The Short Report

This story features NRW HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: NWH

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 12, 2013

Shorting activity shifted into a higher gear over the week and month to 12 June. There were seven increases to short positions greater than one percentage point over the week. There was just one decrease of that magnitude.

Materials and related companies continued to dominate the proceedings, with uncertainty seemingly the name of the game. A falling AUD continues to pull one way, while falling commodity prices, rising costs and shrinking capex budgets are doing more than enough to offset most sentiment gains.

The monthly count is almost as one sided. Short positions increased by more than 2ppt in a dozen stocks. This compares to just three short position decreases of the same magnitude over the period.

Weekly Short Increases

Shorts in NRW Holdings ((NWH)) increased to 9.50% from 5.91%.

Last week NRW cut its FY guidance. Macquarie thought that given the size of the downgrade, word could have been released sooner. Work in hand looks okay for now and the balance sheet remains in decent condition. The recommendation, however, was lowered to Neutral given the big cut to earnings. But with the stock trading below its asset value, the broker was anxious to hear a little more about FY14 earnings. The cut to the price target was a big one, the broker pointing out much of that was due to a change in valuation methodology, Macquarie now valuing the company at just 1x net tangible assets.

Sentiment for the stock remains positive.

Shorts in Bathurst Resources ((BTU)) increased to 9.07% from 5.72%.

Last week, management got the nod from its mostly Australian owners to create a New Zealand incorporated company. Press reports indicate that around 96% of the shareholder base was in favour. Shares will be moved to the new Bathurst Resources (New Zealand) and the old company will be delisted. Bathurst will be listed on the NZX and ASX, but the Australian office, a requirement for an Australian-based listed company, will be closed after the change. The restructuring still needs approval from the courts, the Overseas Investment Office and market regulators on both sides of the Tasman.

Sentiment for the stock is positive.

Shorts in Elders ((ELD)) increased to 6.56% from 3.61%.

Last week, Elders entered a trading halt as it mulled final bids for its struggling rural services and auto parts businesses. Press reports yesterday indicate Elders had rejected a bid from Ruralco saying it was "inadequate with respect to value, execution risk and other considerations".

Sentiment for the stock is neutral.

Shorts in Bandanna Energy ((BND)) increased to 7.06% from 4.56%.

Credit Suisse noted last month that despite its lower coal price assumptions, the stock still looks cheap and its Outperform call was still warranted.

Sentiment for the stock is positive.

Shorts in Monadelphous Group ((MND)) increased to 12.46% from 10.02%.

JP Morgan said at the end of May that headwinds are increasing for resources and energy sector capex. Maintenance and industrial services are also likely to face a number of headwinds as resources customers pull back on non-essential items. While Monadelphous has capabilities to go into the broader construction sector, the transition is expected to be difficult.

Sentiment for the stock is negative.

Weekly Short Decreases

Shorts in Virgin Australia ((VAH)) decreased to 3.00% from 4.12%.

Sentiment has been steadily improving for Virgin, upgraded by three separate brokers over the past few months. The last upgrades came from UBS and JP Morgan mid-May, UBS saying last month’s profit downgrade was due mostly to temporary revenue issues and thus the resultant 17% drop in the share price was overdone. If anything, the broker thought the outlook for the company had actually improved, with just two domestic players owning pretty much the whole market. So while forecasts may be cut by 15%-20%, the recommendation was upgraded to Buy.

Macquarie said yesterday that a weaker Aussie dollar can be a major drag on earnings for airlines as it pushes up the costs for fuel. But because both Virgin Australia and Qantas ((QAN)) are facing the same fuel battle, the expectation is that competition in the domestic Australian market will remain rational. Ironically, this should benefit both, on the analysts' assessment.

Sentiment for the stock is positive.

Monthly Short Increases

Shorts in Boart Longyear ((BLY)) increased to 11.44% from 5.02%.

Macquarie reported earlier this month 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 believes sentiment will remain negative in the near term because of commodity price volatility and problems for junior miners obtaining funds.

A note for Citi a few weeks prior also sheds some light. The broker noted the company had decided to get ahead of the weakness in commodity prices and mining budget cuts, announcing FY earnings would come in at the lower end of the consensus range, which worked out to a downgrade of 8%-15% on prior consensus. Citi said earnings risk will likely remain to the downside, while debt continues to creep higher, putting the balance sheet at risk. The broker did note the company is aware of the issue and intends to keep to a net debt range of $400-$450m. Citi thought the levers are still there to bring it in if needed. The broker admitted the shares look pretty cheap at a 24% discount to the broker’s fundamental valuation, but the current environment means near-term catalysts are limited.

