The Short Report

This story features KINGSGATE CONSOLIDATED LIMITED, and other companies. For more info SHARE ANALYSIS: KCN

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, March 19, 2014.

The King is dead. Long live the King. Or at least, last week UGL(y) knocked Cochlear off its longstanding number one position on the podium, becoming the most shorted stock on the ASX. It's a tenuous lead at 17.22% shorted versus 17.17%, but a milestone nonetheless. Brokers cannot find anything particularly positive to say about UGL at present and the balance sheet is stretched.

Kinsgate is another balance-sheet stretched company for which the shorts continue to increase in anticipation of a raising. UGL and KCN saw the only two short increases of one percentage point or more on the ASX last week against six short decreases, which include the response to a solid result from Alacer and some strange goings on in Wotif.

Eleven monthly short increases of 2ppt or more met five short decreases, with increases including potential pairs trade candidates such as M2 Telecom, SingTel and Shopping Centres Australia, and decreases still reflecting a work-out of positions post surprisingly good interim results, such as Fairfax and Perpetual.
 

Weekly Short Increases

Shorts in UGL ((UGL)) increased to 17.22% from 14.83%

UGL shares tumbled from over $7 to almost $6 in February on the result release but have since been clawing their way back towards the $7 mark. The company announced a contract win at Ichthys late in February but UGL can’t buy a Buy from the FNArena database where 5 Holds and 3 Sells prevail. UGL has not been able to sell its DTZ business and the balance sheet is stretched. UGL is now the most shorted stock on the ASX.

Shorts in Kingsgate Consolidated ((KCN)) increased to 12.74% from 10.83%

Short interest in Kingsgate has been rekindled in the wake of the company’s result which showed a fall in cash balance and increase in gearing. Kingsgate's funding capacity with regard its development plans is becoming less viable as the months go past. The shorters smell a raising. KCN has this week moved to 8 from 15 on the Top 20 most shorted.

Weekly Short Decreases

Shorts in New Corp ((NWS)) decreased to 14.52% from 17.02%

Until the year-long rationalisation of News and Fox related instruments is complete we’re best to ignore NWS short positions.

Shorts in Retail Food Group ((RFG)) decreased to 2.64% from 4.79%

This is basically a reversal of the previous week’s short increase in Retail Food suggesting perhaps a brief pairs trade.

Shorts in Singapore Telecom ((SGT)) decreased to 3.29% from 4.75%

SingTel shorts fluctuate with tedious regularity without noticeable reason beyond perhaps a telco pairs trade. An announced restructure of the Singapore business has prompted a share price rally since a reasonable quarterly result.

Shorts in Alacer Gold ((AQG)) decreased to 0.69% from 2.07%

Alacer scared off the shorts last week with a solid underlying earnings result and a surprise dividend payment.

Shorts in Veda Group ((VED)) decreased to 0.62% from 1.77%

Veda’s stock price has risen steadily since the December listing. We might be seeing some IPO shareholders exiting their arbitrage trades.

Shorts in Wotif.com ((WTF)) decreased to 4.63% from 5.74%

Brokers have little positive to say about Wotif but the shares saw a surprise 15% rally one day last week which would have drawn a speeding ticket. We might say short covering rally although these numbers aren’t that big.

Monthly Short Increases

Shorts in Cokal ((CKA)) decreased to 0.00% from 9.45%

This position was established in full the previous week and is now gone. There is no obvious explanation (except perhaps a recording error) and no new news.

Shorts in Kingsgate Consolidated increased to 12.74% from 5.85%

See above.

Shorts in UGL increased to 17.22% from 13.26%

See above.

Shorts in M2 Telecommunications ((MTU)) increased to 7.34% from 4.36%

M2’s share price staged a rally in the week in question, ahead of the positive result posted this week by rival TPG telecom ((TPM)) which floated all junior telco boats. Given the number of listed telco juniors, MTU is a strong candidate for pairs trading.

