Tag Archives: Health Care and Biotech

article 3 months old

Sigma Has Excess Cash, But With Ongoing Risks

 - Sigma result showed improved metrics
 - Further improvements expected in coming months
 - Tough industry backdrop tempers views
 - Neutral and Sell ratings continue to dominate

By Chris Shaw

Sigma Pharmaceuticals ((SIP)) reported full year net profit of around $50 million for FY12, the result showing improvement in terms of market share gains, margin improvement, cost control and strong cash conversion.

This improvement should continue through FY13 and into FY14 according to BA Merrill Lynch, but price adjustments such as for Lipitor on December 1, 2013 will impact on the group's financials. In the view of JP Morgan, Sigma's result confirms the company is now better placed to deal with the effects of Pharmaceutical Benefits Scheme (PBS) reform. 

The problem is the industry backdrop will make growth difficult given flattening PBS growth and increasing financial pressures. These pressures have big pharma groups waiting to acquire any bankrupt pharmacy licences that become available. Thus ongoing industry consolidation will create ongoing pressures on distributor margins according to JP Morgan.

Financially Sigma is in a position where it can consider growth via acquisition to offset the impact of worsening industry dynamics as the balance sheet shows net cash. An issue for BA-ML is finding a suitable acquisition to generate a return on investment of around 15% given the industry dynamics in place.

If acquisitions are not made Deutsche Bank sees scope for ongoing capital management initiatives, especially given the view returns and operating cash flows will continue to improve. This supports a positive view on the stock in Deutsche's view, so post the result the broker retains a Buy rating.

This is the only positive view on Sigma among brokers in the FNArena database, which shows three Neutral recommendations and three Sell ratings. Consensus price target stands at $0.61, up slightly from before the full year result.

Citi is one broker with a Sell rating, arguing FY13 will be challenging as the majority of PBS generics will be subject to an average price cut of 28.7%. While Sigma plans to reduce rebates to help counter this, Citi expects pharmacists will push against any such reductions. 

While guidance from Sigma for FY13 was not specific and implies little more than further improvement in return on capital invested and the maintenance of a high dividend, this is not a stretch in Citi's view. Factoring in its forecasts leaves Citi expecting a negative total return from Sigma, which suggests little value at current levels.

UBS agrees with Citi's Sell rating, arguing the adverse industry structure leaves little room for earnings growth going forward. Valuation is also not favourable in UBS's view, as the broker's numbers imply a 14 times one-year forward multiple and this is a 15% premium to market earnings multiples.

BA-ML's estimated valuation for Sigma is $0.66 per share and on this basis the broker retains a Neutral rating, though it sees risk for Sigma if others follow the lead of Pfizer and attempt to market products directly.

Outside of the FNArena database, Goldman Sachs has downgrade Sigma to a Neutral rating and removed the stock from its Australia/NZ Buy list. This reflects both recent share price gains and the view the stock is fair value at current levels given the industry risks going forward.

Moelis also rates the stock as a Hold, taking the view a forecast FY13 earnings multiple of 13.7 times, which is a 21% premium to the Small Industrials index, as not compelling given the industry's structural issues that include ongoing government funding pressures.

While Sigma's yield is attractive and the balance sheet is in good shape, until the cash available is deployed for a suitable purpose the stock looks appropriately priced in the view of Moelis.

Shares in Sigma have moved within a trading range over the past year of $0.305 to $0.755. The current share price implies downside of about 4% relative to the consensus price target in the FNArena database.


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article 3 months old

Weekly Broker Wrap: Global Investor Confidence Rising

By Chris Shaw

A survey of nearly 700 institutional clients by Barclays Capital has shown global investor confidence has risen significantly over the past three months. The lift reflects the expectation prospects for the US economy are likely to continue improving as well as the fact asset valuations are not a major concern at current levels.

While confidence has improved, Barclays notes clients are not overly bullish, which is acknowledgement many risks remain such as the sovereign debt crisis in Europe. The survey showed 38% of respondents expect at least one country will leave the euro zone this year. Barclays views this number, down from 50% in the same survey last year, as still uncomfortably high given the potential significance of such an outcome.

Among its clients, Barclays notes 37% view equities as likely to be the strongest performing asset class, followed by credit at 18%. This compares to December survey results that showed 34% viewed bonds as the likely best performer compared to 19% for equities. 

For clients that are equity market investors, the survey showed 71% expect equity prices will increase by 5% or more by the end of this year. This measure is up from 25% last December. Only 10% of such clients expect a fall of at least 5%.

Confidence has also improved in other asset classes, with Barclays noting 39.5% of investors in credit markets expect US high yield securities to be the best performer. Foreign exchange investors see best results coming from G10 currencies, followed by emerging market commodity currencies.

While investors were also fairly confident about the coming year in the first quarter survey last year, Barclays suggests conditions are somewhat different now, as while concerns over the euro zone crisis remain they have diminished somewhat.

A positive is both within and outside the US, monetary policy is expected to remain loose, which should prove to be supportive of economic growth. 

BA Merrill Lynch has conducted a similar survey, finding while global equities have risen 28% from their lows of last October, sentiment is far from overly bullish. Cash levels remain high, while March allocations to equities, Europe and Banks rose only modestly from the previous month.

From a macro perspective, BA-ML notes its survey shows investors are now pricing out fresh central bank liquidity measures, as 47% now say there will be no QE3 in the US, which is up from 36% in the previous survey. It is a similar story in Europe as 43% expect no new European Central Bank QE, up from 23% previously.

In terms of asset allocations, BA-ML notes investors remain overweight equities and commodities and are underweight bonds and cash. Among equity markets, emerging market positions remain very overweight, long US equities remains popular and underweight European equities is still the case for most investors. Allocations to Japan rose strongly from the previous month.

In the view of BA-ML, the reluctance of investors to trim emerging market allocations may partly reflect an improving macro outlook, as a net 28% of investors see the global economy strengthening over the next 12 months. This is up from 13% last month.

Among Asia Pacific investors, BA-ML notes while overweight China remains a dominant position allocations fell to a five-month low of plus 26%. Hong Kong is the next most favoured market at plus 18%. Australia remains the least loved market in the region at a minus 13% position.

With respect to the Australian market, Deutsche Bank suggests conditions for a recovery in deposit margins for the major banks are emerging, which could deliver significant upside surprise to profits going forward.

This can be explained by the correlation between falling wholesale funding costs and improving deposit spreads of 0.8x, so the recent 70-80 basis point reduction in wholesale funding costs should see deposit rates reduce, so boosting industry margins.

For every 20-basis point improvement in spreads there is a 5-7 basis point improvement in group margins, which Deutsche suggests would translate to a 3-4% upgrade in earnings per share. The broker suggests ANZ Banking Group ((ANZ)), Commonwealth Bank ((CBA)) and Westpac ((WBC)) should benefit by around the same amount from this theme, while National Australia Bank ((NAB)) would lag given its UK operations.

Among the major banks Deutsche rates ANZ and NAB as Buy, while ascribing Hold ratings to CBA and Westpac.

UBS has looked more closely at the impact of department stores on Australian REITs, especially those involved in leasing retail space. This market is significant given department stores contribute around 5% of total rent, occupy about 20% of gross lettable area and pay rent of around $200-$250 per square metre.

At present, UBS notes the two major department stores in Australia are at opposite ends of the spectrum. Myer ((MYR)) is focused on trying to optimise its store network and returning space to landlords when possible, while David Jones ((DJS)) has a relatively small current footprint but is committed to growing its store network.

By income, UBS estimates CFS Retail Property ((CFX)) has 7.5% exposure to department stores, Westfield Retail ((WRT)) 6.0%, GPT ((GPT)) 4.0% and Centro Retail ((CRF)) 2.1%. The importance of these exposure levels, in the view of UBS, is concerns from retailers on rents are unlikely to go away anytime soon.

