Tag Archives: Consumer Discretionary

article 3 months old

Breville: A Stock For The Times

By Greg Peel

There would be few Australians unaware of Breville electric household products. The company was established in 1932 and on my reckoning probably cemented its Vegemite-style iconic status around about the seventies, by which time seemingly every home could boast a Breville toasted sandwich maker, kitchen whizz or similar device. Indeed, I do not joke when I recall that in my house, when I were a lad, we called toasted sandwiches “Brevilles”.

Not much has changed since that time, but today the Breville Group ((BRG)) derives only 29% of its earnings in Australia. The other 71% are derived offshore. The most valuable offshore market for Breville has proven to be, unsurprisingly, North America, and this is where the real story behind Breville's investment thesis lies. When Americans were introduced to the George Foreman Grill several years back, they though it was revolutionary. It's success was immediate and arguably un-American, given the GFG's selling point was the draining off of fat. When the GFG came downunder Australians just shrugged – we'd been using similar products for decades, made by Breville and others.

If someone had said to you at the beginning of this year(*) that you should invest in Breville – a consumer discretionary stock selling household electric goods in arguably the weakest consumer environment anyone in Australia can remember – you probably would have laughed. Just look at how the other listed consumer names are faring, you would have said, the electronic goods, clothing and department store retailers. But since January, BRG shares have doubled in price.

At its FY12 result, Breville delivered flat earnings growth for its Domestic Electricals division. Gerry Harvey would have given his right arm to see flat earnings growth, but it wouldn't have doubled his share price. The clue lies in Breville's international revenues, which increased by 18% over the period. Having begun to make some inroads into the North American market, Breville decided to put its prices up to reflect its product quality. A mistake? No. Breville's offshore earnings grew 45% (Aussie dollar EBITDA).

Well a doubling in share price is nice work if you can get it, and investors are no doubt thinking the gate is now shut after the horse. But stock analysts staunchly disagree, noting Breville's North American success has come from as yet only around a 6-7% market share penetration. In the greatest consumer market in the world – and one that appears prepared to pay up for quality – it seems the Breville story has only just begun.

“Whilst near term share price consolidation is inevitable post a more than doubling to date in 2012,” suggests stockbroker Moelis & Co, “the significant growth opportunities afforded by the North American operations were aptly highlighted [by 45% earnings growth] despite the subdued economic environment across all regions”.

The analysts at RBS Australia agree. They have initiated coverage on Breville with a Buy rating in a report entitled “Not too late to the party”.

RBS views BRG as a “unique proposition” in the current environment as the significant growth potential it offers is not predicated on underlying market growth. Rather, it is predicated on further penetration into large offshore markets in which the company has been successful to date but has yet achieved only modest market share.

And success in the retail sector brings with it valuable cashflow. BRG has not funded its offshore push with dangerous amounts of debt, and indeed RBS believes that by the end of FY13 the company should have around 50 cents per share of cash sitting on the balance sheet. The lack of debt means the company can pay healthy, growing dividends and still leaves the door open for capital management.

As the Moelis analyst, who retains a Buy rating, points out, Breville has not hit the US with its full suite of product lines all at once, so aside from further market share gains being available vertically there's also horizontal share to be gained as new product segments are introduced. RBS offers further horizontal opportunities, this time geographic, as BRG has only just begun its push into the burgeoning consumer markets of Asia.

On initiating with a Buy rating, RBS joins UBS, Credit Suisse and Macquarie as the only other FNArena database brokers to cover the stock, all of whom retain Buy or equivalent ratings. (Moelis is not a database broker.) UBS upgraded from Hold last month. RBS has initiated with a target price of $$6.48 (Moelis $6.40), to establish a new consensus target of $6.21.

The consensus target suggests 9% upside from the current share price, and we acknowledge that BRG has had a very solid run to here. However the successful investor never despairs the one that got away, but rather assesses every investment opportunity on today's merits. Today's consensus database forecasts suggest 11% earnings growth for BRG in FY13 and 8% in FY14, with dividend growth of 13% and 8% respectively. Those figures suggest a forward yield today of 4.8% and 5.2% on around a 70% payout ratio of dividends from earnings. See FNArena's Stock Analysis.

On RBS' earnings before tax (EBIT) forecast for FY13, Breville's forward multiple of 9.4x represents only a 6% premium to the All Industrials. This despite doubling in price.

Looking at the forward multiple in earnings per share terms, a figure in excess of 14x is justifiable, says Moelis, given the substantial growth opportunities by the US and Breville's balance sheet strength. Longer term investors should note that BRG remains one of Moelis' preferred “buy and hold” stocks.

(*) For the record: When the Sydney Morning Herald asked the FNArena Editor to nominate stocks for the year ahead in early 2012, Breville was nominated as the number one choice
 

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article 3 months old

Coles And Coal: Why Wesfarmers Is Expensive

By Greg Peel

Yes, Status Quo have sold out. Do they care? Of course not. The band was already mostly a parody of itself by the early eighties and as ABC's Gruen Transfer explained last night, their mutually beneficial deal with Coles provides a lucrative opportunity. Fodder for the Chaser boys as well, but then every time those big red hands come out, even to be lampooned, Coles scores free advertising.

No one seemed surprised when Dawn French sold out too.

As the Gruen team went on to explain, the Coles “down, down” campaign has been an unqualified success. To the point the campaign will probably become a case study for future marketing hopefuls. And as stock market watchers have noted, Coles' successful turnaround under the Wesfarmers ((WES)) umbrella has translated into solid share price gains for the group. To draw upon another old ad campaign, “They said you'd never make it”. (Swan Lager, for those who can remember.)

Even the BA-Merrill Lynch analysts have been impressed. Merrills had always been highly critical of last decade's takeover of the Southcorp wine giant by brewing giant Foster's, forecasting disaster. Ultimately the analysts were right. When it came to the big Western Australian taking on Coles – a supermarket business so overwhelmed by its single main competitor Woolworths ((WOW)) that it was at risk of heading out the back door, Merrills was similarly dismissive from the outset. What did a conglomerate of agribusiness, coal mining, hardware and insurance (one of the last great mish-mash conglomerates that were once popular in the eighties) know about selling milk and bread? Woolies was so far ahead, the task of returning to a level of competitiveness seemed almost impossible.

Today, Merrills has a Buy rating on Wesfarmers – one of only two of the eight brokers in the FNArena database to do so. After a solid FY12 earnings result delivered in August, Merrills upgraded its target price for WES, citing a growing confidence in the business, better than expected quality, and impressive cash generation. Merrill's current twelve-month target of $36.50 is surpassed only by UBS' high mark of $36.70, in a range from $30.06 (RBS, Hold).

