The Short Report

Array
(
    [0] => Array
        (
            [0] => ((APA))
            [1] => ((ENV))
            [2] => ((JBH))
            [3] => ((TRY))
            [4] => ((NWH))
            [5] => ((CSR))
            [6] => ((BLY))
            [7] => ((BDR))
            [8] => ((ASL))
            [9] => ((BBG))
            [10] => ((KCN))
            [11] => ((BKN))
            [12] => ((BBG))
            [13] => ((PIR))
            [14] => ((PIR))
            [15] => ((NWH))
            [16] => ((GRY))
            [17] => ((RMS))
            [18] => ((DUE))
            [19] => ((CSR))
        )

    [1] => Array
        (
            [0] => APA
            [1] => ENV
            [2] => JBH
            [3] => TRY
            [4] => NWH
            [5] => CSR
            [6] => BLY
            [7] => BDR
            [8] => ASL
            [9] => BBG
            [10] => KCN
            [11] => BKN
            [12] => BBG
            [13] => PIR
            [14] => PIR
            [15] => NWH
            [16] => GRY
            [17] => RMS
            [18] => DUE
            [19] => CSR
        )

)

This story features APA GROUP, and other companies.
For more info SHARE ANALYSIS: APA
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

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 17, 2013

Shorting activity on the Australian market continued at a steady pace over the seven days to the seventeenth of July. There were six changes greater than one percentage point (ppt) reported over the week, with the tally at two increases and four decreases.

There were a few more significant monthly moves, ASIC data showing twelve changes greater than 2ppt. The decreases balanced out the increases on a monthly count, the score coming in at six to six. The short interest continued to focus on materials and related stocks as well as retailers and consumer plays. The short covering side looked to be of pretty much the same composition.

Weekly Short Increases

Shorts in APA Group ((APA)) increased to 2.39% from 1.20%.

Macquarie downgraded its call to Neutral last week 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 JB Hifi ((JBH)) increased to 17.57% from 16.52%.

Analysts at CIMB reviewed retailer activity after the June end of year sales a couple of weeks back. The survey suggested sales momentum had eased in the fourth quarter for JB Hi-Fi leading the broker to forecast like-for-like growth of 1.5%. Top line sales growth was expected to be strong at 8.5% for the second half, a minor slowdown from 10.3% growth reported in the first four months. The Outperform rating was retained.

A few weeks prior BA-Merrill Lynch, at Underperform, said trading was holding up better than for most and while it is a tough market, sales really hadn’t slowed since April like they have for almost everyone else. Comps were positive, margins holding firm and overall earnings risk looked minimal leading into the FY result in August. On the other hand, the broker also thought there was a really good chance the company would eventually feel the bite. The broker predicted increasingly difficult conditions for the next 6-12 month from which JBH is unlikely to remain immune. On top of that, the share price was trading well in advance of peer multiples.

Sentiment for the stock is neutral.

Weekly Short Decreases

Shorts in Troy Resources ((TRY)) decreased to 1.10% from 4.86%.

The company announced a few weeks back that its interest in Azimuth Resources had reached 93.97%, with any remaining shares now to be acquired by Troy under the provisions for compulsory acquisition. The acquisition process was expected to take around 4 to 6 weeks, although it could take longer, depending on circumstances.

Shorts in NRW Holdings ((NWH)) decreased to 7.31% from 8.84%.

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 CSR ((CSR)) decreased to 7.59% from 9.08%.

Deutsche Bank noted 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 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.

Shorts in Boart Longyear ((BLY)) decreased to 8.35% from 9.54%.

The stock wore three downgrades at the beginning of July. CIMB dropped to Hold, while both Citi and BA-Merrill Lynch cut to Sell.  Citi said two years of losses and no dividend is what it now on the cards for FY13-14. The broker noted Boart Longyear had downgraded its FY guidance by an effective 10% or so citing further deterioration in commodity prices and mining budgets. There were no numbers, just “below the bottom end of consensus”, and this had Citi bemoaning the continued lack of earnings visibility. The company has managed to restructure its bank debt, so at least there is increased covenant headroom, but Citi said that with demand still deteriorating, balance sheet risk remains high. FY13-15 earnings forecasts were cut between 30%-37% to better reflect the weaker demand outlook. And with demand still worsening, balance sheet risk elevated, and little in the way of near-term catalysts, Citi said it was time to downgrade to Sell.

There was another downgrade yesterday, Credit Suisse cutting to Neutral, which makes it four downgrades this month so far. The broker was reacting to yet another earnings downgrade and news of a revised bank facility. The news saw Credit Suisse downgrade earnings forecasts by an average 27%. And with no imminent sign of a recovery in minerals exploration spending, the broker though this news did bode well for the stock. The company is expected to remain within debt covenants.