This suggests to UBS a cautious stance on those stocks where there is no capital management or capital recycling to prove up net asset value is appropriate. Among the REITs the broker's order of preference remains Westfield Group ((WDC)) and Charter Hall Retail ((CQR)) as the top picks, following by mid-weightings on CFS Retail, GPT, Centro Retail and Westfield Retail. UBS continues to prefer CS Retail to Westfield Retail.

Still in relation to retail in Australia, BA-ML notes earnings growth for food and beverage producers and retailers has been in decline for the past two to three years, this rate of decline picking up sharply over the last six to 12 months.

While the retailers have attributed weaker earnings to cyclical factors such as adverse weather and weak consumer spending, BA-ML sees the issue as more structural. These include over-investment in an already crowded market, a large proportion of investment being on property developments and renovations and the effective entry of a new major competitor given the resurgence in Coles over the past couple of years.

BA-ML argues the consumer sector is currently experiencing margin pressure from price deflation and increasing costs, with these stemming more from over-investment than from cyclical factors. This implies a lengthy period of margin pressure for the Australian food and beverage sector. 

On BA-ML's numbers, the three main food retailers in Australia need to lift earnings before interest and tax (EBIT) by around $1.3 billion over the next three years to make an acceptable rate of return. A concern in achieving this is retailers are likely to step up what are already intense efforts to boost earnings via measures such as price cuts, which could cause a worsening outlook for both consumer products and the retailers.

Given price deflation is expected to stay for at least some time, BA-ML suggests Australian consumer companies are likely to realise, at best, low single digit earnings growth over the next two to three years. 

For BA-ML a key will be owners and managers adjusting growth expectations to reflect the new market reality. This means not acting in an overly ambitious manner by investing to sustain abnormal growth rates, as such action could generate material dilution to returns on investment.

BA-ML notes the leading consumer stocks in Australia – Woolworths ((WOW)), Wesfarmers ((WES)) and Coca-Cola Amatil ((CCL)) are all trading on earnings multiples of 14-15 times at present, while dividends are better than 4.5%.

A company offering 3% growth with a cost of equity of 10% and a dividend yield of around 5% should have a price to growth multiple of around 1.2 times on BA-ML's numbers. This equates to an earnings multiple of around 10 times, well below current multiples for the sector leaders. This highlights BA-ML's caution in terms of investing in the sector at current levels.

JP Morgan has reviewed its coverage of emerging companies, noting since the start of 2012 the Small Industrials accumulation index has risen 15%. This is outperformance relative to an 8% increase in the Small Resources index and the 4% and 5% gains for S&P/ASX100 Industrials and Resources indices.

In JP Morgan's view the primary reason for the recent outperformance has been earnings multiple expansion, as the Small Industrials are now trading at a premium of around 10% relative to the S&P/ASX100 Industrials on a 12-month forward basis.

Among the emerging cap stocks under coverage, JP Morgan rates Asciano ((AIX)), Aristocrat ((ALL)), Ausdrill ((ASL)), Blackmores ((BKL)), Bradken ((BKN)), Credit Corp ((CCP)), Dulux ((DLX)), Fantastic Holdings ((FAN)), Flight Centre ((FLT)), Henderson Group ((HGG)), iiNet ((IIN)), Jetset Travelworld ((JET)), Miclyn Express ((MIO)), Norfolk ((NFK)), NIB Holdings ((NHF)), Programmed Maintenance ((PRG)), QRxPharma ((QRX)), REA Group ((REA)), SAI Global ((SAI)), Silex Systems ((SLX)), Seven Group ((SVW)), Transfield Services ((TSE)), Thinksmart ((TSM)) and Wotif.com ((WTF)) as Overweight.

Among the REITs, JP Morgan has Overweight ratings on Astro Japan ((AJA)), Carindale Property Trust ((CDP)), Charter Hall Group ((CHC)) and FKP Properties ((FKP)), while for the resource plays Overweight ratings are ascribed to Australian Worldwide ((AWE)), Aston Resources ((AZT)), Grange Resources ((GRR)), Hillgrove Resources ((HGO)), PMI Gold ((PVM)), Roc Oil ((ROC)), Silver Lake ((SLR)), Venture Minerals ((VMS)) and YTC Resources ((YTC)).

Among JP Morgan's Underweight recommendations are REIT plays Bunnings Warehouse Property ((BWP)) and Charter Hall Retail and resource plays Aurora Oil & Gas ((AUT)) and Sandfire Resources ((SFR)).

Among the emerging industrials, JP Morgan is Underweight on Austar ((AUN)), Billabong ((BBG)), Envestra ((ENV)), Gunns ((GNS)), Hastie ((HST)), Matrix Composites ((MCE)), Nufarm ((NUF)) and PaperlinX ((PPX)).


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article 3 months old

The Short Report

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By Chris Shaw

While the week from March 6 was relatively quiet in terms of changes in short positions among ASX-listed stocks, some of the changes were of interest given the companies involved.

Among the reductions in short interest of more than 1.0 percentage points were three retail plays – Myer ((MYR)), Billabong ((BBG)) and David Jones ((DJS)). All saw shorts fall to levels now around the 10% mark from more than 11% previously. Despite the falls in shorts for the three companies mentioned, top short positions in the Australian share market continue to be dominated by consumer discretionary plays. JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Flight Centre ((FLT)) and The Reject Shop ((TRS)) are still among the top-20 shorts in the market.

Among other declines in short positions for the week from March 6 was Beach Energy ((BPT)), where positions fell to 5.29% from 7.21% the week before. This was prior to the company announcing production at a project in Egypt had commenced.

Shorts in Tatts ((TTS)) fell to 1.4% from 2.69% previously, as post a solid interim result Deutsche Bank suggested the second half has started well for the company. Deutsche sees scope for some upside from the recent Tote Tasmania and Lotteries acquisitions.

QBE Insurance ((QBE)) is raising some funds to help with the recent acquisitions of Hang Seng Bank and HSBC Argentina, moves that were generally well received. Shorts have fallen to 3.25% from 4.44% previously as the market adjusts to the transactions and capital raising, though some brokers continue to have some concerns with respect to QBE's capital position. Others, however, are willing to take a more optimistic stance.

On the side of increases in shorts the most significant in the week from March 6 was registered for Singtel ((SGT)), where positions rose to 7.06% from 5.37% previously. The increases follow some broker visits and come post the acquisition of Amobee, a mobile advertising business.

The other largest increase was in Wesfarmers partly protected shares ((WESN)), where shorts rose to 2.61% from 1.56% previously. Shorts in Wesfarmers ordinary shares were largely unchanged.

In terms of monthly changes from February 13 the most significant increases were in Echo Entertainment ((EGP)) and Beach. Echo's shorts increased to more than 7.4% from less than 0.9% previously, as the market continues to question whether Crown ((CWN)) will move on the group from its current stake of around 10%. Beach's shorts have risen over the month to nearly 5.3% from 1.79% previously.

Among stocks where shorts have fallen over the past month were OneSteel ((OST)), where positions have declined to 2.9% from just over 6.0% the month before. Brokers remain positive on the company from a valuation perspective, supported by some increases to forecasts post last month's interim profit result.

Shorts in Seek ((SEK)) fell in the month to just more than 4.1% from just over 6.0% previously, this as brokers have in general lifted forecasts and price targets post the recent interim profit result. Goodman Fielder ((GFF)) also saw short positions for the month fall solidly, total positions now standing at 2.7% from 4.49% previously. The decline is likely related to Singapore agribusiness group Wilmar taking a stake of just over 10% in the company, potentially implying Goodman Fielder is in play.

