News: SOL Norway sovereign fund excludes three more firms from portfolio, page-90

This is wildly incorrect. ASX reports 1.09% of the shares on issue reported as being sold short on 23/04. There is no looming short-squeeze here.

Moreover, most of these shorters are probably doing the obvious thing and have taken a long position in BKW, taking advantage of the fact that buying a BKW share gets you a SOL share at a discount, and will not be in a hurry to get out of their positions. This long/short combo is a natural hedge.

Today, buying $1000 of BKW shares gets you $850 worth of SOL through their 39.4% ownership, plus you get BKW's own assets, which are worth considerably more than this $150 difference. Specifically, for that $1000 invested, there's $254 worth of land and buildings in the Property Trust (at book value), and something similar again in the Building Products Division (a more subjective valuation).

So $1000 invested in BKW gives ~$1350 in underlying assets. About half of these are the same assets you can buy directly by owning SOL shares, but in that case, $1000 only buys you $1000...

At several times in the last 12 months, $1000 invested in BKW gave you MORE than $1000 worth of SOL. And yet the market kept bidding up the SOL price.

In November last year you could short SOL at $31, and buy BKW for about $17. In this way, you could "buy" (or more accurately, get paid to become the owner of) BKW's non-SOL assets. For example:

Short 684* SOL, receiving $21,204 in cash
Buy 1000 BKW, spending $17,000

Keep the $4204. You now own BKW's Property Trust and Building Products Assets, worth about $6700. You do not own SOL: Brickworks' exposure to SOL through it's 39.4% holding has been removed by the short sale of the same number of shares. Your success is linked only to the BP and PT assets.

$6700 worth of assets and $4204 in cash, for no upfront investment. Funny how markets work, isn't it?

It is because of the extreme over-valuation of SOL relative to BKW last year that I think the small number of shorters are here to stay. Anyone taking a position like the above has ownership of BKW assets that cost them nothing to obtain. In fact, they were paid to obtain these assets. They are long so many BKW shares and short so few SOL shares that even ignoring the (so far) healthy gains, the dividend stream from BKW is larger than the costs of covering the short. Currently, the interest rate on borrowed SOL shares is lower than AUD inflation.

But most importantly, as I illustrate with the example of investing $1000 in either BKW or SOL today, SOL is still very much overvalued relative to BKW.

Until the gap closes meaningfully, I see the SOL shorters as being here to stay. And, as noted, they are only short 1% of the issued stock - about $56M, about the trading trading volumes of a typical week. Nothing very shocking.

While someone doing the same trick today has much less to gain than in November (or March this year), SOL remains overvalued relative to BKW. It's a mystery why more SOL holders don't exit and re-buy via BKW. The investment case for both companies is about the same, since they own each other. If you own SOL, you already own 42% of BKW. If you own BKW, you already own 39% of SOL. But the same assets are worth less in the hands of a SOL-holder than a BKW-holder.

*1 BKW share gave ownership of 0.684 SOL shares in November - the number is now 0.631 after the selldown.