For the past twelve months Coles has initiated a price war with Woolies, and any other unfortunate sap who might sell household staples, and has won handsomely. Coles' like-for-like sales growth has gone from strength to strength, leaving Woolies in the dust. But we must remember, of course, that Coles was coming off a much lower sales base when compared to Woolies, which had a sales base at the time that seemed impossible to improve upon when  Wesfarmers made its move.

The bottom line is that the WES share price has risen from just over $28ps in April to around $34ps today. Mind you, the WOW share price has performed similarly, as investors have focused on defensive cash flow businesses. With Woolies now attempting to take on Wesfarmers in the Hardware Hell space, with Bunnings well entrenched, there's more than just supermarkets aligning the two competitors. But there is one glaring difference – Woolies doesn't mine coal.

Indeed, it appears that when stock market investors look at Wesfarmers now, they see Coles. Probably Bunnings as well (and maybe even K-Mart and Target), but really it seems that WES is just about retail and nothing else. Yet in FY12 WES derived around 12% of its earnings from its Curragh coal mine near Rockhampton in Queensland. Readers may have noted that coal prices have been under a great deal of pressure in 2012, and while Curragh produces both coking coal for steel production and thermal coal for power generation, both have seen significant price falls. And unlike the iron ore price that crashed recently, but has since rebounded somewhat, coal prices remain depressed.

It is a point not lost on the analysts at Deutsche Bank. Deutsche has been warning of the coal situation and its potential impact on WES for over a month now, and today the analysts have translated their concerns into hard numbers. They now forecast an average FY13 coking coal price of US$173/t, down 26% from their previous forecast, and an Aussie of US$1.03, up 4.7%. The result is a 50% downgrade to Wesfamers' coal division forecast earnings in the period, and a 22% reduction in the net present value assumption of the Curragh mine.

Coal may have only represented 12% of group FY12 earnings, but today's downgrades have translated into a 6.3% reduction in forecast group earnings for FY13 and 4.6% in FY14. This now means WES is trading at a PE of almost 17x on Deutsche's FY13 forecasts, “which we consider to be fully valued notwithstanding the continued margin benefit likely to be delivered by Coles”.

Deutsche has nevertheless retained its Hold rating and $33 target, which sits just above the FNArena database consensus target of $32.85. 

Back in August, post result, Citi also cited a 17x multiple when its analysts decided to downgrade WES to Sell. At the time, Citi was expecting slower earnings across all of Wesfarmers' supermarket, discretionary retail and resource divisions, and made note of the strong run in the share price. Credit Suisse maintained its Sell rating despite its belief in the longer term value offered by the group, again citing the solid share price run.

Interestingly, RBS Australia chose the same day to upgrade its rating to Hold from Sell. The WES share price has consolidated somewhat since and brokers in general have reined in their earnings forecasts to some degree. However, the real action in bulk material prices was seen over September.

The FNArena database currently shows two Buys, four Holds and two Sells for Wesfarmers on a target of $32.85, as noted. WES is trading at $34.48 as I write, making it a candidate for an FNArena Icarus signal warning (price exceeding consensus target, in this case by 4%).

While resource sector analysts have become a little more hopeful about Chinese iron ore prices, having correctly assumed the rapid price plunge would prove a temporary overreaction, they remain cautious over near-term pricing given China's excess steel inventories. They are more pessimistic about coking coal, not expecting a similar bounce. For thermal coal, the Chinese slowdown and the rise of the US shale gas industry will serve to keep a lid on prices.

For Wesfarmers, it may be difficult to retain the status quo.

 

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article 3 months old

More Discounting For Retailers

- Christmas will be very competitive
- Retailer inventory levels high
- Discounting to be unprecedented


By Eva Brocklehurst

Once again, retailers are expecting a very competitive Christmas shopping season. However, this time the pressure on selling prices looks to be the most intense for decades.

Dun & Bradstreet's latest survey shows businesses are expecting to discount strongly heading into Christmas to get buyers in the mood. According to the National Business Expectations survey, companies see discounting as the way to increase sales. Expectations for selling prices are now close to the lowest level in more than 20 years, having fallen by more than 10 points over the past two years to an index level of 11.

Forty nine per cent of businesses expect sales to increase over Christmas. Meanwhile, expectations for inventory levels have risen to the highest point since 2000, with more than a third of businesses expecting to boost their inventories to meet anticipated demand. This is a 21 points rise, up from an index of three during the December quarter 2011.

Dunn & Bradstreet CEO Gareth Jones said businesses are being forced to discount frequently now." Five years ago, discounting was a seasonal tactic that was primarily limited to post-Christmas and end of financial year periods," he maintained.

The reliance on discounting to deliver sales during the December quarter reflects the approach taken in the June quarter 2012. The selling price index fell nine points to three during the June quarter – the lowest index level since 1997.

However, there is the downside, as discounting impacts margins and culls profits. The survey shows one in five firms expect profits to fall during the December quarter. Retailers have expressed the most conservative expectations for profits in the coming quarter, with a profit outlook 14 points below the all-firms average at an index of seven.

Moreover, retailers appear to be reluctant to put on extra staff to sell all this discounted stock. Staff levels fell during the June quarter to an index of minus 4 and employment is seen remaining flat heading into Christmas. The profits index was up three points to an index of 4 in the June quarter and 30 per cent of companies increased profits while 26 per cent recorded lower earnings. Meanwhile, 31 per cent believe fuel prices will have the greatest influence in the quarter ahead and 28 per cent of executives ranked interest rates as the primary influence on their business, up two points from the prior month.

Dun & Bradstreet economist, Stephen Koukoulas, still sees sales expectations as buoyant and profitability rising. "The results fit with the general tone of the economy since the middle of the year when overall growth was close to the long running trend," he said. "This solid performance for sales does not however show up in employment expectations, which are broadly flat. This suggests that despite more favourable sales expectations, job creation and the unemployment rate are likely to be stable around recent levels."

Mr Koukoulas said the fall in selling price expectations suggests inflation will be contained to the lower end of the Reserve Bank's target band of 2-3% and should give scope to lower interest rates.

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article 3 months old

Private Dick And The Implications For Retail

By Greg Peel

It was not lost on the media yesterday that Woolworths' ((WOW)) final sales price for the Dick Smith Electronics business, after having put the For Sale sign out eight months ago, was $20m – the same price Woolies paid Dick Smith, the man, for Dick Smith, the business, thirty years ago.

So they got out square. Well, not exactly. There's a small matter of “real” dollars and the fact Woolies wrote down the value of its investment by $420m in FY12, equating to about 33cps. In selling Dick Smith, Woolies loses 2.9% of total sales and 0.8% of earnings on FY13 forecasts. But this, and the piddling sales price, are not important. What is important in analyst eyes is that Woolies has relieved itself of the distraction of Dick Smith. And, significantly, it has relieved itself of ongoing lease obligations.