Elsewhere, an increase in shorts in CSL ((CSL)) of nearly 1.4% in recent weeks to around 1.45% is significant to RBS Australia. The broker is cautious on the stock given moderating sales and growing competition and as CSL appears to be transitioning to a more research-driven organisation. This shift is likely to take time and involve a number of development challenges and regulatory risks.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 20692605 98850643 20.94
2 FXJ 262136108 2351955725 11.15
3 ISO 606809 5703165 10.64
4 BBG 26397994 255102103 10.29
5 DJS 52963906 524940325 10.07
6 MYR 58546325 583384551 10.02
7 FLT 9470628 100017679 9.43
8 COH 5228051 56929432 9.16
9 LYC 151906891 1714396913 8.89
10 EGP 51244627 688019737 7.44
11 GNS 62413343 848401559 7.34
12 SGT 12516986 176974336 7.06
13 WTF 14766631 211736244 6.96
14 HVN 72641318 1062316784 6.84
15 CRZ 14934741 233674223 6.36
16 TEN 63516058 1045236720 6.07
17 TRS 1577120 26071170 6.04
18 PPT 2428858 41980678 5.77
19 ILU 23052563 418700517 5.48
20 BPT 58854487 1113497051 5.29

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

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article 3 months old

The Short Report

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By Chris Shaw

The week from February 28 saw a number of significant increases in short positions on the Australian market, while reductions in short positions were far more modest. Increases of more than five percentage points were experienced by three stocks and of more than two percentage points by eight companies, while only three companies saw short positions fall by more than one percentage point.

On the increase in short positions side the largest was in Echo Entertainment ((EGP)), total shorts increasing from a negligible 0.79% to 7.0% during the week. The change came after an interim earnings report that fell short of some expectations and was regarded in some quarters as a low quality result. Corporate activity remains a possibility with Echo but the likes of JP Morgan question whether there are enough synergies for a deal to be completed.

Beach Energy ((BPT)) saw total shorts increase to 7.21% from 1.74% previously, as while the company continues to try and develop its unconventional gas resources some brokers are cautious in terms of whether the resources can be brought to a successful financial conclusion.

Uncertain end markets remain an issue for Gunns ((GNS)) and this is reflected in short positions continuing to rise to 6.98% for the week from February 28 from 5.0% previously. Shorts also rose in QBE Insurance ((QBE)) to 4.44% from just over 3.0% previously, this coming prior to some modestly accretive acquisitions in the Hong Kong and South American markets.

Shorts increased in Mesoblast ((MSB)) post a slightly disappointing interim earnings result to 4.88% from 1.94% previously, while news of a stem cell trial by Baxter also indicates competition in the group's markets is increasing.

Having trended down in recent weeks shorts in Billabong ((BBG)) turned higher for the week from February 28, rising to 11.47% from 8.82% the previous week. This came on the back of news of Billabong management turning away interest from private equity.

Billabong has moved to number three in terms of the market's largest short positions overall, trailing only JB Hi-Fi ((JBH)) and Fairfax ((FXJ)). Consumer discretionary stocks continue to dominate overall short positions as the top 20 include Myer ((MYR)), David Jones ((DJS)), Harvey Norman ((HVN)) and the likes of Wotif.com ((WRF)) and Carsales.com ((CRZ)).

The Reject Shop ((TRS)) is another consumer discretionary stock where short positions rose for the week from February 28, increasing to 6.19% from 3.62%, while shorts in JB Hi-Fi rose for the week to 21.56% from 19.4% previously.

On the other side of the ledger shorts in Seek ((SEK)) fell to 4.51% from 5.69% in the week from February 28, this change coming post an interim profit result that was slightly better than most in the market had expected.

Shorts have also declined in both Treasury Wine Estates ((TWE)) and OneSteel ((OST)) by a little more than one percentage point for the week, to less than 2.4% for the former and to just over 3.2% for the latter.

With respect to monthly increases for the period from February 6, Iluka ((ILU)) was among the more significant as shorts rose from less than 3.6% to more than 6.1%, while shorts in Bradken ((BKN)) also increased to a more significant 3.09% from 1.21% previously.

The former may reflect the risk of weaker zircon prices if the Chinese property market falls, while for the latter the market may still be adjusting to a slightly weaker than expected interim result.

Bank of Queensland ((BOQ)) experienced one of the more significant declines in short positions for the month from February 6, falling to 3.33% from 5.36%, this despite brokers continuing to trim earnings estimates to reflect the expectation of further increases in bad debt charges.

 

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 21293893 98850643 21.56
2 FXJ 276796151 2351955725 11.79
3 BBG 29367544 255102103 11.47
4 MYR 66772210 583384551 11.42
5 DJS 58619085 524940325 11.14
6 ISO 602790 5703165 10.57
7 FLT 9710768 100017679 9.68
8 COH 5364695 56929432 9.41
9 LYC 154027177 1714396913 8.99
10 BPT 80158446 1113497051 7.21
11 EGP 48132371 688019737 7.00
12 GNS 59345650 848401559 6.98
13 HVN 73307885 1062316784 6.88
14 WTF 14261629 211736244 6.73
15 CRZ 14511701 233674223 6.19
16 TRS 1616407 26071170 6.19
17 ILU 25664725 418700517 6.13
18 TEN 61383524 1045236720 5.89
19 WSA 10332252 179735899 5.76
20 PPT 2357879 41980678 5.61

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: More Model Portfolios Adjustments

By Chris Shaw

With Australia's interim reporting season out of the way investment banks and equity brokers continue making adjustments to their recommended exposures and model portfolios. The week past saw Macquarie, Goldman Sachs, Citi and Credit Suisse update their views and macro-recommendations (top down), while JP Morgan and Deutsche Bank undertook in-depth reviews of companies in the building materials sector.

The general outlook in Macquarie's view is global economic growth won't be fast and will continue to be impacted by concerns such as Europe and Iran, but growth will continue on an upward trajectory. This suggests 1H12 will be broadly constructive for global equities, with the US market likely to lead the way.

Domestically, Macquarie suggests headwinds for the Australian market are greater than for most given the combination of a strong dollar, relatively high interest rates, negative productivity growth and an inflexible industrial relations framework.

This has left Australia uncompetitive across a wide range of industries and is likely to see corporate management teams look to cut costs in an attempt to restore cash flows. This leads Macquarie to suggest FY12 earnings per share (EPS) growth will be negative by around 5.0% (current consensus expectations are sitting around +4%).

Sectors where above average growth is expected are Energy and Mining Services, Macquarie's recommended portfolio being already overweight both. This position is being extended via the addition of Santos ((STO)), with this position being funded by a move to Underweight on BHP Billiton ((BHP)) given an expectation of negative earnings growth this year.

This means Macquarie's overall resource allocation is unchanged. Other resource and energy stocks in Macquarie's recommended portfolio include Rio Tinto ((RIO)), Atlas Iron ((AGO)), PanAust ((PNA)), Oz Minerals ((OZL)), Woodside ((WPL)), WorleyParsons ((WOR)) and Origin Energy ((ORG)).

Outside of the resource sector Macquarie continues to favour a defensive portfolio, with a concentration on a small number of stocks expected to deliver strong top line growth and companies expected to deliver stable and sustainably high dividend yields.

Among the industrial plays in the first category Macquarie's portfolio includes Campbell Brothers ((CPB)), Mineral Resources ((MIN)), WorleyParsons, Ansell ((ANN)) and Ramsay Health Care ((RHC)), while the second category includes of Telstra ((TLS)), Transurban ((TCL)), Wesfarmers ((WES)), Coca-Cola Amatil ((CCL)), CFX Retail Property ((CFX)) and GPT ((GPT)). 

Commonwealth Bank ((CBA)) and Amcor ((AMC)) are also overweight holdings in Macquarie's recommended portfolio.

Goldman Sachs has made a similar review of its model portfolio and concluded now is an appropriate time to turn more cautious on resources, this given a tougher environment to outperform given volume growth rather than higher commodity prices is currently driving earnings.

Key investment themes for Goldman Sachs are a solid earnings profile, especially when combined with an attractive dividend yield, mining investment, energy and deep value plays where re-ratings are possible as market sentiment improves.