Sentiment for the stock is positive.

Shorts in Bathurst Resources ((BTU)) increased to 9.07% from 5.00%.

See above.

Shorts in Seek ((SEK)) increased to 6.54% from3.59%.

On Monday, BA-Merrill Lynch hiked up its unemployment expectations, with base case for a 6.75% rate by early 2016 and a bear case of 7.5% by mid-2016. Either way, the broker sees three years of rising unemployment ahead. BA-Merrill Lynch's expectations for a domestic recovery were pushed out by two years and this sees some changes to forecasts, with FY15 EPS the biggest victim, down some 9%. The broker said the market is expecting too much, too soon, which is why its FY14-15 EPS forecasts sit 9%-15% below consensus. With the broker continuing to see further downside risk to its forecasts, the Underperform call was maintained.

Sentiment for the stock is negative.

Shorts in Ausdrill ((ASL)) increased to 3.81% from 0.99%.

Macquarie said last week its outlook for Ausdrill was assuming limited further downside for the core contract businesses. Based on current forecasts, the broker thought the company could survive the next two years without tapping equity markets. A Neutral rating was retained despite the recent sell off and steep discount to net tangible assets. This is because of gearing levels and the fall in the gold price. While Macquarie believes the company offers a well-managed exposure to mining services, it thought consensus earnings would need to stabilise before the price could improve.

Sentiment for the stock is positive.

Shorts in Elders ((ELD)) increased to 6.56% from 3.74%.

See above.

Shorts in Cabcharge ((CAB)) increased to 9.81% from 7.25%.

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 is 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.

Shorts in Leighton Holdings ((LEI)) increased to 4.76% from 2.23%.

BA-Merrill Lynch downgraded its recommendation to Underweight last week citing a peaking in mining sector investment, a tightening up of government infrastructure spending as well as expectations of softer economic growth in 2013 and 2014. Analysis of current and committed major projects also suggested that roads and highway sectors are most at risk.

Sentiment for the stock is negative.

Shorts in Emeco Holdings ((EHL)) increased to 4.33% from 2.05%.

CIMB said in late May the company operates in one of the toughest segments of a challenged domestic mining services sector. CIMB also did not think the stock was overwhelmingly cheap from an earnings multiple perspective. In the wake of a earnings update, CIMB cut FY13-15 forecasts by 11-29%. Normal circumstances would warrant a more positive view, but with visibility low, and doubts about the sustainability of pricing, the broker’s Neutral rating was maintained.

Sentiment for the stock is positive.

Shorts in Mineral Resources Holdings ((MIN)) increased to 4.24% from 2.04%.

Shorts in NRW Holdings ((NWH)) increased to 9.50% from 7.35%.

See above.

Shorts in Gindalbie Metals Energy ((GBG)) increased to 4.74% from 2.59%.

UBS noted last week Gindalbie's partner at Karara, Ansteel, is going to lend the company money to cover any near term cash shortfalls over the course of the ramp up. In return, Ansteel will end up with an option to up its stake in the JV from 50% to a maximum of 52.16%. This would leave GBG with a minimum stake of 47.84%, $35m in the bank and no debt. The broker liked the news, noting it covers any spectre of a cash call risk were there any further delays. In the meantime, the broker expects the company to remain hostage to volatile iron ore prices just like everyone else. The Neutral was maintained.

Sentiment for the stock is negative.

Shorts in Bandanna Energy ((BND)) increased to 7.06% from 5.05%.

See above.

Monthly Short Decreases

Shorts in Oz Minerals ((OZL)) decreased to 2.44% from 6.79%.

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 3.95% from 6.37%.

CIMB confirmed yesterday that ferrous scrap prices have continued to soften and are down average of 12% since the broker picked up coverage on the stock in March. As you can imagine, this is putting even more pressure on what was an already tight volume environment. This has the broker double guessing its FY forecasts, thinking the benefits of a US upturn will likely take longer to flow through than in previous cycles. The current demand weakness saw FY13-15 net profit estimates cut by 45%, 16% and 9%, bringing about a lower target price.

Credit Suisse noted around a month back that Sims' scrap margins in the UK had halved from their peak. This was 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 was looking full and retained its Neutral call.

Sentiment is positive for the stock.

Shorts in Kingsgate Consolidated ((KCN)) decreased to 3.82% from 6.02%.

Macquarie, at Neutral, said a while back now that 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.

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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