Dick Smith has not been losing money per se, but its debt obligations equal its asset value, Deutsche Bank notes. The current electronic retail climate is concerning enough but the $430m UBS calculates would have been Woolies' ongoing lease obligation was the real concern. Woolies has now handed those leases over lock-stock to the buyer, local private equity firm Anchorage Capital, and what's more, an undisclosed deal has been struck that sees Woolies participating in the spoils of any future profit when Anchorage comes to flip the business, as is the private equity game's goal.

At the same time, Woolies also divested of its Woolworths Wholesale India business to a Tata subsidiary for $35m. The two divestments are in line with the strategic review management began last year, and analysts can only see positives in Woolies now having put these assets and their troubles behind them.

But what does it all mean for the rest of the sector, notably competitors JB Hi-Fi ((JBH)) and Harvey Norman ((HVN))?

Well at face value, both would have grimaced to learn Anchorage plans to keep all 325 Dick Smith stores as going concerns and may even add more down the track. The preference would have been for Dick to be closed down and sold for scrap but barring that, at least a consolidation of store numbers and a rationalisation of the business would have removed some of the competitive pressure. As it is, JBH and HVN remain in the same boat, with the former more directly a competitor of Dick's than the latter. The difference is at least, in Deutsche's view, that the risk of aggressive discounting of product lines in the short term is removed.

Having said that, other analysts note that Dick Smith under Anchorage will be operating on a much smaller capital base than the competition, providing scope to chase sales to drive earnings, as Citi notes. JP Morgan further points out that Woolies' Big W stores still operate in electronics and might now prove a tougher competitor.

Citi, for one, has retained a Neutral rating on Woolies and a Sell on both JB and Harvey.

Any changes to analysts' Woolworths forecasts post the sale have been negligible. On an isolated basis, UBS is still concerned Woolies' own supermarket roll-out plans will lead to cannibalisation in an environment of rising costs. UBS also retains Neutral.

Not all FNArena database brokers have reported on the deal today, so as it stands Woolies scores three Buys and two Sells in the database (of eight), Harvey Norman has two Buys and two Sells and JB Hi-Fi has two Buys and three Sells. The balance of ratings are all Hold.
 

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The past week has been fairly evenly balanced in terms of ratings changes by the eight brokers in the FNArena database, with seven ratings upgraded and ten downgraded during the period. Total Buy ratings now stand at 44.64%.

Among the upgrades were two resource plays, Atlas Iron ((AGO)) and Regis Resources ((RRL)). Atlas was upgraded by UBS to Neutral from Sell, as despite the weaker iron ore price the broker suggests Atlas has enough liquidity to meet its capex, dividend and tax requirements in FY13. Recent share price weakness has improved the value on offer enough for UBS to upgrade.

For Regis Resources, full year earnings showed a strengthening of the group's balance sheet, while Deutsche continues to see value as production increases from the combination of the Moolart Well and Garden Well projects and dividends from the company come closer to reality. Deutsche has lifted its rating to Buy from Hold, while also lifting its price target on the stock.

Among the industrials, UBS upgraded Breville Group ((BRG)) to Buy from Neutral given the expectation the company can continue to grow its share of the US market. Breville's profit result prompted changes to earnings forecasts and the result was an increase in UBS's price target for the stock.

While forecasting lower average income growth in the office sector in FY13, JP Morgan continues to like the quality of Dexus's ((DXS)) portfolio, while the broker also sees scope for an increase in payout ratios in coming years. This is enough for an upgrade to a Neutral rating from Underweight previously.

Sigma Pharmaceuticals ((SIP)) delivered a better interim profit result than Macquarie had forecast, the result being increases to estimates in coming years. Macquarie's price target increased as well and on valuation grounds the broker has upgraded to a Neutral rating from Sell.

Deutsche Bank upgraded both Leighton Holdings ((LEI)) and Myer ((MYR)) to Buy ratings this week, in both cases from Hold previously. For Leighton, Deutsche suggests the market is pricing in too much risk, particularly given the company is primarily exposed to low cost mines and committed LNG projects within its resource sector activities. There are also some potential balance sheet positives such as a sale of NextGen, which is enough to justify a more positive view at current share price levels.

With respect to Myer, an improvement in gross margin was the highlight of the full year profit result in Deutsche's view. Top line growth continues to look difficult to achieve but the stock offers an attractive yield and some longer-term value at current levels in the broker's view, which supports the upgrade in rating.

On the downgrade side of the ledger UBS has cut its rating on Ansell ((ANN)) to Sell from Neutral, the change something of a relative valuation call given the company is seen to have less defensive earnings than others in the sector. The downgrade in rating comes despite an increase in price target.

UBS also downgraded Brambles ((BXB)) to a Hold rating from Buy, again on valuation grounds following an 8% rally in the share price since full year earnings were announced in August. As UBS notes, the stock is now trading broadly in line with valuation.

Aquarius Platinum ((AQP)) has been downgraded by BA Merrill Lynch to Sell from Hold as part of a reinstatement of coverage. With two mines on care and maintenance the broker sees a turnaround as reliant on improving operations at Kroondal, which is currently operating at a loss. When political risk is added to the equation BA-ML sees little upside for the stock in the shorter-term.

Credit Suisse has similarly downgraded Envestra ((ENV)) to Sell from Hold, this coming after changes to estimates to account for expectations of upcoming draft regulatory decisions. The cuts to forecasts impacted on the broker's price target, while the rating downgrade is a valuation call by Credit Suisse.

The Reject Shop ((TRS)) was also downgraded to Sell from Hold by Credit Suisse, this after recent share price outperformance suggests limited further upside from current levels. While group gearing should improve with Ipswich DC flooding claims being finalised, Credit Suisse expects tough operating conditions will continue for some time.

Recent share price strength has been enough for Citi to downgrade Insurance Australia Group ((IAG)) to Hold from Buy, as even allowing for an increase in price target the broker doesn't see enough upside from current levels to justify a more positive rating. 

JP Morgan has made two downgrades over the week, lowering ratings on both Southern Cross Media ((SXL)) and Toll Holdings ((TOL)) to Sell from Hold. For Southern Cross, still tough TV conditions lead the broker to suggest further cuts to consensus earnings estimates are unlikely, something that will act to limit potential share price upside.

In Toll's case, JP Morgan suggests a focus on market share is generating some domestic margin pressure and this suggests earnings headwinds are likely to remain in place for some time. Along with the downgrade in rating, the broker has trimmed earnings forecasts and price target.

OnTheHouse Holdings ((OTH)) delivered a result better than RBS Australia had forecast for FY12, but the broker expects FY13 will see earnings pumped back into the online business an in attempt to ensure longer-term growth. This is enough to prompt a downgrade to a Hold rating from Buy.

Macquarie has similarly downgrade Woodside ((WPL)) to Hold from Buy, this as a result of taking a less bullish view on the outlook for Australian LNG plays given the expectation of increasing competition in the global market. This view prompted cuts to earnings estimates and the broker's price target for the stock.