This has brought about some model portfolio changes, with Goldman Sachs reducing its exposure to BHP while exiting positions in Rio Tinto, Iluka ((ILU)) and Origin Energy. This created the issue of where to invest the funds being freed up, with major beneficiaries being Telstra and CSL ((CSL)) for the solid earnings theme and WorleyParsons for exposure to energy and the mining investment theme. Woodside and Oil Search ((OSH)) remain the preferred energy stocks.

Among the deep cyclical exposures, Goldman Sachs has switched out of Myer ((MYR)) and into Super Retail ((SUL)), this reflecting the latter's more attractive growth profile and lower execution risk in relation to growth strategies.

The MSCI AC World Index delivered a gain of 5.1% in February, which followed a return of 5.9% in January. But as Citi points out via its model portfolio, investing in the right market at the right time can deliver even better returns. 

Citi's stock market country selection model, which is based on 22 global markets for which ETFs are available, outperformed the benchmark by 0.6% in February, mainly due to relative outperformance from the Austrian and South African markets during the month. 

Austria retains its place at the top of Citi's rankings for the second month in a row, while Germany has moved up to number two position. Brazil has fallen out of that spot to position seven in Citi's rankings. Completing the top five are Korea at number three, Australia at number four and South Africa at number five spot.

At the bottom of the rankings Citi has replaced Hong Kong and Switzerland with Spain and the US, while Italy, Belgium and Mexico continue to hold their places in the bottom five rankings. The shift into this bottom five for the US reflects unfavourable valuation, while Citi points out Spain's inclusion is a reflection of poor short-term momentum and negative earnings revisions.

Market strategists at Credit Suisse used their final wrap of the February reporting season to warn investors not to get too excited about the short term prospects for Australian equities. The share market is merely "fair value", argue Atul Lele and his team, and there remain plenty of headwinds, the lack of any noteworthy growth in profits is only one of them.

Credit Suisse has decided to remain overweight defensives and USD exposures, neutral banks, slightly underweight domestic cyclicals and underweight resources.

JP Morgan has reviewed the outlook for the Building Materials sector, suggesting conditions remain tough given the Australian environment remains weak and the pace of recovery in the US is still slow. At least there are some pricing tailwinds in Australia, which compares to an expectation of further headwinds for prices in the US market.

In individual stock terms, JP Morgan sees some room for optimism with respect to prices for Boral ((BLD)), which would be a positive given the group's leverage to concrete and aggregate prices. This is enough for an Overweight rating to be maintained, a rating also extended to CSR ((CSR)).

For Adelaide Brighton ((ABC)) FY12 will be the key in JP Morgan's view, as a return to growth is needed after FY11 was the first year of no growth in net profit after tax for six years. Adelaide Brighton is currently rated as Neutral, as is Fletcher Building ((FBU)). This reflects a recent cut to full year earnings guidance and the lack of a significant enough lift in NZ data to drive any change to the broker's view.

James Hardie remains the only Underweight rating in the building materials sector for JP Morgan, this due to pricing headwinds that are offsetting any benefits from volume improvements that are starting to emerge. Prices are expected to remain under pressure in coming months while management attempts to retain or grow category share.

Deutsche Bank has conducted a similar review of the building materials sector, agreeing with the assessment of JP Morgan the current demand environment remains under pressure. Where Deutsche's view differs is it sees some upside potential for companies exposed to the US housing market, though any recovery is likely to be a cautious one given a still somewhat fragile economic recovery.

In terms of the outlook across the sector, Deutsche remains of the view market forecasts for Boral and Fletcher Building remain too high, while there is still some balance sheet risk for both companies at present.

A favourable exposure to mining and engineering projects sees Deutsche retain Adelaide Brighton as its top pick in the sector. The fact the company is significantly overweight Western and South Australia should see better than average demand growth relative to other states, which supports Deutsche's Buy rating. A further positive is Adelaide Brighton appears inexpensive relative to peers. In contrast, Deutsche rates Boral, Fletcher Building and James Hardie as Hold.


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article 3 months old

Icarus Signal New Entries For Today: Cochlear

Daily update on share prices and consensus price targets.

By Rudi Filapek-Vandyck

Cochlear ((COH)) has remained on many an investors' radar since the company had to announce a recall of its top product, with the main question being asked whether the subsequent drop in share price has created a buying opportunity, or not?

The jury's still out on that one and it probably very much depends on what price level we're adding to the question. Since peaking above $80 (before recall announcement) Cochlear shares have traded close to $45 and as high as $64. In recent sessions weakness has started to kick in which, in Icarus terms, has pushed the share price back under the consensus price target, currently at $59.81.

It looks like the shares are finding it increasingly difficult to withstand gravity when trading above the target, even when that target is merely the result of very polarised market views on the outlook for Australia's pride in international healthcare.

Over at RBS Morgans, technical chartists have come to a different view. They believe that Cochlear shares have been merely setting themselves up for another rally towards the $64 price mark. RBS Morgans believes buying support is located around $57 and today's mild rise in the share price seems to vindicate this view. In addition, momentum indicators are approaching oversold territory, and the chartists believe this points to a likely bounce in the short-term.

The chartists believe Cochlear shares are aiming for $63 in the weeks ahead. They do advise traders willing to play the opportunity should set a strict stop loss just below $57.23.

Cochlear has joined the likes of Tox Free Solutions ((TOX)), Mastermyne ((MYE)), Super Retail Group ((SUL)) and Cabcharge ((CAB)) in a group of 28 stocks which are trading within 3% of their consensus price target. Another 47 stocks are trading above target, including Maverick Drilling and Exploration ((MAD)), Matrix Composites and Engineering ((MCE)), Talent 2 ((TWO)) and Tishman Speyer Office Fund ((TSO)).

Investors should note Cochlear has a long tradition of trading above target for extended periods of time and there's no indication as such this is going to change anytime soon.

Investors should consider the information and data are provided for research purposes only.

Stocks <3% Below Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 ANN $ 14.86 $ 15.25 2.65%
2 CAB $ 5.73 $ 5.90 2.97%
3 CIF $ 1.14 $ 1.15 1.32%
4 HDF $ 2.18 $ 2.24 2.75%
5 IRE $ 7.18 $ 7.39 2.88%
6 JHX $ 7.30 $ 7.41 1.49%
7 MIN $ 13.10 $ 13.47 2.79%
8 MYE $ 2.52 $ 2.54 0.79%
9 SUL $ 7.18 $ 7.34 2.27%
10 TOX $ 2.68 $ 2.68 0.11%
11 WOR $ 28.68 $ 29.00 1.11%
12 WTF $ 4.46 $ 4.52 1.43%

Stocks Above Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 APA $ 4.94 $ 4.85 - 1.82%
2 MAD $ 0.80 $ 0.76 - 4.40%
3 MCE $ 3.37 $ 3.33 - 1.19%
4 TSO $ 0.91 $ 0.91 - 0.55%
5 TWO $ 0.51 $ 0.48 - 4.95%

Top 50 Stocks Furthest from Consensus

Order Symbol Current Price($) Consensus Target($) Difference(%)
1 HZN $ 0.31 $ 0.47 54.10%
2 KGL $ 1.44 $ 2.34 62.50%
3 LNC $ 1.37 $ 2.05 49.64%
4 SFW $ 0.32 $ 0.47 49.21%
5 WTP $ 1.05 $ 1.63 55.24%

To see the full Icarus Signal, please go to this link

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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

The final week of reporting season for Australian equities has again seen downgrades from brokers in the FNArena database outweigh upgrades, this time by a score of 35 to 17. The ratings changes have brought total Buy ratings to 51.45%, down from 52.15% last week.

Among the companies to receive more than one upgrade were James Hardie ((JHX)) and QBE Insurance ((QBE)). Upgrades for the former came from UBS and Credit Suisse, both moving to Neutral recommendations from Sell previously.