Shorts in Treasury Wine Estate ((TWE)) increased to 8.01% from 4.76%

Treasury’s February result was the most recent in a line of disappointing announcements from a company in which few brokers now have faith. JP Morgan downgraded to Underweight at the end of last month, suggesting arguments about locked up value (ie Penfolds) were flimsy. Five of seven FNArena brokers rate TWE a Sell or equivalent.

Shorts in Ausdrill ((ASL)) increased to 10.62% from 7.86%

While Ausdrill posted a decent result last month, its share price has drifted lower. ASL’s fortunes are inexorably linked to gold mining service demand and miners are reining in their capex.

Shorts in Shopping Centres Australasia ((SCP)) increased to 6.69% from 4.30%

Shopping Centres’ share price has fluctuated since the February result release. As a retail REIT among many, SCP is a good candidate for pairs trading.

Shorts in Boart Longyear ((BLY)) increased to 9.93% from 7.63%

Boart’s weak result shocked no one but even though the company has avoided covenant breaches, its outlook remains challenged. A strategic review is underway and might involve capital restructuring. Five of seven FNArena brokers rate BLY a Sell. The stock sits at 18 on the Top 20.

Shorts in Singapore Telecom increased to 3.29% from 1.00%

See above.

Shorts in Cochlear ((COH)) increased to 17.17% from 14.94%

Despite constant talk of market share attack following the N5 recall, COH has defied the shorters and held up as a market favourite, albeit now slipping (just) to Number Two most shorted. One day, perhaps, the shorters will win. Last week’s approval of the Nucleus Hybrid L24 caused a share price spike, but only briefly.

Shorts in Horizon Oil ((HZN)) increased to 7.42% from 5.21%

Horizon’s Maari project is now back online but reserves have been downgraded. HZN posted a messy result two weeks ago. Two FNArena database brokers cover HZN and both have Buy ratings.

Monthly Short Decreases

Shorts in Western Areas ((WSA)) decreased to 10.10% from 14.05%

Western Areas posted a decent result last month but also completed a share placement. This reduction in shorts represents the closing trade on a placement play.

Shorts in Fairfax Media ((FXJ)) decreased to 5.64% from 9.56%

Fairfax shocked the nation at its result release last month by reporting an increase in earnings and a lift in dividend. Two weeks ago FXJ departed the Top 20 after a long tenure, although the shares have begun to drift lower again more recently.

Shorts in Perpetual ((PPT)) decreased to 2.58% from 4.52%

Perpetual was for some time seemingly a perpetual loser even as the stock market rose all last year but last month’s solid result represented a turnaround for the fund manager, and along with the earlier Trust Co acquisition, prompted a rally. Broad market weakness since has seen PPT dip somewhat more recently.

Shorts in Leighton Holdings ((LEI)) decreased to 4.50% from 6.71%

Major Leighton shareholder Hochtief has bid to increase its shareholding to 74%, which sparked a significant surge in the stock price two weeks ago.

Shorts in Silver Lake Resources ((SLR)) decreased to 3.97% from 6.05%

Silver Lake shares have stagnated this month in the wake of the Murchison closure, which means SLR will not be generating anymore cash for around another 18 months.
 

Top 20 Largest Short Positions

Rank	Symbol	Short Position	Total Product	%Short
1	SSO	151528	801304	18.91
2	UGL	28667519	166511240	17.22
3	COH	9796440	57062020	17.17
4	QRE	517432	3022150	17.12
5	NWS	2804368	19315405	14.52
6	MND	12957193	92308047	14.04
7	MYR	80156138	585684551	13.69
8	KCN	20912756	164154349	12.74
9	JBH	12205304	100385400	12.16
10	MTS	106682054	888338048	12.01
11	NWSLV	396203	3390091	11.69
12	BKN	18376157	169240662	10.86
13	SXA	9651064	88970180	10.85
14	ASL	33178008	312277224	10.62
15	AGO	97166543	915496158	10.61
16	ILU	42427619	418700517	10.13
17	WSA	22866878	226392226	10.10
18	BLY	45815830	461163412	9.93
19	ACR	16411090	166521711	9.86
20	PDN	94684148	964367284	9.82

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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