With respect to changes to price targets, the largest increases were seen in Webjet ((WEB)) and Sigma, while the largest decrease was in NRW Holdings ((NWH)). Only the latter saw a change of more than 10%.

Changes to earnings estimates were more significant, with Aquarius seeing the largest increase in forecasts and Panoramic Resources ((PAN)), Lynas ((LYC)) and Gindalbie ((GBG) experiencing the largest cuts to earnings expectations.  

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup
Suisse,Deutsche<*br*>Bank,JP<*br*>Morgan,Macquarie,RBS<*br*>Australia,UBS&b0=114,91,103,91,74,130,140,116&h0=76,116,91,130,97,100,154,125&s0=50,26,38,9,45,36,10,15" style="border-bottom: #000000 1px solid; border-left: #000000 1px solid; border-top: #000000 1px solid; border-right: #000000 1px solid" />

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 ATLAS IRON LIMITED Sell Neutral UBS
2 BREVILLE GROUP LIMITED Neutral Buy UBS
3 DEXUS PROPERTY GROUP Sell Neutral JP Morgan
4 LEIGHTON HOLDINGS LIMITED Neutral Buy Deutsche Bank
5 MYER HOLDINGS LIMITED Neutral Buy Deutsche Bank
6 REGIS RESOURCES LIMITED Neutral Buy Deutsche Bank
7 Sigma Pharmaceuticals Ltd Sell Neutral Macquarie
Downgrade
8 ANSELL LIMITED Neutral Sell UBS
9 AQUARIUS PLATINUM LIMITED Neutral Sell BA-Merrill Lynch
10 BRAMBLES LIMITED Buy Neutral UBS
11 ENVESTRA LIMITED Neutral Sell Credit Suisse
12 INSURANCE AUSTRALIA GROUP LIMITED Buy Neutral Citi
13 ONTHEHOUSEHOLDINGS LIMITED Buy Neutral RBS Australia
14 SOUTHERN CROSS MEDIA GROUP Neutral Sell JP Morgan
15 THE REJECT SHOP LIMITED Neutral Sell Credit Suisse
16 TOLL HOLDINGS LIMITED Neutral Sell JP Morgan
17 WOODSIDE PETROLEUM LIMITED Buy Neutral Macquarie
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 PAN 67.0% 100.0% 33.0% 3
2 BRG 67.0% 100.0% 33.0% 3
3 SIP - 14.0% 14.0% 28.0% 7
4 DXS - 29.0% - 14.0% 15.0% 7
5 BSL 43.0% 57.0% 14.0% 7
6 RRL 57.0% 71.0% 14.0% 7
7 AGO 50.0% 63.0% 13.0% 8
8 WEB 25.0% 33.0% 8.0% 3

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 AQP 40.0% 20.0% - 20.0% 5
2 CTX - 33.0% - 50.0% - 17.0% 6
3 ARI 83.0% 67.0% - 16.0% 6
4 GPT - 14.0% - 29.0% - 15.0% 7
5 NWH 86.0% 71.0% - 15.0% 7
6 BXB 86.0% 71.0% - 15.0% 7
7 ANN 29.0% 14.0% - 15.0% 7
8 IAG 38.0% 25.0% - 13.0% 8
9 NCM 38.0% 25.0% - 13.0% 8
10 SUN 88.0% 75.0% - 13.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 WEB 3.580 3.917 9.41% 3
2 SIP 0.627 0.681 8.61% 7
3 BRG 5.683 6.117 7.64% 3
4 RRL 4.686 4.844 3.37% 7
5 ANN 15.060 15.226 1.10% 7
6 GPT 3.500 3.534 0.97% 7
7 IAG 4.079 4.098 0.47% 8
8 CTX 14.060 14.110 0.36% 6
9 CHC 2.656 2.663 0.26% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 NWH 3.924 3.516 - 10.40% 7
2 PAN 1.175 1.083 - 7.83% 3
3 ARI 1.238 1.172 - 5.33% 6
4 AGO 2.299 2.236 - 2.74% 8
5 SXL 1.501 1.471 - 2.00% 8
6 WPL 40.359 40.171 - 0.47% 8
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AQP 2.608 3.387 29.87% 5
2 COH 274.738 281.325 2.40% 8
3 SIP 4.657 4.757 2.15% 7
4 GPT 23.957 24.129 0.72% 7
5 QRN 21.075 21.200 0.59% 7
6 RMD 19.962 20.004 0.21% 8
7 WPL 223.107 223.443 0.15% 8
8 WDC 63.775 63.813 0.06% 8
9 SGP 28.914 28.929 0.05% 7
10 HZN 2.081 2.082 0.05% 4

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 PAN 4.400 0.125 - 97.16% 3
2 LYC 1.800 0.600 - 66.67% 5
3 GBG 4.567 3.617 - 20.80% 6
4 AGO 12.763 11.513 - 9.79% 8
5 FMG 53.948 49.840 - 7.61% 8
6 RRL 60.529 56.286 - 7.01% 7
7 GRR 6.933 6.517 - 6.00% 6
8 MGX 24.363 22.963 - 5.75% 8
9 NWH 41.086 39.543 - 3.76% 7
10 BHP 280.180 271.866 - 2.97% 8
 

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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article 3 months old

Rudi’s Response: JB Hi-Fi Is A Maturing Business

Every so now and then FNArena receives a question that is worthwhile sharing with a broader audience. This week's question from subscriber John from Altona Meadows, Victoria about JB Hi-Fi ((JBH)) qualifies in our view.

Question:

Hi,

I know you are not an advisor as such, but i would love a little information about JB Hi-Fi.

I purchased them around $2.00 and they did go up to 20+ dollars.. they have now gone down to under $9.00 and i have been reluctant to sell. I did get rid of some shares a few months back at $12.00, and am trying to figure out whether to get rid of the lot.

I am hearing about takeover rumours etc and that they are still a good company etc, but I have to admit I am getting a little worried.

Thanks in advance....

John

Response from the FNArena Editor:

John,

Maybe I should write this down in a Weekly Insights one day...

What many investors don't understand is that retailers such as JB Hi-Fi go through a growth cycle. At first they have a few stores only and growth becomes abundant as new stores are being opened in leverage of a successful business model.

At some point, however, the business reaches a certain level of maturity and this is where all bad things start happening; lower growth, de-rating, share price falls.

At this point in time, JB Hi-Fi shares are not expensively priced, as you can see in Stock Analysis. But our consensus data also show the company is effectively ex-growth.

At least, as far as the analysts are concerned.

This means the potential for further upside is not very large and those high dividends may well become the maximum achievable.

What could change this picture? Maybe a successful launch of the iPhone 5 can temporarily attract more buyers and sales in stores? But then we recently published a review that suggested selling more Apple products is not beneficial for retailers in Australia as it effectively depresses margins.