The changes followed a 3Q result that gave some cause for optimism the worst may be behind the company, particularly with the prospect of additional capital management initiatives going forward. At the same time Macquarie downgraded to a Neutral recommendation from Outperform on valuation grounds.

More positive were the upgrades for QBE as Citi, BA-Merrill Lynch, JP Morgan and UBS all moved to Buy ratings from Neutral previously. The changes reflect a combination of factors, including value in the stock at current levels, better understanding of the company's margin outlook post its recent result and a more positive stance on general insurance stocks in general.

Among the other upgrades where brokers moved to Buy views were Aston Resources ((AZT)), Macquarie seeing some upside from the proposal for 10% of the group's stake in the Maules Creek project to be sold.

Deutsche Bank upgraded CSL ((CSL)) to a Buy from Neutral given its view the company should continue to enjoy margin expansion in coming years, while Citi has turned more positive on Insurance Australia Group ((IAG)) also in part due to an improved margin outlook.

Jetset Travelworld ((JET)) offers potential for a re-rating over the next 12 months according to Deutsche and this was enough to prompt an upgrade to Buy, while RBS Australia made the same change with Prime Television ((PRT)) given a somewhat more positive outlook and the potential for some corporate activity involving the company.

For Deutsche the potential for grade and production expansion is enough to justify upgrading to a Buy on Regis Resources ((RRL)), though at the same time UBS has downgraded to a Neutral rating on the stock on valuation grounds.

ResMed ((RMD)) offers scope for an increased buyback boosting earnings per share, which sees Credit Suisse lift its valuation and move to a Buy rating. It was a similar story for Seven Group ((SVW)), as BA-ML no longer sees working capital as an issue and expects valuation support from the group's media assets.

Warrnambool Cheese and Butter ((WCB)) was upgraded to a Buy by RBS following a stronger than expected profit result that implies good value at current levels, while JP Morgan upgraded Westpac ((WBC)) on relative valuation grounds following what appears to be excessive underperformance relative to ANZ Bank ((ANZ)). The broker downgraded ANZ to a Sell at the same time.

On the downgrades side, those receiving multiple cuts to ratings were Aristocrat Leisure ((ALL)), Australian Worldwide Exploration ((AWE)), Harvey Norman ((HVN)) and Newcrest Mining ((NCM)).

For Aristocrat, the downgrades were a factor of valuation after recent share price gains, as full year earnings were generally better than expected and prompted increases to earnings estimates and price targets.

UBS and Deutsche both moved to Neutral ratings on AWE from previous Buy ratings, again valuation calls following recent share price gains. Harvey Norman continues to deal with poor retail conditions and brokers now see additional pressure on franchise margins, which was enough for Macquarie and BA-ML to downgrade to Sell ratings from Hold previously. 

Newcrest also has some issues as Lihir is again proving a problematic asset, enough that full year production expectations have been revised lower. The changes saw JP Morgan and UBS downgrade to Neutral views as shorter-term outperformance now appears less likely.

The other most significant downgrade this week came courtesy of Macquarie, the broker moving to a Sell on Air New Zealand ((AIZ)) from a Buy previously. The change in view reflects still tough operating conditions given a combination of weaker long haul demand and increases to operating costs.

In terms of changes to price targets, the largest increases were in Seven Group, Aristocrat and Ausdrill ((ASL)), the latter on the back of a better than expected interim result. Price target cuts were most significant for Jetset, as brokers adjusted for lower than expected interim earnings.

 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 ABACUS PROPERTY GROUP Sell Neutral JP Morgan
2 ASTON RESOURCES LIMITED Neutral Buy Macquarie
3 CSL LIMITED Neutral Buy Deutsche Bank
4 INSURANCE AUSTRALIA GROUP LIMITED Neutral Buy Citi
5 JAMES HARDIE INDUSTRIES N.V. Sell Neutral UBS
6 JAMES HARDIE INDUSTRIES N.V. Sell Neutral Credit Suisse
7 JETSET TRAVELWORLD LIMITED Neutral Buy Deutsche Bank
8 PRIME TELEVISION LIMITED Neutral Buy RBS Australia
9 QBE INSURANCE GROUP LIMITED Neutral Buy Citi
10 QBE INSURANCE GROUP LIMITED Neutral Buy BA-Merrill Lynch
11 QBE INSURANCE GROUP LIMITED Neutral Buy JP Morgan
12 QBE INSURANCE GROUP LIMITED Neutral Buy UBS
13 REGIS RESOURCES LIMITED Neutral Buy Deutsche Bank
14 RESMED INC Neutral Buy Credit Suisse
15 SEVEN GROUP HOLDINGS LIMITED Neutral Buy BA-Merrill Lynch
16 WARRNAMBOOL CHEESE AND BUTTER FACTORY COMPANY HOLDING LTD Neutral Buy RBS Australia
17 WESTPAC BANKING CORPORATION Neutral Buy JP Morgan
Downgrade
18 AIR NEW ZEALAND LIMITED Buy Sell Macquarie
19 ARISTOCRAT LEISURE LIMITED Neutral Sell Macquarie
20 ARISTOCRAT LEISURE LIMITED Buy Buy Citi
21 ARISTOCRAT LEISURE LIMITED Neutral Sell Deutsche Bank
22 ASG GROUP LIMITED Buy Neutral UBS
23 AUSDRILL LIMITED Buy Neutral BA-Merrill Lynch
24 AUSTAL LIMITED Buy Neutral Macquarie
25 AUSTRALIA & NEW ZEALAND BANKING GROUP Neutral Sell JP Morgan
26 AUSTRALIAN WORLDWIDE EXPLORATION LIMITED Buy Neutral UBS
27 AUSTRALIAN WORLDWIDE EXPLORATION LIMITED Buy Neutral Deutsche Bank
28 BEACH PETROLEUM LIMITED Buy Neutral Macquarie
29 BRAVURA SOLUTIONS LIMITED Buy Neutral JP Morgan
30 CLARIUS GROUP LIMITED Buy Neutral JP Morgan
31 CROWN LIMITED Buy Neutral RBS Australia
32 ECHO ENTERTAINMENT GROUP LIMITED Buy Neutral Citi
33 GLOUCESTER COAL LTD Buy Neutral RBS Australia
34 GRANGE RESOURCES LIMITED Buy Neutral RBS Australia
35 HARVEY NORMAN HOLDINGS LIMITED Neutral Sell Macquarie
36 HARVEY NORMAN HOLDINGS LIMITED Neutral Sell BA-Merrill Lynch
37 HENDERSON GROUP PLC. Buy Neutral Citi
38 HUTCHISON TELECOMMUNICATIONS (AUST) LIMITED Buy Neutral RBS Australia
39 JAMES HARDIE INDUSTRIES N.V. Buy Neutral Macquarie
40 LINDSAY AUSTRALIA LIMITED Buy Neutral RBS Australia
41 MACQUARIE ATLAS ROADS GROUP Buy Neutral Macquarie
42 NATIONAL AUSTRALIA BANK LIMITED Buy Neutral UBS
43 NEW HOPE CORPORATION LIMITED Buy Neutral RBS Australia
44 NEWCREST MINING LIMITED Buy Neutral JP Morgan
45 NEWCREST MINING LIMITED Buy Neutral UBS
46 PREMIER INVESTMENTS LIMITED Neutral Sell Credit Suisse
47 REGIONAL EXPRESS HOLDINGS LIMITED Buy Neutral RBS Australia
48 REGIS RESOURCES LIMITED Buy Neutral UBS
49 RETAIL FOOD GROUP LIMITED Buy Neutral JP Morgan
50 TAP OIL LIMITED Buy Neutral Credit Suisse
51 TELECOM CORPORATION OF NEW ZEALAND LIMITED Buy Neutral Deutsche Bank
52 THORN GROUP LIMITED Buy Buy RBS Australia
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 QBE 13.0% 63.0% 50.0% 8
2 SYD - 25.0% 17.0% 42.0% 6
3 SVW 50.0% 75.0% 25.0% 4
4 JET 50.0% 75.0% 25.0% 4
5 AZT 80.0% 100.0% 20.0% 5
6 PRT 33.0% 50.0% 17.0% 6
7 SUL 57.0% 71.0% 14.0% 7
8 RMD 50.0% 63.0% 13.0% 8
9 WBC 38.0% 50.0% 12.0% 8
10 CSL 63.0% 75.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 AIZ 100.0% 50.0% - 50.0% 4
2 RHC 25.0% - 13.0% - 38.0% 8
3 TTS 13.0% - 25.0% - 38.0% 8
4 NHC 67.0% 33.0% - 34.0% 3
5 ENV 17.0% - 17.0% - 34.0% 6
6 RFG 67.0% 33.0% - 34.0% 3
7 AWE 71.0% 43.0% - 28.0% 7
8 TAP 75.0% 50.0% - 25.0% 4
9 ALL 38.0% 13.0% - 25.0% 8
10 NCM 100.0% 75.0% - 25.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 SVW 9.423 10.925 15.94% 4
2 ALL 2.656 2.989 12.54% 8
3 ASL 4.018 4.456 10.90% 5
4 TOL 5.436 5.783 6.38% 8
5 PRT 0.760 0.807 6.18% 6
6 TPI 0.878 0.923 5.13% 6
7 RSG 1.750 1.833 4.74% 3
8 AWE 1.961 2.050 4.54% 7
9 IAG 3.368 3.499 3.89% 8
10 ENV 0.763 0.792 3.80% 6

