From the Securities Lending Trading Desk

Modern building with flying airplane

Long term interest continues for Cathay Pacific, after the airline announced its worst half year loss in at least two decades as passenger numbers and fares declined. We are seeing increased directional demand for VMware, Inc. (VMW) as investors question if the share price rally is warranted.  Meanwhile in Europe, borrowers are seeking shares of German Potash miner, K+S, after the firm revised its 2020 profit figure off the back of a challenging price outlook.

Below please find this week’s edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.

Americas

Under Armour, Inc. (UAA) saw its share price decline amid slowing growth, competition, and political controversy. Last week, UAA CEO Kevin Plank joined other CEOs in quitting the White House advisory council prior to its dissolution. While he may have hoped this would win back the support of shareholders and his own endorsers, this has not been the case and the share price fell to a 52-week low of $18.22 on 8/15. Plank faced immediate backlash starting in February as he voiced support for Trump and the POTUS’ “pro-business” approach. However, this is not the end of investor concerns with UAA as growth has slowed for the brand and competition from much larger rivals, Nike Inc. and Adidas AG, mounts.

We are seeing increased directional demand for VMware, Inc. (VMW) as investors question if the share price rally is warranted. On 8/14, VMW rallied to a 52-week high of $98.02; this is up 14% from the six-month low of $85.89 reached on 7/3. VMW saw their share price decline as investors were focused on concerns with stagnancy in their legacy market of virtualization software, growing competition to their core business from Microsoft, and declining revenue growth. “The virtualization market is being increasingly commoditized as large portions of new enterprise workloads are moving to the cloud. Additionally, Microsoft is including virtualization software as part of its server operating system and other vendors are bundling products, heightening competition for stand-alone virtualization offerings.” Despite these concerns, the share price has been trending higher as bullish investors focus on the “fourth consecutive quarter of double-digit bookings growth which suggests that newer products are gaining traction, especially the company’s network virtualization offering, NSX, which saw bookings rise 50% in fiscal 1Q18.” VMW is a name to watch as fee levels, utilization and demand trend higher.

Asia Pacific

The beleaguered Japanese conglomerate Toshiba Corp has seen a temporary respite from its recent woes after a series of broker upgrades and increased investor support. In recent weeks, three brokerage firms, Citigroup, CLSA, and JP Morgan upgraded the company’s prospects and suggested a corner has been turned for the firm that has been beset by mounting losses following a multibillion dollar write-down of its nuclear power equipment business. In addition, several event-driven hedge funds such as Greenlight Capital and King Street Capital reported recent increases in their stakes in Toshiba, citing a better than expected performance of its lucrative NAND memory business. We have seen a softening in securities lending demand for Toshiba in recent weeks, which has seen its share price rally by over 20% since the beginning of August on this renewed optimism.

Cathay Pacific Airways announced its worst half year loss in at least two decades as passenger numbers and fares declined. Chief Executive Officer Rupert Hogg rejected calls to setup a budget carrier and instead announced plans to focus on better services to return the carrier back to financial health. Following the earnings announcement, shares in Cathay Pacific rose in Hong Kong trading after analysts upgraded the stock and forecast an improved outlook for future profitability. We have seen moderate long term lending interest in Cathay Pacific Airlines.

Europe

German Potash miner, K+S, revised its 2020 profit figure off the back of a challenging price outlook. The German miner highlighted that it would not be able to meet its 2020 EUR 1.6 billion profit figure this week due to uncertainty of future prices for the potassium based commodity. The target was based on a potassium chloride price of $330 per tonne; however, recent prices are closer to $240 per tonne with no indication of levels set to rise in the near-term. Heavy investment, due to 2011 price highs, have meant new mines have created an oversupply in the market putting downward pressure on price levels. The share price has fallen just over 9% this week with short interest in the name currently fluctuating around 15%.

UK commercial property short interest spiked following a negative earnings outlook and adverse headwinds. Shares of mixed-use developer Sirius Real Estate and shopping center REIT Intu Properties have seen utilization and fees climb over the past week. Structural issues such as leverage risk, tenant default, and fundamental earnings growth/dividend prospects may hamper these names in the near to mid-term. Negative sentiment among short sellers may be compounded by the rise of online retail and the subsequent challenges facing brick and mortar; however, shareholders stand to benefit through generating out-performance in their lending programs.