With retail spending to remain moderate, especially in the market segment of consumer electronics, I don't think your expectations regarding JB Hi-Fi should be too high.

Too many investors look over their shoulder and reminisce about how well those good times have been for the share price. They shouldn't. JB Hi-Fi is not just a story of a changing landscape for consumer spending in Australia, it is equally about a retail business model that has matured.

Watch cash flow statements to get an idea about how secure those dividend payouts are, and whether they will remain secure.

I hope this answers your question.

Cheers

Rudi Filapek-Vandyck
Your Editor

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

P.S. I - All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories (this includes the occasional Rudi's Response stories). Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website. 

 

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article 3 months old

The Short Report

By Andrew Nelson

For the week to 05 September 2012, significant increases in short positions far outweighed significant decreases, both in terms of the numbers and in terms of the average magnitude of the changes. Just one stock saw its short position pull back by more than one percentage point over the period, while nine stocks experienced a greater than one percentage point increase.

We’ll start our coverage on the decrease side of the ledger, as it is a fairly short list of just one. After last week sitting on the top of the increase list, Allied Gold ((ALD)) finds itself on top of the weekly short decrease leader board this week, with total shorts decreasing by 2.49 percentage points from 2.81% to 0.32%. Investors have seemingly come to grips with the St Barbara Mines ((SBM)) merger that was approved by the High Court a few weeks back.

St Barbara, who were number two on the increase list last week right behind Allied didn’t respond in the quite the same fashion. Shorts in SBM actually increased a further 0.87 percentage points from 3.60% to 4.47% over the period. The stock remains Neutrally regarded by brokers in the FNArena database, with one Buy, Hold and Sell call recorded. The company’s FY result was reviewed by all three brokers towards the end of August, with Macquarie noting some doubts about the risk/reward profile of the merger.

Number eight on this week’s Top 20 list (that being a list of the 20 most shorted stocks on the Australian market) also booked a decline in its overall short position, albeit a minor one. Shorts in the shares in Cochlear ((COH)) declined 0.42 percentage points to 9.51% from 9.53%. The stock is negatively regarded by brokers in the FNArena database, with 4 Sells and 4 Neutrals. Yesterday, the company announced new N5 failure rates from US data that most brokers saw as a sign of improvement. Of course, this news would have had no impact on short position moves up to Sept. 5.

Number 19 on this week’s Top 20 list, Carsales ((CRZ)), also featured near the top of the decliners list, with short positions coming off 0.47 percentage points to 7.59% from 8.06%. Full year earnings in mid-August were well received. Again, while having no bearing on last week’s short position moves, Macquarie noted this Monday that it seems the threat from News Ltd’s ((NWS)) Carsguide that many were expecting to take a chunk out of Carsales has pretty much proved a non event.

Switching focus to the other side of the table, we see that three of the top 4 biggest increases in short position over the week were booked by retailers. Shorts in The Reject Shop ((TRS)) advanced 2.77 percentage points from 7.87% to 10.64%, seeing it now sit at number 5 on the Top 20 list. The company’s FY efforts were fairly well received by brokers late August; with Credit Suisse even lifting its call to Neutral post release. The Reject Shop would likely be higher on the list were JB HiFi ((JBH)), Flight Centre ((FLT)), or Fairfax ((FXJ)) to relax their grip on their seemingly permanent Top 5 spots a little.

Fellow retailer Myer finds itself at number two on the increase list, helping it to easily maintain its position in the Top 20. Short positions in the company increased by 2.70 percentage points from 7.23% to 9.93% over the week. The company reports FY numbers today and just this Monday analysts at Citi voiced their concerns about falling margins. The guys across the street at David Jones also saw their short position increase significantly, rising 2.27 percentage points from 7.18% to 9.45%.

Cabcharge saw its short position grow by 2.57 percentage points from 1.61 to 4.18%. In-line FY results were fairly well recieved in the last week of August and the stock is Neutrally regarded by brokers in the FNArena database, boasting one Sell, one Buy and four Holds.

Engineering services companies also featured amongst the biggest increasers, with Downer EDI ((DOW)), UGL ((UGL)) and Monadelphous ((MND)) all seeing their short position increase by more than 1%. Shorts in both Downer and UGL lifted by 1.71 percentage points, taking Downer to 3.69% shorted and UGL to 5.84%. Monadelphous’ short position rose 1.45 percentage points to 5.88%.

While there has been little of note from Downer over the past few weeks, last week saw UGL host analysts in Shanghai to talk about the new strategy. The response was fairly positive for the most part. Both stocks are regarded positively by brokers in the FNArena database, although out the two, Downer is the more favoured. UGL had to issue a profit warning in August.

The weekly Top 20 list looks pretty much the same as last week, with a only a few minor position changes of note.

Discretionary retail plays continued to dominate the top 20 most shorted list, with investors and brokers remaining concerned about the uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi ((JBH)), Flight Centre ((FLT)), The Reject Shop, Harvey Norman ((HVN)), Myer and David Jones. All remain in the top 10.

Resources and resources services stocks also maintain their prominent positions in the top 20.  Lynas ((LYC)) and Iluka ((ILU)) remain in the Top 10, while numbers 11-20 are dominated by base materials plays of various description such as CSR ((CSR)), Alumina ((AWC)), Paladin ((PDN)) and Fortescue ((FMG)).

The picture was quite similar looking at the monthly changes to short positions, with 21 stocks booking an increase of 1 percentage point or more, while just eight stocks enjoyed a better than 1 percentage point decrease in position.

The most prominent move on the decrease side of the ledger was booked by Discovery Metals ((DML)), with its short position falling 3.02 percentage points from 5.31% to 2.29%. The latest broker commentary on the stock came from Citi at the end of August, with the broker worried that costs will come in much higher than expected. The broker has DML at Sell, versus two Buys and a Neutral that are also recorded in the FNArena database.

Carsales was number two on the decrease list, down 2.74 percentage points from 10.33% to 7.69% shorted. Next was Seven West ((SWM)), whose short position declined 1.93 percentage points from 3.77% to 1.84%.  The stock is very positively regarded in the FNArena database, with broker’s positively reviewing the company’s FY effort on the 23-24 of August.

The most significant monthly decrease was posted by Silver Lake Resources ((SLR)), with JP Morgan liking the FY result last week and seeing potential upside from the Integra Mining ((IGR)) acquisition.

APA Group ((APA)) was next on the list, with short positions pulling back 2.80 percentage points to 4.51%, while Whitehaven Coal’s ((WHC)) short position improved by 2.43 percentage points to 3.92% shorted. The latter stock enjoys across the board Buy call in the FNArena database.

Monadelphous and Mesoblast ((MSB)) round out the top 5 decliners list. Both companies enjoy marginally positive ratings in the FNArena database and neither have drawn broker commentary over the past three weeks.