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 JET 0.988 0.890 - 9.92% 4
2 FKP 0.798 0.760 - 4.76% 6
3 GCL 9.618 9.225 - 4.09% 5
4 RFG 3.017 2.917 - 3.31% 3
5 ILU 21.074 20.569 - 2.40% 8
6 NCM 42.969 41.965 - 2.34% 8
7 CWN 10.150 9.944 - 2.03% 8
8 DJS 2.656 2.605 - 1.92% 8
9 NHC 6.073 6.017 - 0.92% 3
10 TAP 1.085 1.075 - 0.92% 4
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 CHC 17.800 22.417 25.94% 6
2 NWH 30.300 33.600 10.89% 4
3 SKI 12.600 13.938 10.62% 8
4 ASL 33.440 36.880 10.29% 5
5 PAN 4.700 5.050 7.45% 4
6 TAP 3.075 3.300 7.32% 4
7 ENV 4.083 4.367 6.96% 6
8 SVW 82.180 87.780 6.81% 4
9 IAG 22.013 23.450 6.53% 8
10 VBA 2.914 3.086 5.90% 7

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 GCL 5.480 - 22.520 - 510.95% 5
2 AGO 20.726 7.300 - 64.78% 8
3 AIZ 6.579 3.245 - 50.68% 4
4 QUB 14.075 7.600 - 46.00% 4
5 IGO 6.020 4.080 - 32.23% 5
6 ROC 6.532 4.716 - 27.80% 5
7 FKP 10.450 8.483 - 18.82% 6
8 HZN 1.365 1.148 - 15.90% 4
9 ILU 290.388 248.038 - 14.58% 8
10 FXJ 10.600 9.163 - 13.56% 8
 

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article 3 months old

The Short Report

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By Chris Shaw

The week from February 14 was relatively quiet in terms of significant changes in short positions, only 10 stocks experiencing changes in total short positions of more than one percentage point.

Among the increases the largest was in Wesfarmers ((WESN)), where total positions increased from 0.04% to 2.44%. At the same time shorts in the ordinary shares of Wesfarmers also rose to 3.39% from 2.86% previously, this following an interim earnings result that missed on a few key metrics (margins for Coles included).

Shorts continued to rise in Cochlear, hitting 9.59% for the week from February 14 compared to 8.4% the week before, again post what was a solid interim for some in the market but a less positive result in the view of others including UBS given a decline in unit sales.

Little covered Alliance Aviation ((AQZ)) and Tangiers Petroleum ((TPT)) both saw shorts jump from a negligible levels of less than 0.25% the previous week to more than 1.0% respectively, while Paladin ((PDN)) and Iluka ((ILU)) also saw modest increases in total short positions.

In terms of declining short positions, Linc Energy ((LNC)) saw shorts fall from a somewhat significant 5.75% the week before to 2.94% for the week from February 14, while Shorts in Southern Cross Media ((SXL)) declined from 2.3% to 0.44% after the company announced a share buyback with its interim result.

Shorts in Hastings Diversified ((HDF)) fell to 0.41% from 1.88% the previous week as the market adjusts to a proposed acquisition of the company by APA Group ((APA)). The next largest decline in shorts was in Energy World Corporation ((EWC)), where positions in the junior fell to 1.33% from 2.68% the week before.

With respect to monthly changes, the major increases were experienced by Rialto Energy ((RIA)) and Singapore Telecom ((SGT)), increases of more than 5.0 and 3.0 percentage points in each case pushing total shorts to 5.23% and 4.88% respectively.

The major decline over the month from January 20 has been in the iShares Small Ords derivative ((ISO)), where total shorts have fallen to 10.58% from 17.24% previously. From a stock perspective, the major decline was in Bank of Queensland ((BOQ)), shorts falling to 3.28% from just over 5.0% previously.

The changes in positions have not impacted significantly on the top 20 short positions, which continue to be dominated by consumer discretionary stocks. Among the top 20 continue to be JB Hi-Fi ((JBH)), Myer ((MYR)), David Jones ((DJS)), Billabong ((BBG)), Flight Centre ((FLT)), Harvey Norman ((HVN)), The Reject Shop ((TRS)) and Wotif.com ((WTF)).

Among these companies the pick of the interim results appeared to come from Wotif.com, where headline results were a little better than had been expected. While this was due in part to one-off cost cutting, the result was enough to prompt a solid rally in the share price that may have reflected some covering of short positions.

Top 20 Largest Short Positions

Rank Symbol Short Position Total Product %Short
1 JBH 21449536 98840643 21.70
2 MYR 70933745 583384551 12.12
3 FXJ 282570650 2351955725 12.04
4 DJS 58355903 524940325 11.09
5 BBG 28028623 255102103 10.96
6 ISO 571468 5403165 10.58
7 COH 5450536 56902933 9.59
8 FLT 9517934 100009946 9.49
9 LYC 156953209 1714396913 9.15
10 HVN 74774546 1062316784 7.05
11 SEK 23486633 337101307 6.94
12 WTF 14407551 211736244 6.82
13 TRS 1714382 26071170 6.55
14 GNS 53124711 848401559 6.25
15 VLC 10000 160001 6.25
16 OST 80037613 1342393583 5.96
17 CRZ 13890041 233264223 5.94
18 PPT 2284897 41980678 5.43
19 TEN 55392137 1045236720 5.31
20 RIA 22560161 431256264 5.23

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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article 3 months old

Top Ten Weekly Recommendation, Target Price, Earnings Forecast Changes

By Chris Shaw

With earnings season almost complete it has been a busy week for changes to broker ratings, the FNArena database showing a total of 19 upgrades and 51 downgrades to recommendations by the eight brokers covered. Total Buy ratings now stand at 52.15%, well down from 53.86% last week.

Among the upgrades were four companies where ratings were lifted by more than one broker – these were Bendigo and Adelaide Bank ((BEN)), CSL ((CSL)), David Jones ((DJS)) and Toll Holdings ((TOL)).

For Bendigo Bank, both RBS Australia and BA Merrill Lynch upgraded to Hold recommendations from Sell previously, the former as the recent profit result showed some signs of stabilisation and the latter on valuation grounds post recent share price weakness. Across the market price targets and earnings estimates for the bank were adjusted.

