquisition.

Sentiment is positive for the stock.

Shorts in Sims Metal Management ((SGM)) decreased to 3.72% from 5.79%.

Credit Suisse noted Sims' scrap margins in the UK have now halved from their peak. This is due to stiff competition, forcing the company to make further write-downs for the SRS business. Second half write-downs now total $115m and the broker was not backward in coming forward to suggest the loss of shareholder value is the result of poor practices or wrong decision making, and overestimation of UK opportunities in general. The broker suggested SGM's price is currently full and retained its Neutral call.

Sentiment is positive.

Shorts in WHK Group ((WHG)) decreased to 0.58% from 2.58%.

UBS downgraded to Neutral in early May, having noted the company has withdrawn its indicative, non-binding, scrip-based merger proposal for SFG. Another proposal may be considered when both parties are in a position to review FY13 earnings. The broker continued to see merit in the tie-up and saw limited opportunities for WHK Group to remain independent. UBS also continued to see risks around FY14 estimates, given the deterioration in discretionary accounting demand.

Sentiment is neutral.

Shorts in Iluka ((ILU)) decreased to 11.91% from 13.09%.

CIMB increased its 2013 and 2014 zircon price forecasts by 7% and 17% at the end of May, the move underpinned by more balanced supply-demand dynamics. Despite the more positive outlook, the broker said the share price is already factoring in a material pick up in both core products – zircon and titanium dioxide.

Sentiment is positive.

Monthly Short Increases

Shorts in Boart Longyear ((BLY)) increased to 9.76% from 4.18%.

Macquarie noted last week that global peers Major Drilling and Layne Christensen reported weak quarterly results. To date, Boart Longyear revenue has held up better than its peers, but Macquarie said it believes sentiment will remain negative in the near term because of commodity price volatility and problems for junior miners obtaining funds. The stock is trading at 4-year lows, so an Outperform rating was retained

Shorts in Seek ((SEK)) increased to 6.79% from 3.74%.

See above

Shorts in NRW Holdings ((NWH)) increased to 9.78% from 7.61%.

Deutsche Bank downgraded to Hold from Buy having noted it's downgrade was 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 were reined in and DPS forecasts were slashed.

Sentiment is positive.

Monthly Short Increases

Shorts in Kingsgate Consolidated ((KCN)) decreased to 3.81% from 7.44%.

Macquarie, at Neutral, said the March quarter results were well below its forecasts and the broker thinks this will 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 target price was cut on the lower grade profile at Chatree as well as a lower carrying value for Nueva Esperanza.

Sentiment is negative.

Shorts in Sims Metal Management ((SGM)) decreased to 3.72% from 6.88%.

See above

Shorts in OzMinerals ((OZL)) decreased to 2.91% from 5.82%.

See above

Shorts in Iluka ((ILU)) decreased to 11.91% from 14.71%.

See above

Shorts in Perseus Mining ((PRU)) decreased to 2.87% from 5.16%.

BA-Merrill Lynch was impressed by its trip out to Edikan at the end of March and is 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 bit more consistency is needed. The problem the broker saw is that the higher throughput may result in lower recoveries. FY14-15 production forecasts were cut and this flowed through to 20% lower earnings.

The Neutral call was maintained, leaving Merrill all by itself. All of the other brokers in the FNArena database are at Buy.

Shorts in Fleetwood Corp ((FWD)) decreased to 3.50% from 5.63%.

JP Morgan, at Underweight, said the trading update towards the end of May has put the share price under pressure. JP Morgan said there's more pain to come and cut margin estimates further.

Macquarie was a bit more moderate in its assessments, as while EPS forecasts were lowered a little following the profit downgrade and the broker assumed no final dividend will be paid given the solid interim dividend. On the other hand, the fully franked yield of over 5% is expected to be maintained and should offer support.

Sentiment for the stock is negative.

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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