Sentiment for the stock is negative.

Monthly Short Increases

Shorts in Beadell Resources ((BDR)) increased to 8.58% from 5.66%.

UBS reported two weeks ago that management had released preliminary June quarter production numbers of 36,200 ounces, which was marginally below UBS' forecasts. Duckhead mining was expected to start this month, which should mean that the 2013 target of 200,000 ounces is achievable. A Buy rating was maintained based on valuation and for the successful commissioning of the Tucano project. The price target was unchanged at 80c.

Sentiment for the stock is perfect on straight Buys.

Shorts in Ausdrill ((ASL)) increased to 6.25% from 3.37%.

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. Shorts in Billabong ((BBG)) increased to 4.42% from 3.02%.

Broker sentiment for the stock is positive.

Shorts in Kingsgate Consolidated ((KCN)) increased to 5.81% from 3.46%.

Macquarie downgraded its call to Underperform from Neutral yesterday, noting the company had recently announced a new plan for its Challenger mine with a shifted focus to higher grades. This saw Macquarie downgrade its production profile by around 20,000 ozs per annum to 73,000 ozs. The broker notes that at current prices, the mine is not cash flow positive.

Citi pushed through lower gold price assumptions last week and it resulted in lower earnings and price targets across the sector. Kingsgate was also the odd man out, being the only stock downgraded as part of the process. FY13-14 EPS was cut by 13% and 125%, pulling the price target lower.

Sentiment for the stock is negative.

Shorts in Bradken ((BKN)) increased to 8.68% from 6.40%.

UBS, at Buy, noted at the end of June the company had reduced its FY13 earnings guidance to 4.5% below the broker's forecast. Given the challenges facing the industry the broker took a more conservative approach going forward, reducing FY14-15 forecasts by 11-14%. Challenges aside, the broker said BKN is one of the best placed to cope with cyclicality, offering 65% of revenues from consumables used across a spectrum of commodities.

The FY earnings guidance came in a little ahead of Deutsche Bank and a little shy of the market and while net profit was also in line with the broker, it was about 7% short of consensus. There will also be a $29m one-off for the Norcast case, although an appeal is lodged. There wasn't any outlook commentary or an update on order books, but the broker has its own opinions on the topic and they are not positive, with tough trading conditions expected for FY14. Forecasts were tweaked a little higher on the update, but with risks to FY14 consensus earnings abounding, the Hold call was maintained.

Sentiment for the stock is positive.

Shorts in Billabong ((BBG)) increased to 3.55% from 1.44%.

The stock was upgraded to Hold By Deutsche Bank and to Buy, High Risk by Citi last week on news the company had been thrown a life line. Deutsche reported that BBG had 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 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 Papillon Resources ((PIR)) increased to 2.89% from 0.86%.

Deutsche Bank noted a few weeks back that the new pre-feasibility study on the Fekola Gold Project pretty much confirmed what was reported in the scoping study last year. Annual gold output actually came in a bit higher, while low cash costs paint a pretty picture for margins in the current low price environment. The broker also thought the 9-year life of the mine can be extended. In short, Deutsche Bank said this is the now best undeveloped gold asset in the entire Australian gold sector, so development funding should be easy despite the challenging market and scarce funds. The broker’s Buy call and $1.90 price target were maintained.

Sentiment for the stock is positive.

Monthly Short Decreases

Shorts in Papillon Resources ((PIR)) decreased to 1.10% from 5.13%.

See above.

Shorts in NRW Holdings ((NWH)) decreased to 7.31% from 9.97%.

See above.

Shorts in Gryphon Minerals ((GRY)) decreased to 3.04% from 5.41%.

Macquarie downgraded its recommendation to Underperform from Neutral just yesterday, the broker having reported that Gryphon will require capital to develop Banfora. The good news was Macquarie does not think the company will require additional capital in the next 12 months. Gryphon has received indicative proposals from a significant number of international banks and financial institutions to provide project debt, as part of the overall financing package for the development of the Banfora project. As well, the company is evaluating funding options from export credit agencies and multi-lateral parties.

Sentiment for the stock is positive.

Shorts in Ramelius Resources ((RMS)) decreased to 1.03% from 3.39%.

Shares jumped more than 20% earlier this month after the gold miner posted a record June quarter production result. The Perth-based miner reported that June quarter production at its Mt Magnet gold mine in Western Australia was at 17,100 ounces, up 17.5 % on the March quarter. Ramelius is otherwise working to reduce operating costs in response to weaker gold prices.

Shorts in DUET Group ((DUE)) decreased to 1.03% from 3.39%.

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 7.59% from 9.65%.

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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