In contrast to a less bad result from Bendigo Bank, CSL delivered strong earnings thanks to albumin and specialty products performing well. Brokers lifted earnings estimates and price targets on the back of the result and both Macquarie and BA-ML now see enough value to upgrade to Buy ratings from Neutral previously.

For David Jones ((DLS)) it was the turn of both UBS and RBS Australia to upgrade to Neutral ratings from Sell previously, this to reflect both better value on the back of recent share price weakness and the company having better positioned itself for stronger FY13 results by clearing excess inventory.

Toll Holdings ((TOL)) has also improved its position and with potential for new contracts and some scope for positive earnings surprise relative to low expectations, both Macquarie and Deutsche Bank have upgrade to Buy ratings. This was partially offset by Credit Suisse downgrading to Neutral from Outperform on valuation grounds.

Among the other upgrades, a strong result from Ausenco ((AAX)) prompted UBS to reverse a recent downgrade and move to Buy from Sell, almost doubling its price target for the stock in the process. A similarly solid Coca-Cola Amatil ((CCL)) result, particularly given tough markets and a dispute with a key customer (Woolworths), was enough for Credit Suisse to upgrade to a Neutral view.

Emerging value following recent underperformance was enough for Citi to upgrade Oil Search ((OSH)) to Buy from Neutral, while around the market earnings estimates and price targets for the stock were largely increased following a better than expected profit result.

Super Retail Group ((SUL)) delivered one of the standout results in the consumer discretionary sector and this was enough for BA-ML to upgrade to a Buy rating, while again estimates and price targets across the market were lifted post the result. 

On the downgrade side those companies copping a cut in rating from more than one broker were Charter Hall Office ((CQO)), Envestra ((ENV)), Fleetwood ((FWD)), iiNet ((IIN)), Industrea ((IDL)), Kingsgate Consolidated ((KCN)), Ramsay Health ((RHC)), Tatts Group ((TTS)), Woodside ((WPL)) and Wotif.com ((WTF)).

Valuation was behind the downgrades to both Charter Hall Office and Envestra, with both Credit Suisse and Citi seeing limited share price upside from current levels for the former even allowing for current corporate interest and RBS and Macquarie taking similar views with respect to the latter.

While Fleetwood's result was broadly as expected, the solid earnings outlook is now priced in according to RBS, a view shared by both UBS and Credit Suisse. For iiNet increasing competitive pressures means the result was a little on the disappointing side for both RBS and Credit Suisse, while both also see less relative value in the stock at current levels than was the case a few months ago.

A poor profit result from Industrea meant earnings estimate across the market have been cut significantly, which leaves the outlook for little earnings growth this unattractive when compared to peers. The earnings miss has also raised the question of management credibility in the view of BA-ML.

Kingsgate Consolidated's earnings were broadly in line with expectations but the company surprised by announcing a capital raising that prompted cuts to estimates and targets. As well, Kingsgate faces a challenging year from an operational perspective in the view of both Citi and BA-ML. 

Uncertainty with respect to the outcome of proposed changes to private health insurance pose enough risks for Ramsay Health that both Macquarie and Deutsche Bank downgraded to a Neutral rating, this despite a result broadly in line with expectations. Valuation was behind the downgrade of Credit Suisse.

Limited upside potential, especially given some recent share price strength, saw both Macquarie and Citi downgrade to Sell ratings on Tatts, while less value following recent gains was enough for Citi and Credit Suisse to downgrade Woodside to Neutral from Outperform in both cases. A similar story is behind downgrades by Macquarie and BA-ML on Wotif.com, as tough market conditions suggest limited upside from current share p[rice levels.

In terms of changes to price targets, the largest increase was seen in Ausenco, as along with the near doubling in target from UBS, the likes of RBS, Macquarie and Deutsche also lifted their targets significantly. 

Aside from the capital raising induced changes to targets for Kingsgate, the most significant cut in target was experienced by Alumina Ltd ((AWC)), both RBS Australia and JP Morgan cutting their targets on revisions to earnings and related commodity price estimates. 

Total Recommendations
 Recommendation Changes

 

Broker Recommendation Breakup

 

Broker Rating

Order Company Old Rating New Rating Broker
Upgrade
1 AUSENCO LTD Sell Buy UBS
2 BENDIGO AND ADELAIDE BANK LIMITED Sell Neutral RBS Australia
3 BENDIGO AND ADELAIDE BANK LIMITED Neutral Neutral BA-Merrill Lynch
4 BILLABONG INTERNATIONAL LIMITED Sell Neutral Deutsche Bank
5 CFS RETAIL PROPERTY TRUST Neutral Buy UBS
6 COCA-COLA AMATIL LIMITED Sell Neutral Credit Suisse
7 COMMONWEALTH PROPERTY OFFICE FUND Sell Neutral Credit Suisse
8 CSL LIMITED Neutral Buy Macquarie
9 CSL LIMITED Neutral Buy BA-Merrill Lynch
10 DAVID JONES LIMITED Neutral Neutral RBS Australia
11 DAVID JONES LIMITED Sell Neutral UBS
12 MACQUARIE ATLAS ROADS GROUP Neutral Buy Deutsche Bank
13 MIRVAC GROUP Neutral Buy Credit Suisse
14 OIL SEARCH LIMITED Neutral Buy Citi
15 PERPETUAL LIMITED Sell Neutral UBS
16 SONIC HEALTHCARE LIMITED Neutral Buy Credit Suisse
17 SUPER RETAIL GROUP LIMITED Neutral Buy BA-Merrill Lynch
18 TOLL HOLDINGS LIMITED Neutral Buy Macquarie
19 TOLL HOLDINGS LIMITED Neutral Buy Deutsche Bank
Downgrade
20 AMCOR LIMITED Buy Neutral BA-Merrill Lynch
21 AMP LIMITED Buy Neutral Citi
22 BILLABONG INTERNATIONAL LIMITED Buy Sell Credit Suisse
23 CHALLENGER FINANCIAL SERVICES GROUP Buy Neutral Citi
24 CHARTER HALL OFFICE REIT Neutral Sell Credit Suisse
25 CHARTER HALL RETAIL REIT Neutral Neutral UBS
26 COMMONWEALTH PROPERTY OFFICE FUND Buy Neutral UBS
27 DISCOVERY METALS LIMITED Neutral Neutral Citi
28 DIVERSIFIED UTILITY AND ENERGY TRUSTS Buy Neutral UBS
29 DOWNER EDI LIMITED Neutral Sell Credit Suisse
30 ENVESTRA LIMITED Buy Neutral RBS Australia
31 ENVESTRA LIMITED Buy Neutral Macquarie
32 FKP PROPERTY GROUP Neutral Sell Citi
33 FLEETWOOD CORPORATION LIMITED Buy Neutral RBS Australia
34 FLEETWOOD CORPORATION LIMITED Buy Neutral UBS
35 FLEETWOOD CORPORATION LIMITED Neutral Sell Credit Suisse
36 FLETCHER BUILDING LIMITED Buy Neutral JP Morgan
37 FLIGHT CENTRE LIMITED Buy Neutral UBS
38 GR ENGINEERING SERVICES LIMITED Buy Neutral Macquarie
39 IINET LIMITED Buy Neutral RBS Australia
40 IINET LIMITED Neutral Sell Credit Suisse
41 ILUKA RESOURCES LIMITED Buy Neutral UBS
42 INDUSTREA LIMITED Buy Sell BA-Merrill Lynch
43 INDUSTREA LIMITED Buy Neutral UBS
44 KINGSGATE CONSOLIDATED LIMITED Buy Neutral RBS Australia
45 KINGSGATE CONSOLIDATED LIMITED Neutral Sell Citi
46 KINGSGATE CONSOLIDATED LIMITED Neutral Sell BA-Merrill Lynch
47 MACQUARIE ATLAS ROADS GROUP Buy Neutral JP Morgan
48 MORTGAGE CHOICE LIMITED Sell Sell UBS
49 PERSEUS MINING LIMITED Buy Neutral Credit Suisse
50 RAMSAY HEALTH CARE LIMITED Buy Neutral Macquarie
51 RAMSAY HEALTH CARE LIMITED Buy Neutral Credit Suisse
52 RAMSAY HEALTH CARE LIMITED Buy Neutral Deutsche Bank
53 REA GROUP LIMITED Buy Neutral Deutsche Bank
54 SEEK LIMITED Buy Neutral Macquarie
55 ST BARBARA LIMITED Neutral Sell Citi
56 TATTS GROUP LIMITED Neutral Sell Macquarie
57 TATTS GROUP LIMITED Neutral Sell Citi
58 TATTS GROUP LIMITED Buy Neutral UBS
59 TATTS GROUP LIMITED Neutral Sell Credit Suisse
60 TEN NETWORK HOLDINGS LIMITED Buy Neutral JP Morgan
61 TOLL HOLDINGS LIMITED Buy Neutral Credit Suisse
62 TOX FREE SOLUTIONS LIMITED Buy Neutral RBS Australia
63 Transpacific Industries Group Ltd Buy Neutral RBS Australia
64 TREASURY WINE ESTATES LIMITED Neutral Sell Macquarie
65 UNITED GROUP LIMITED Buy Neutral Macquarie
66 WOODSIDE PETROLEUM LIMITED Buy Neutral Citi
67 WOODSIDE PETROLEUM LIMITED Buy Neutral Credit Suisse
68 WOOLWORTHS LIMITED Neutral Sell Credit Suisse
69 WOTIF.COM HOLDINGS LIMITED Buy Neutral Macquarie
70 WOTIF.COM HOLDINGS LIMITED Neutral Sell BA-Merrill Lynch
 

