The Short Report

This story features PRL GLOBAL LIMITED, and other companies. For more info SHARE ANALYSIS: PRG

Guide:

The Short Report draws upon data provided by the Australian Securities & Investment Commission (ASIC) to highlight significant weekly moves in short positions registered on stocks listed on the Australian Securities Exchange (ASX). Short positions in exchange-traded funds (ETF) and non-ordinary shares are not included. Short positions below 5% are not included in the table below but may be noted in the accompanying text if deemed significant.

Please take note of the Important Information provided at the end of this report. Percentage amounts in this report refer to percentage of ordinary shares on issue.

Stock codes highlighted in green have seen their short positions reduce in the week by an amount sufficient to move them into a lower percentage bracket. Stocks highlighted in red have seen their short positions increase in the week by an amount sufficient to move them into a higher percentage bracket. Moves in excess of one percentage point or more are discussed in the Movers & Shakers report below.

Summary:

Week ending July 2, 2015.

Last week saw the ASX200 zig-zag wildly between levels below 5500 to towards 6500 as the odds of a Greek exit rose and fell and Beijing threw various measures at its own stock market, ultimately to no avail. As the last couple of days have shown on Bridge Street, any rebound attempt has proven short-lived.

A quick glance at our table below reveals a sea of red, suggesting the shorters were exploiting the opportunity provided by these brief stock market bounces to increase short positions. Most moves were nevertheless only of the bracket-creep nature, with a couple of exceptions.

Two stocks seeing big increases in shorts last week were Programmed Maintenance and G8 Education. But in both cases we can point to peer takeover bids by both companies. Programmed Maintenance is attempting a merger with Skilled Group while G8 has made a hostile and opportunistic bid for Affinity Education Group.

No such M&A talk or even new news has flowed from Cabcharge of late but the taxi service, which is facing a raft of uber-issues at the moment, suddenly saw a big jump in shorts last week. Cabcharge has now joined the elite 10% plus shorted club.
 

Weekly short positions as a percentage of market cap:

10%+

MYR   21.0
MTS    19.1
MND   14.1
ORI     14.0
MRM  12.8
MIN    12.7
WOR   11.7
FLT     10.6
AGO   10.1
CAB    10.1

In: CAB          Out: PRY

9.0-9.9%

UGL, PRY, FMG, CDD, PRG, DSH
 
In: PRY, PRG            

8.0-8.9%

SXY, MGX, SGH

Out: CAB

7.0-7.9%

GXL, WOW, GEM, NXT, NWH, SEK, SGM, ACR, OFX, MSB, KAR, SUL, SWM, VOC

In: GEM, SEK, SGM, OFX, SUL, SWM     

6.0-6.9%

KCN, AWE, JHC, JBH, WHC, GWA, SGN, ILU, DOW, PBG, ASL

In: AWE, JBH, GWA, SGN, ILU, DOW, ASL       

Out: PRG, OFX, SGM, SEK, SWM, SUL, GEM

5.0-5.9%

NEC, SPO, PDN, CAR, TFC, ARI, NWS, TEN, BCI, STO, DLS, KMD, BPT

In: CAR, NWS, TEN, STO    Out: ILU, ASL, GWA, AWE, SGN, DOW, JBH, DLS, KMD

Movers and Shakers

It is a truth universally acknowledged that when one company seeks to takeover another, rarely is the first bid put forward the last. Just as one might haggle at the bazaar, suitor companies will usually pick a valuation and then underbid on the first instance, expecting the target to cry foul and recommend to shareholders that such a silly bid should be immediately rejected.

They then follow up with a sweetened deal, which may bring success, or maybe even further sweetening will needed to achieve board and shareholder approval.

Which is why takeover bid announcements typically prompt selling in the suitor’s shares on day one and buying of the target’s shares, on the assumption that a higher bid will be needed to the detriment of the suitor and the benefit of the target. One might even pair the two trades, going short the suitor and long the target.

Services company Programmed Maintenance ((PRG)) and peer Skilled Group ((SKE)) entered into friendly merger talks in May before Programmed made an official cash and scrip offer late last month. Even though the offer was immediately proved by the Skilled board, it still requires shareholder and ACCC approval and thus is not yet a done deal.

Last week Programmed shorts rose 2.3ppt to 9.1% from 6.8%.

The interesting thing about G8 Education’s ((GEM)) 1.5ppt jump in shorts last week to 7.7% from 6.2% is that it was last Friday that child care centre peer Affinity Education Group ((AFJ)) delivered a profit warning and last Monday when G8 wasted no time in swooping in with an opportunistic cash and scrip offer that was immediately rejected by the board. This Report covers the week to last Thursday.

However this Report has also previously made note of G8’s gradual rise up the shorted table, likely on a standalone bet on the company expanding its child care numbers too fast for comfort and on potential risk from regulatory changes (See: the May federal budget). So perhaps last week’s short increase for G8 simply reflects more of the same, and we need to wait for next week’s Report (based on delayed ASIC data) to see what happened next.

Cabcharge ((CAB)) has been lingering on our shorted table for a long time and has been quietly creeping up as the weeks have gone by. For a few years now the once almost monopoly taxi and taxi payment service has been under threat from competition, regulatory attacks and, more recently, privateer services such as Uber. Given state governments have not shown to be entirely sure just what to do about such controversial services such as Uber’s, a deal of uncertainty has been generated.

Last week Cabcharge was accepted into the elite 10% plus shorted club with a 1.6ppt increase to 10.1% from 8.6%.
 

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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