rbs round up: 05 november 2010

8/8/2019 RBS Round Up: 05 November 2010

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Equity Structured Products and Warrants

Overnight Commentary

United States Commentary

The US had a day out overnight as QE2 spurred on the demand for stocks with investors now able to justify the marketsrecent gains. The lower $US sparked demand for materials while some stronger than expect same store sales numberspushed the retailers higher. The QE, which bodes well for asset prices and company profits, is still failing to address theunemployment issues which was highlighted by a rise in initial jobless claims. Eyes will be on tonight's Non-FarmPayrolls which will provide more clarity around the issue.

Movers - Freeport McMoran, Denbury Resources and Vulcan Resources were rock solid adding 6.3% to 7% while Apollo,

the largest education company in the states shed 8% as the US department of education said it was reviewing federal aidpractices. On the DOW, heavyweights JPMorgan, BOA, CAT, GE, Boeing, Amex and Alcoa drove the rally with allnames adding 2.8% to 5.5%. On the downside Pfizer was the only stock to finish in the red as it traded ex-div.

United Kingdom and Europe Commentary

UK - The FTSE returned to 29 month highs as the market digested the second round of QE which saw the greenbackfall close to annual lows. The weaker dollar sparked demand for commodities across the board. Miners were lead byBHP who added 6.6% after their bid for Potash was rejected by the Canadian government, while Xstrata, ENRC,Kazakhmys, Fresnillo, Antofagasta, Lonmin and RIO all added 4.8% to 7.1%, dominating the leader board. Best onground went to MAN Group, which added 14.6%, after the largest listed hedge fund reported stronger than expectedresults. Energy plays were given a shot in the arm as crude surged 1.7%; BP, RDSA and BG adding 1.3% to 2.7%. Onthe downside retailers remained under pressure as WM Morrison Supermarkets provided a bearish outlook adding toNEXT's poor forecasts on Wednesday. WM, NEXT, and Marks and Spencer off 1.6% to 3.9%. Rolls Royce was theworst on the 100 as Qantas grounded its entire A380 fleet after an engine failure yesterday. The stock shed 5% as aninvestigation into the malfunction begins.




Commodities Commentary

Last % Move

GOLD 1392 2.1% OIL 86.62 2.3% NI 24463 4.0%

AL 2444 1.6% ZN 2512 4.4% CU 8599 3.4% CRB 2.4%

SPI Commentary

The SPI traded up 27ts to 4757. Open at 4730 with a high of 4769 and a low of 4695. Volume 32,161. Overnight the SPI traded up71pts to 4831.

SPI Intraday SPI Daily

*SPI report taken from the 9:50am open to the 4:30pm close on the previous trading day. Charts taken from IRESS

Upcoming Economic Events for the Week

Monday AUS

US

Tuesday AUS

US

Wednesday AUS Building Approvals (MoM)

US ADP Nonfarm Employment Change (MoM) , Interest Rate Decision , FOMC Statement

Thursday AUS Retail Sales (MoM) , Trade Balance

US Initial Jobless Claims (MoM) , Nonfarm Productivity (QoQ)

Friday AUS RBA Monetary Policy Statement , Nonfarm Payrolls (MoM) ,

US Pending Home Sales (MoM) , Fed Chairman Bernanke Speaks*Dates are indicative only and may change




MINI Trading Buy: Telstra Corporation (TLSKZD) - Telstra underperforms global peers

Telstra's share price has significantly underperformed its global peers in recent weeks. It is now trading at alarger than usual discount to its international peer group on both a PE multiple and dividend yield basis. BuyTLSKZD MINI and play up to RBS Research Target Price of $3.06.

Source: IRESS

Telstra share price underperforms peers Our recent marketing trip to Asia highlighted to us that Telstra is starting to come back onto the radar screen for globaltelecoms investors following its recent underperformance relative to global peers. Telstra's share price has fallen 8% overthe last 2 months vs the FTSE World Telecom Index which is up 11% over the same period (eg Vodafone up 10% and BTup 9%).

Telstra PE multiple of 10.0x is below MSCI world Telecom index on 12.1x The PE multiple for the MSCI world Telecom services index has tracked up to 12.1x in recent weeks and is close to its 5-yr average of 12.7x (based on IBES 12m forward earnings estimates). Telstra, on the other hand, trades on a PE of 10.2x(below its 5yr average of 12.6x) and at a 15% discount to the MSCI index. Telstra's dividend yield of 10.6% is well abovethe MSCI Telecoms index on 5.6%, with the gap having increased in the last couple of months (although there are some

risk factors specific to Telstra that explain the size of this differential).Limited visibility over key rerating catalysts Whilst Telstra's trading multiples look increasingly attractive vs global peers, there is still limited visibility over the keycatalysts for a rerating, including: 1) clearer evidence that the strategy to cut prices and increase spend is deliveringsustained customer growth and revenue growth; and 2) Parliamentary and regulatory approval of the NBN which isrequired to deliver greater certainty around payments to Telstra to decommission its copper network.