Looking at the week to 10 September, analysts from RBS note short positioning across the market remains at a record high average of 2.4%. Small to mid-cap resource stocks like Iluka and Panoramic Resources ((PAN)) remain key targets. The broker also points out that shorts in both Gold and Iron Ore stocks have doubled in the past six months, while Capital Goods stocks have also seen a recent spike in short interest.

On the other hand, short covering in banks has been the recent trend, with short decreases in Westpac ((WBC)) and Commonwealth Bank ((CBA)) more than offsetting the rise in shorts booked by National Australia Bank ((NAB)), which the broker notes has gone from 0.4% to 1.0% over the past two weeks.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 19697908 98850643 19.93
2 FLT 12714644 100072666 12.71
3 LYC 194606019 1715029131 11.35
4 FXJ 263096984 2351955725 11.19
5 TRS 2808625 26092220 10.76
6 ILU 42481692 418700517 10.15
7 MYR 58213554 583384551 9.98
8 COH 5509152 56972605 9.67
9 DJS 50142816 528655600 9.48
10 HVN 97646834 1062316784 9.19
11 CSR 45278798 506000315 8.95
12 LNC 45070275 504487631 8.93
13 AWC 211621322 2440196187 8.67
14 PDN 65993967 835645290 7.90
15 FMG 241608127 3113798659 7.76
16 SGT 10509671 154444714 6.80
17 GNS 55105305 848401559 6.50
18 MSB 18505035 284478361 6.50
19 CRZ 14981006 233689223 6.41
20 WTF 13557185 211736244 6.40

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.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Weekly Broker Wrap: Banks, Retail and Earnings Forecasts

By Andrew Nelson

While it’s fairly easy to say that recent FY results beat market expectations by a little this reporting season, the statement can nonetheless be a little misleading. As while top line numbers may have come in a little better than forecasts, things weren’t as clear cut for forward estimates.

Last week, Goldman Sachs totalled up the number and found that while results from the August 2012 reporting season were 2.3% ahead of the analysts' forecasts, downgrades going forward were an overriding feature. In fact, the broker has downgraded FY13 earnings for almost half of the companies under coverage, while upgrading forecasts for only 21% of companies.  

And there weren’t just more downgrades than upgrades either, as the average size of downgrades also outpaced the average size of upgrades as well. The median upgrade to FY13 EPS forecasts was 4.3%, while the median downgrade size was 5.9%.

The sectors that experienced the largest downgrades to FY13 forecasts, on a market cap adjusted bias were Steel, Gold, Diversified resources, Gaming and Building materials. Upgrades were recorded across the Energy, Info tech and Transport sectors.  

The good news is the broker continues to see significant earnings leverage across the market given current earnings forecasts are based on margins that are close to their 10-15 year lows.  It’s all about the cycle turning, but Goldman Sachs still sees a number of structural issues such as slower credit growth, high household savings levels, tight financial conditions and the strong AUD that it feels will continue to keep margins under pressure and thus forestall any earnings recovery. This is especially so in for Industrial sector earnings, notes the broker.

Overall, the broker points out the best looking stocks were the ones best able to confirm an ability to grow given industry positioning and continuing investment, and the ones that demonstrated the ability to maintain secure income streams and attractive yields. On the broker’s numbers, such stocks included, but are not limited to ANZ Bank ((ANZ)), Brambles ((BXB)), CSL ((CSL)), Santos ((STO)), Telstra ((TLS)) and Wesfarmers ((WES)). Among the smaller capped companies, the broker liked Bradken ((BKN)), Domino’s ((DMP)) and REA Group ((REA)).

Goldman Sachs' overall post-reporting season bottom-up FY13 ASX300 EPS forecast is for growth of 9.1% for the Industrials sector, 8.5% for Resources Sector and 6.6% for the Major Banks.

Now let’s talk about a few issues facing the banks. Analysts at Macquarie note that gearing levels may well come under increasing pressure, as impaired assets don’t really have to increase to have BDDs (bad & doubtful debt) increase or stay flat, given BDD top-ups. Thus, a protracted run of declining asset values and extension risk could lead to the need for provisions to be increased.

What’s worse is the size of the downgrades could even be more than 10%, were declining asset values and extension risk working in unison.

The silver lining in the broker’s tale is that it seems the Big-4 have taken a fairly intelligent approach to impaired loans, with workouts undertaken to recover debt rather than the fire sale approach of days gone by. The broker notes this lesson was learnt back in the early 1990s, although there is risk if others don’t play ball and move to exit positions early at substantial discounts. There could also be disadvantage if the market for second tier assets remains closed, although, Macquarie thinks a “weaker for longer” scenario will lend itself to the provisioning of top-ups.

And here’s another bit of news for the banks, this time from Credit Suisse. The broker notes that the most recent survey of Australian bankrupts, from 2011, shows the actual incidences of bankruptcy were at their lowest level since 2002. The broker notes there is support coming from the fact that home ownership among bankrupts is increasing, thus providing collateral, while there has also been an increase in the overall ability to realise assets.

On the other hand, the broker notes there is a growing proportion of bankrupts with more than $50,000 of unsecured debt, while the instance of  bankrupts re-offending has lifted to 16%. The broker notes that fewer bankrupts are unemployed and the income of bankrupts continues to increase. All up, this makes for a concerning picture, thinks Credit Suisse, as the trends imply that bankrupts are increasingly found among the employed.

South East Queensland is home to the highest incidences of bankruptcy, with  7.7%  of  total  personal  insolvencies  and  8.2%  of  all  bankruptcies.  This number puts South East Queensland well ahead on the leader board, as number two and three, while the NSW South Coast and the Qld Central Coast were at 6.2% and 6.4% respectively.

In 41% of the cases, economic conditions were to blame. Next is unemployment, which contributes 34% to overall numbers for both business related and non-business related bankruptcies.

Analysts at Deutsche Bank gave us a bit more seemingly bad news for the Australian retail sector. After sorting through recent results and outlook statements from a number of retailers, the broker just can’t see a consumer recovery in 2013.

With that said, Deutsche does see a few bright spots such as a improving gross margins, especially in clothing, while rents and online sales also look to be on the up. The broker continues to like exposure to companies that possess drivers outside the general macro environment. Number one on this list is Premier Investments ((PMV)) given a nice cost cutting buffer and an undemanding valuation. Super Retail ((SUL)) and Domino’s also fit the broker’s criteria, but current valuations do not present attractive entry points, it feels.

Citi also sees an emerging problem for retailers in Australia, at least those involved in the gadgets and gizmos business, and it’s called Apple. In total, the company’s sales in Australia and NZ are over $4.8bn and they are shifting profit away from consumer electronics retailers.

