Short-Sellers Outdone as Funds Buy FLSmidth Stakes, CEO Says

  • FLSmidth is fifth-most shorted share in Stoxx 600 at 20%
  • Two long-term funds have bought combined 15% stake past months

FLSmidth & Co. A/S, the most shorted company in Scandinavia, will finally get some relief from equity market volatility after two of Denmark’s biggest funds bought its shares.

That’s according to Chief Executive Officer Thomas Schulz, who says investments by Lundbeckfonden and Novo Nordisk Fonden suggest speculators betting against his company are in for a bumpy ride. The two funds have been buying up shares after short interest spiked and amid a sudden selloff that hit commodities giant Glencore Plc, which is a client of FLSmidth.

“It’s a very positive sign that these long-term investors are coming in,” Schulz said in an interview on Monday. “They believe in us and think we can manage well in the industries we operate in.”

FLSmidth shares gained as much as 1.5 percent after the CEO’s comments were published and traded 0.4 percent higher as of 11:57 a.m. in Copenhagen.

At about 20 percent of shares outstanding, FLSmidth is the fifth-most shorted stock in the Stoxx 600 index, according to data compiled by Markit Ltd. That compares with a June low of 7.7 percent and an average short position for companies of 2.3 percent. But speculators have started to scale back their bets against FLSmidth. Short positions on the firm were as high as 23 percent in the beginning of October.

According to Schulz, it’s “normal” that short sellers target companies related to mining during the low point of the industry cycle and FLSmidth was particularly vulnerable to such attacks. Its shares are down about 6 percent this year, compared with a 21 percent gain in Copenhagen’s benchmark index of Denmark’s 20 most-traded stocks.

“We have had a relatively high level of availability in our shares unlike other companies where big investors are blocking short interest from going up,” the 50 year-old CEO said. “Only a few months ago, we had very few of our shares held by big funds, which -- purely by mathematics -- meant that we always ranked high on short interest.”

Lundbeckfonden said on Sept. 1 it had bought a 5.16 percent stake in FLSmidth. Three weeks later, it said it had increased that holding to 10.03 percent. Novo Nordisk Fonden said Oct. 8 it owns a 5.02 percent. Franklin Templeton Investment Funds and Franklin Mutual Advisers both own more than 5 percent.

The practice of short-selling means investors borrow stock and sell it, betting it will decline so they can make a profit when they repurchase it. Marshall Wace LLP and Marble Arch Investments LP are among the funds with the biggest short positions in FLSmidth, according to the website of the Danish Financial Supervisory Authority.

FLSmidth’s stock losses this year mean it’s heading for a fifth year of declines. The shares have dropped about 53 percent since a December 2010 peak, compared with a 63 percent decline in the Bloomberg World Mining Index.

The CEO said FLSmidth’s new fund ownership also makes the company less likely to suffer a similar fate to Glencore, which fell a record 29 percent on Sept. 28, only to recover the share loss over the following weeks.

“What happened with Glencore was that a lot of investors decided to move out at the same time,” Schulz said. What’s more, FLSmidth is “a diversified company because we have both cement and mining. We operate in several areas, which makes us more resilient.”

The company has reduced revenue volatility by building up its service division, which generates a more stable income, the CEO said. Focusing on service also enables FLSmidth to stay in close contact with clients on a daily basis, meaning they’re more likely to return to the company.

But the commodities selloff has taken its toll. FLSmidth in August lowered its full-year profit forecast citing renewed pressure on the mining industry. The CEO said Monday that he still doesn’t see growth returning to the mining industry until the end of 2017.

“It’s negative to be in a cyclical industry as investors don’t like it when it’s not predictable for them,” Schulz said. “But the positive part is that if you as a company play the cycle well, you’re ahead of your peers as you prepare for the upturn.”

One of the bright spots in the mining industry is copper as the world’s mineable deposits decrease and demand and supply will “very soon” be matched, the CEO said. That will trigger orders for FLSmidth’s machinery, he said. The company said late Monday it has received a five-year maintenance contract for a copper project in Chile.

“The focus on mining is very negative at the moment,” he said. “But you must remember that without mining there would be nothing: you can’t make a mobile phone, you can’t build a road, you can’t buy a book without mining,” he said. “The market will definitely come back.”

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