Risk reward equation seems to be improving. Hold maintained We believe that value may be starting to emerge in Telstra at current levels, particularly when compared to global peers.Consensus earnings forecasts have been reduced to a level where they are starting to look relatively conservative andthe balance of risk/reward may be starting to shift to the upside. However, we expect the market to want clearer evidenceof success with the turnaround strategy and more certainty over NBN before rerating the stock. RBS Research retain a

Hold rating and A$3.06 price target (10% discount to A$3.40 DCF valuation).

Security ExPrc Stop Loss CP ConvFac Delta Description

TLSKZC 2.4588 2.57 Long 1 1 Long MINITLSKZD 2.1131 2.32 Long 1 1 Long MINI




MINI Trading Buy:

Santos (STO.AX): $29.5Bn CSG Projects get the go ahead

STO has delivered a 3Q result that was largely in line with our expectations. The delays to

Kipper were a mild disappointment, but the Santos story remains firmly about GLNG in thenear term. With the environmental approval now received a deal with Kogas is just around thecorner.

Source: IRESS

Production of 12.9mmboe in line with our 12.8mmboe forecast No major variances, although condensates production (especially Bonaparte) was a little bit ahead. Sales revenue ofA$535m was also a touch ahead of our A$522m forecast, with a slightly higher realised crude price (A$83/bbl vs RBSA$80/bbl) and average gas price. The only change to guidance metrics was a lowering of capex by A$300m to A$2bn,largely on the back of GLNG FID delays.

Kipper delays drive a small downgrade in FY11F... Another six-month delay in Kipper (technical design issues) has knocked about 1mmboe off our FY11 production forecast(see Table 1) and trimmed NPAT slightly. Our FY10 forecasts have increased slightly (+5%) after factoring in today'squarterly. We are now looking for 50mbbls (guidance 49-52). The net change to our valuation has been a 5c fall toA$15.75 ps.

Buy maintained, we think STO is great value and has some positive potential catalystsRightly or wrongly, the market's sole focus right now is STO's GLNG project and sentiment has been hit hard since someelements of the Total deal surprised the market (stock off 12% since then). Looking forward, we believe things can onlyget better from here. Post Federal environmental approvals, a pre FID deal with Kogas is still a possibility and we thinkthe final capex number should give the market some comfort (RBS A$20bn). An equity raising could be on the horizon,but the recent upsizing of the hybrid has reduced equity needs further. We have pencilled in A$1.5bn, but the finalnumber will depend on what S&P's magic box spits out. At current levels, STO is our top pick in the energy sector. RBS MINIs over STO

Security ExPrc Stop Loss CP ConvFac Delta Description

STOKZD 942.82 10.30 Long 1 1 MINI Long




MINI Trading Buy:

Origin Energy (ORGKZC) – Cashflow set to surge

ORG's FY10 earnings fell a little short of our forecasts, but, importantly, FY11 is on track to be a bigyear on the earnings front. With cashflows set to surge over the coming years, on our estimates, we

think the market is underestimating ORG's financial flexibility and optionality. Buy maintained.Buy maintained with RBS Target Price of $18.25

Source: IRESS

Underlying NPAT of A$585m was behind our A$611m forecast EBITDA of A$1,304m (incl associates) was the main variance to RBS Research numbers (A$1,321m forecast) but D&A(variance of A$9m) and minorities (variance of A$9m) also impacted. Operationally, the generation and E&P contributionswere lower than we expected with retail offsetting. Management has suggested it would have hit its 15% growth target ifnot for the overseas exploration write-downs, although RBS Research had these in the numbers already. OPCF ofA$789m was a little below RBS Research’s expectations (A$840m), but the 25c dividend was in line.

ORG has guided for 15% NPAT growth in FY11 FY11 guidance has been set at +35% EBITDAF growth and +15% NPAT growth in FY11. Importantly, the guidance nowincludes a reasonably aggressive A$170m exploration programme and RBS Research have pushed up forecasts for

exploration write-offs to about A$65m (from A$40m). This has been the sole driver of RBS Research’s earningsdowngrade. Importantly, the valuation impact is negligible.

APLNG - is consolidation lurking? Today ORG appeared the most open to collaborating with another project proponent since the Conoco deal was struckalmost two years ago and we continue to believe that any news on that front would be well received by the market. Likeall investors, we would like to see an off-take arrangement done before we get too excited about the project, but, in ourview, an investor is not paying a dime for any LNG upside.