Apple’s sales have tripled in the past three years on the back of iPhone and iPad sales, while the sales in the broader sector were fairly flat. Yet Apple's sales account for 20% of JB Hi-Fi’s Australian sales and 2% of Harvey Norman’s sales and at much lower margins than most other products. Thus while the broker expects consumer electronics spend will likely remain strong in tablets and smartphones, the shift is negative for retailers given lower margins on Apple products.

And with Apple and JB Hi-Fi continuing to build more stores, as well as Masters ((WOW)) and Bunnings (WES) expanding whitegoods offerings, there is actually $468m in new sales expected for the industry in FY13, which offsets the estimated $414m to be saved via store closures. Thus the broker sees only limited sector benefit via sector rationalisation and store closures, with Citi believing more store closures are needed to restore consumer electronics industry profits.

This general trend will also see no help on the macro front in the short-term. UBS noted last week that the August employment figures came in weaker than expected, with the trend continuing its downward trajectory. Most of the downturn came from the part-time segment of the workforce, with full-time numbers remaining fairly flat.

Jobs growth is now clearly softening, with the broker citing the net fall over the last three months, which it notes has now fully reversed the more optimistic tone that was generated earlier in the year. Hours worked are also weakening and UBS sees this as a good leading indicator of a further slowing in household income growth.

Yet despite the apparent slowing in jobs growth, the broker notes that a drop in the participation rate at least saw the unemployment rate at 5.1%, which remains within the range of the last few years. All in all, the broker thinks the “big picture” fundamentals have certainly worsened over the past month and this in turn increases the likelihood of the RBA making a further easing move.

 
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article 3 months old

The Short Report

By Andrew Nelson

Significant increases in short positions outweighed significant decreases for the week to 29 August, while the total number of short position increases also outpaced decreases. A total of 3 stocks experienced a short position increase of more than 1% over the period, while only one stock enjoyed a decrease greater than 1%.

Allied Gold ((ALD)) finds itself on top of the weekly short increase leader board this week, with total shorts increasing by 1.9 percentage points from 0.91% to 2.81% over the course of the week. Shareholders approved the merger with St Barbara Mines ((SBM)) a few weeks back and High Court approval followed on August 29th.

No prizes for guessing who’s next on the short increase list. Shorts in St Barbara increased by 1.83 percentage points from 1.77% to 3.60% over the period. The stock is Neutrally regarded by brokers in the FNArena database, with a Buy, Hold and Sell call recorded. The company’s in-line FY result was reviewed by all three brokers on the 24th, with Macquarie skeptical about the risk/reward profile of the merger.

JB Hi-Fi ((JBH)) increased its lead at the number one position on the leader board, with short positions rising 1.36 percentage points from 18.91% to 20.27% over the course of the weekly period. Broker’s reviewed the company’s broadly in-line FY report on the 14th of August, although a good number remain skeptical about the prospects for earnings improvement. The stock is negatively regarded by brokers in the FNArena database, with 2 Buys, 3 Neutrals and 3 Sell calls.

As mentioned, only one stock enjoyed a 1%+ decrease in short positions over the weekly period. Shorts in Australian Infrastructure ((AIX)) pulled back 1.26 percentage points from 3.05% to 2.17%. The FY result posted during the period was viewed positively for the most part, although news that AIX had received a $2bn offer from the Future Fund for all of the group's assets saw both JP Morgan and UBS downgrade the stock to Sell and Neutral respectively on the basis of a good offer price.

Regular Top 10 inclusion Cochlear ((COH)) booked a slightly less significant decrease in its short position over the period. Shorts in the stock pulled back by 0.68 percentage points from 10.61% to 9.93% despite no news or broker commentary over the period. The stock remains negatively reviewed by brokers in the FNArena database, with 4 Neutrals and 4 Sells.

The weekly Top 20 list was little changed, with one stock leaving the list and one stock joining. SingTel ((SGT)) came off the Top 20, giving its number 18 position to Specialty Fashion ((SFH)).

Discretionary retail plays continued to dominate the top 20 most shorted list, with investors and brokers remaining concerned about the uncertain consumer outlook. Significant short positions were maintained by JB Hi-Fi, Flight Centre ((FLT)), The Reject Shop ((TRS)), Harvey Norman ((HVN)) and Myer ((MYR)), which all remain in the top 10.

With the slowdown in China continuing to stifle commodity prices, short sellers also continue to focus on resources and resources services stocks.  Lynas ((LYC)) and Iluka ((ILU)) remain in the Top 10, while numbers 11-20 are dominated by resource plays of various description.

Looking at month on month numbers, stocks on the increase and decrease were fairly well balanced, although the magnitude of the decreases were somewhat more significant than the increases. Fifteen stocks saw short position improve by more than 1 percentage point, while sixteen increased by more than 1 percentage points.

Positively regarded Seven West Media ((SWM)) booked the biggest monthly improvement, with its overall short position dropping 3.61 percentage points from 5.34% to just 1.73%. The move is mostly likely due to a well received FY effort put out over the period.

RBS thinks the stock is cheap on a FY13 PER of 7.3x and especially given a dividend yield of 7.5%. The broker notes TV earnings remain solid and it believes the company should easily be able to maintain a 39-40% market share, with earnings upside possible if Seven can take greater advantage of Ten’s ((TEN)) fall in the ratings.

Myer also featured prominently on the monthly decliners list, with shorts positions coming off 2.75 percentage points from 9.98% shorted down to 7.23%. The stock is Neutrally regarded by brokers in the FNArena universe.

Not to be left out, fellow retailer The Reject Shop also posted a solid monthly improvement, with shorts slipping 2.33 percentage points from 10.2% to 7.87% shorted. Credit Suisse upgraded the stock to Neutral over the period post a fairly well received FY report.

The biggest monthly increase in overall short position was booked by Silver Lake Resources ((SLR)). Opinions remained mixed on the Integra ((IGR)) acquisition leading into the company’s FY result, which occurred just after the weekly period we are reviewing. JP Morgan thought said FY result was solid.

Whitehaven Coal ((WHC)) also saw a significant increase in its overall short position, which was up 2.96 percentage points from 1.2% to 4.16%. The company booked an in-line FY profit result over the period, but investors were likely troubled by news that Nathan Tinkler had withdrawn its takeover offer. The stock still rates all Buys in the FNArena database.