Recommendation

Positive Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 AAX 25.0% 100.0% 75.0% 4
2 SYD - 25.0% 17.0% 42.0% 6
3 MGR 43.0% 71.0% 28.0% 7
4 CSL 38.0% 63.0% 25.0% 8
5 GNC 50.0% 67.0% 17.0% 6
6 OST 57.0% 71.0% 14.0% 7
7 CFX 57.0% 71.0% 14.0% 7
8 SHL 75.0% 88.0% 13.0% 8
9 OSH 75.0% 88.0% 13.0% 8
10 GMG 63.0% 75.0% 12.0% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Rating New Rating Change Recs
1 KCN 60.0% - 20.0% - 80.0% 5
2 TTS 38.0% - 13.0% - 51.0% 8
3 IIN 80.0% 40.0% - 40.0% 5
4 ENV 17.0% - 17.0% - 34.0% 6
5 TOX 67.0% 33.0% - 34.0% 3
6 AMP 88.0% 63.0% - 25.0% 8
7 WES 38.0% 13.0% - 25.0% 8
8 WPL 38.0% 13.0% - 25.0% 8
9 AMC 75.0% 50.0% - 25.0% 8
10 ILU 88.0% 63.0% - 25.0% 8
 

Target Price

Positive Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 AAX 3.110 4.485 44.21% 4
2 REA 13.243 13.963 5.44% 7
3 EHL 1.218 1.283 5.34% 6
4 DOW 4.146 4.367 5.33% 7
5 FLT 23.448 24.660 5.17% 8
6 IIN 3.232 3.380 4.58% 5
7 TPI 0.877 0.915 4.33% 6
8 OST 1.203 1.253 4.16% 7
9 TOX 2.583 2.683 3.87% 3
10 CSL 34.293 35.516 3.57% 8

Negative Change Covered by > 2 Brokers

Order Symbol Previous Target New Target Change Recs
1 KCN 8.966 7.435 - 17.08% 5
2 AWC 1.784 1.589 - 10.93% 8
3 PBG 0.737 0.672 - 8.82% 7
4 CGF 5.474 5.039 - 7.95% 7
5 BEN 8.986 8.513 - 5.26% 8
6 WES 31.961 30.335 - 5.09% 8
7 AMP 5.054 4.834 - 4.35% 8
8 SFR 8.800 8.440 - 4.09% 5
9 GFF 0.593 0.569 - 4.05% 8
10 PRU 3.853 3.712 - 3.66% 6
 

Earning Forecast

Positive Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 GBG 0.057 1.343 2256.14% 6
2 AIO 18.625 26.325 41.34% 8
3 AAX 27.380 33.960 24.03% 4
4 SKE 18.767 21.233 13.14% 3
5 BLY 42.214 47.184 11.77% 8
6 CTX 119.600 132.867 11.09% 6
7 MAH 7.200 7.825 8.68% 4
8 GNC 85.683 92.200 7.61% 6
9 SDM 18.500 19.867 7.39% 3
10 ASL 33.440 35.840 7.18% 5

Negative Change Covered by > 2 Brokers

Order Symbol Previous EF New EF Change Recs
1 AWC 1.416 0.144 - 89.83% 8
2 SFR 27.450 17.260 - 37.12% 5
3 WHC 27.717 17.550 - 36.68% 6
4 MQA 28.300 22.183 - 21.61% 6
5 GFF 6.363 5.300 - 16.71% 8
6 AIX 21.650
article 3 months old

Positive Result For CSL

 - CSL interim better than expected
 - New products and markets an important earnings driver
 - Ratings upgrades follow the profit result
 

By Chris Shaw

Interim earnings for CSL ((CSL)) fell by 3% to $483 million, but currency headwinds meant the headline result masked strong underlying performance in the period. On a constant currency basis, half year net profit after tax for CSL actually increased by 16%, well ahead of guidance of a 10% increase.

In assessing the result, Macquarie noted Ig remains the major growth engine for CSL, delivering a 24% increase in revenue in US dollar terms relative to the previous corresponding period. Even more positive for Macquarie was growth in secondary plasma products, which reported a 17% increase thanks to strong albumin sales in Asia, strong specialty sales into central Europe and strong haemophilia sales in Russia and Brazil.

The fact secondary product sales grew so strongly is significant as Macquarie notes it reduces the risk of margin pressure for CSL. This is a positive for earnings going forward and sees Macquarie lift its earnings per share (EPS) estimates by 3-9% through FY14.

Others such as BA Merrill Lynch and Credit Suisse have also lifted EPS forecasts for CSL post the result, while Bell Potter went the other way and trimmed its full year numbers. Consensus estimates according to the FNArena database now standing at 187.3c this year and 218.2c in FY13. 

The fact CSL is making advances across all key product groups has, in the view of Macquarie, reduced concerns with respect to margin pressure from disparate growth across divisions and any reversion back to industry growth rates.

What should help maintain earnings growth rates is an extension of CSL's share buyback program. Citi expects a current $900 million buyback will be completed within this financial year, while a further buyback of a similar magnitude is likely to be announced in FY13. 

This supports Citi's view CSL remains a Buy at current levels, as on the broker's numbers CSL is not expensive. Others have come around to this view, as on the back of the interim result both BA-ML and Macquarie have upgraded CSL to Buy ratings from Hold previously. 

For BA-ML there is growth potential for CSL from further M&A activity, while as earnings per share increase in part due to the buybacks there is scope for further multiple expansion. Macquarie also sees the group's organic growth outlook as attractive, especially as this growth continues to track higher than elsewhere in the industry.

Outside the database it has been a similar story, as Bell Potter has gone even further and lifted its rating on CSL to Buy from Reduce. Reasons for the Bell Potter upgrade are similar, the broker attracted to strong albumin demand, new products being brought to market and the associated growing importance being paid to R&D to maintain CSL's development pipeline.

Overall the FNArena database shows CSL is rated as Buy five times and Hold three times, with a consensus price target of $35.52. This is up from $34.08 prior to the result.

Shares in CSL today are stronger and as at 12.20pm the stock was up 37c at $32.09. This compares to a range over the past 12 months of $26.12 to $37.00 and implies upside of around 10% relative to the consensus price target in the FNArena database.


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