Looking at the week to 3 September, analysts from RBS note short positioning across the market has reached a record high average of 2.4%. Small to mid-cap resource stocks like Fortescue ((FMG)), Alumina ((AWC)) and Kingsgate Consolidated ((KCN)) led the way, with short positions sitting at 7.2%, 9% and 4.8% respectively. The broker also points out that short position in gold and iron ore stocks have doubled in the past six months.
 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 20579042 98850643 20.82
2 FLT 13272368 100055135 13.27
3 FXJ 264192329 2351955725 11.23
4 TRS 2906225 26092220 11.14
5 LYC 190207424 1715029131 11.09
6 MYR 59546708 583384551 10.21
7 COH 5710860 56972605 10.02
8 ILU 40451260 418700517 9.66
9 HVN 98496106 1062316784 9.27
10 DJS 48870611 528655600 9.24
11 CSR 45665370 506000315 9.02
12 LNC 44180651 504487631 8.76
13 AWC 212078319 2440196187 8.69
14 CRZ 19132975 233689223 8.19
15 WTF 17067127 211736244 8.06
16 PDN 63616539 835645290 7.61
17 FMG 226135686 3113798659 7.26
18 SFY 401384 6123605 6.55
19 MSB 18533201 284478361 6.51
20 GNS 55105305 848401559 6.50

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.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

article 3 months old

Property Value The Real Question For Harvey Norman

- Harvey Norman posts a weak result
- franchisee support significantly increased
- sales not responding
- property valuation thus questioned


By Greg Peel

Shares in retailer Harvey Norman ((HVN)) have rallied some 14% since the end of the full-year period following downgrades to profit expectations in the order of 30%. While the market has generally been a little stronger, investors have clearly been looking for knock-down value. The real question, however, is as to whether HVN should not be valued much lower.

Management had already flagged the FY12 profit result at the last quarterly sales result announcement so there were no surprises on Friday on a net basis. On the breakdown, however, improved property earnings offset a weaker than expected retail result. Sales fell by 8% and profit was down 39%. The Australian franchisee business saw gross profit fall by 50%, including 70% in the second half.

The good news is that the last couple of months have seen more stability in gross margins according to management – an observation also made earlier by rival JB Hi-Fi ((JBH)). The consumer market nevertheless remains depressed, while management was quick to blame Woolworths ((WOW)) for Harvey's woes. The closure of Woolies' Sight & Sound, and especially Dick Smith stores, led to the sort of irrational pricing associated with clearance sales and sucked customers away from HVN. It is interesting though, notes BA-Merrill Lynch, that JB Hi Fi was nowhere near as impacted by the Dick Smith closures. Company-specific issues and structural factors are more importantly weighing on HVN, Merrills suggests. Citi believes weak sales and a “sticky” cost base are to blame.

Over the FY12 period, HVN increased its franchisee support by 106%. “Given support is only offered when a franchisee is not generating sufficient operating income to support their wage,” notes RBS Australia, “the number of loss-making stores has clearly increased”. As Citi points out, HVN reported a 5% drop in franchisee sales in FY12 but increased rents by 9%. The rent/sales ratio has risen by 100 basis points over five years, the analysts note. On that basis, Citi believes there is a 20% downside risk to rental income.

Which brings us to the question of property valuation on the books.

Deutsche Bank (Buy) was disappointed with the performance of HVN's retail operations, but notes the property book continued to deliver a “reliable” earnings stream. Property should limit the downside until trading conditions improve, Deutsche believes. The analysts are heartened by retail exposure to categories that aren't structurally threatened and suggests the troubled AV/IT category will become less important. HVN's format allows it to explore new categories and the “cost lever is yet to be pulled,” the analysts note.

UBS (Buy) also believes property should support HVN's current valuation.

JP Morgan (Neutral) acknowledges the more recent improvement in margins but remains cautious. The outlook for AV/IT is particularly weak, the analysts suggest, while agreeing with Deutsche that unlike other retailers, HVN does have the flexibility to realign its business towards more attractive areas. RBS Australia (Hold) believes it is reasonable to state that the valuation of HVN's property assets is tightly linked to the viability of its retail operations. This is a risk if margins don't improve in the second half of FY13.

Credit Suisse (Neutral) suggests a stabilisation in earnings may not come soon enough for franchises, for whom there is a risk irreparable damage has been inflicted on balance sheets. The risk to valuation would be some write-off of franchisee loan balances. There is thus a potential risk of property revaluation, CS believes. Like other areas of retail, the analysts note, HVN is charging franchises ahead of profitability.

Goldman Sachs (Sell) recognizes that HVN's valuation multiples are at historically low levels and that the company owns a sizeable property portfolio. However the analysts don't see the pressure on HVN's “system” profitability abating anytime soon given ongoing macro and industry headwinds.

Citi (Sell) believes franchisee margin recovery will likely be slow as going as the company focuses on market share instead. Operating costs are high compared to rivals and have proven difficult to cut. The analysts don't think a reliance on an eventually improving retail cycle will be enough. They would like to see store closures to reduce the cost base and contribute further to industry rationalisation.

Morgan Stanley (Underweight) believes HVN is overcharging franchisee rent to maintain property values then increasing “tactical support” to franchisees to offset this. Rental increases of the 9% magnitude in FY12 are unsustainable in the analysts' view. Indeed after crunching the numbers, the analysts believe a more realistic valuation for HVN's property portfolio would be $1.67bn compared to the stated $2.1bn. This would put the stock's ex-property forward FY13 multiple at 8.6x which is too expensive in Morgan Stanley's view. A reduction in property values will be the catalyst for the share price to fall in absolute terms, the analysts suggest.

Merrills notes the increase in franchisee support from $60m in FY11 to $124m in FY12, and notes this did little to improve franchisee sales, which were down. “In our view,” say the analysts, “this underpins the perception that the underlying position of Harvey Norman as a retail offer has materially deteriorated in FY12”.

If we leave property values aside for a moment, the other question is as to just what HVN plans to do to turnaround its deteriorating sales performance. 

Macquarie (Underperform) notes Harvey is a “destination brand” and that despite having the largest promotional marketing spend, and despite increasing tactical support to franchisees to counter aggressive market behaviour from competitors, the company could not prevent a loss of market share in FY12.

HVN has spent “significant time and energy” on its online platform, Macquarie notes, and online sales in FY12 were less than 1% of total sales. Customer searches for products on the site have grown by 25% but sales did not improve at all. The analysts wonder whether if this poor result is a further reflection on the HVN brand and whether consumers are simply using the website for information before shopping at preferred or more convenient retailers. Meanwhile, little has been done in-store to bring consumers back, Macquarie notes. One store, in Balgowlah, is being used as a trial of increased appliance floor space allocation but no accelerated roll-out has been identified.

“HVN appears to be pinning a major part of its turnaround plan,” says Merrills, “on improving its home segment based on the performance of one refitted store”. And so Merrills sums up a bearish view on HVN:

“We believe Harvey Norman's earnings performance will continue to deteriorate, with sustained poor market conditions likely to prevail and a lack (in our view) of a creditable strategy to improve the underlying performance of the business”.

Merrills forecasts a 17% earnings decline in FY13. No database broker changed its rating post the HVN result, which stands at two Buys, four Holds and two Sells (not including Sells from Goldman and Morgan Stanley) and the consensus price target is largely unchanged at $2.00, bearing in mind management provided updated guidance at the recent sales result. That is basically where HVN shares are currently trading. Targets nevertheless range from JP Morgan at $2.45 down to Merrills at $1.45.
 

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