Buy maintained, ORG's balance sheet about to go to work ORG's major capex programme is taking a breather and the company will have very substantial cashflow over the comingyears. Throw in an under-geared balance sheet and we believe the market is under-estimating the opportunities ahead.The NSW energy sell-down and APLNG are the obvious candidates, but we wouldn't be surprised to see some accretiveacquisition from left field that could create shareholder value.BUY ORGKZC for 1-for-1 upside towards RBS Target Price of $18.25

RBS MINIs over ORG Security ExPrc Stop Loss CP ConvFac Delta DescriptionORGKZC 1116.75 12.20 Call 1 1 MINI Long




RBS Round Up Corner:

Monthly Market Review - October 2010Australian equities continued to rise in October, up 1.7%, supported by the key theme of USreflation via a second round of quantitative easing. QE2 has been US-dollar negative andcommodity price supportive and, as a result, materials was the best-performing sector,generating a solid 5.6% return in the month.

Australia's performance vs the worldIn local currency, the All Ordinaries (+2.1%) underperformed the US S&P 500 (+3.7%), the World MSCI exAustralia Index (+3.7%) and the regional MSCI ex Japan Index (+2.7%).

The best- and worst-performing sectorsThe best performers for the month were Materials (+5.6%), Information Technology (+3.4%) andTelecommunication Services (+1.8%). The worst performers were Health Care (-0.8%), Property (-0.6%) andConsumer Staples (-0.5%).

The top-five and bottom-five performing S&P/ASX 200 stocksThe top-five performers from the S&P/ASX 200 (price) Index for the month were Nufarm (+26.0%), ExtractResources (+25.2%), Perpetual (+24.5%), Karoon Gas Australia (+24.0%) and Fortescue Metals (+20.0%).The bottom-five performers were Macmahon Holdings (-27.2%), iSoft Group (-23.2%), Kingsgate Consolidated(-13.5%), Panoramic Resources (-13.3%) and Bow Energy (-12.8%).

Consensus earnings revisionsThe top-five upgrades were MAp Group (+61.6%), Intoll Group (+10.9%), Qantas Airways (+7.6%), BoartLongyear (+6.9%) and Fortescue Metals (+4.9%). The top-five downgrades were Sims Metal (-20.9%),Transurban (-17.7%), MacArthur Coal (-11.9%), Ten Network Holdings (-11.9%) and Santos (-11.9%).




For further information please do not hesitate to contact us on the details below

Equities Structured Products & Warrants

Toll free 1800 450 005 www.rbs.com.au/warrants

Trading Products Team

Ben Smoker 02 8259 2085 [email protected]

Ryan Corrigan 02 8259 2425 [email protected]

Investment Products Team

Elizabeth Tian 02 8259 2017 [email protected]

Tania Smyth 02 8259 2023 [email protected]

Robert Deutsch 02 8259 2065 [email protected]

Mark Tisdell 02 8259 6951 [email protected]

DisclaimerThe information contained in this report has been prepared by RBS Equities (Australia) Limited (“RBS Equities”) (ABN 84 002 768 701) (AFS Licence No 240530) and hasbeen taken from sources believed to be reliable. RBS Equities does not make representations that the information is accurate or complete and it should not be relied on assuch. Any opinions, forecasts and estimates contained in this report are the views of RBS Equities at the date of issue and are subject to change without notice. RBSEquities and its affiliated companies may make markets in the securities discussed. RBS Equities, its affiliated companies and their employees from time to time may holdshares, options, rights and warrants on any issue contained in this report and may, as principal or agent, sell such securities. RBS Equities may have acted as manager orco-manager of a public offering of any such securities in the past three years. RBS Equities’ affiliates may provide, or have provided banking services or corporate finance tothe companies referred to in this report. The knowledge of affiliates concerning such services may not be reflected in this report. This report does not constitute an offer orinvitation to purchase any securities and should not be relied upon in connection with any contract or commitment. RBS Equities, in preparing this report, has not taken intoaccount an individual client’s investment objectives, financial situation or particular needs. Before a client makes an investment decision, a client should consider whether any

advice contained in this report is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on anyrecommendation without first having consulted with your advisor for a personal securities recommendation. The information contained in this report is general advice only.RBS Equities, its officers, directors, employees and agents accept no liability for any loss or damage arising out of the use of all or any part of the information contained in thisreport. This Information is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to locallaw or regulation. If you are located outside Australia and use this Information, you are responsible for compliance with applicable local laws and regulation. This report maynot be taken or distributed, directly or indirectly into the United States, or to any U.S. person (as defined in Regulation S under the U.S. Securities Act of 1993, as amended).The warrants contained in this report are issued by RBS Group (Australia) Pty Limited (“RBS”) (ABN 78 000 862 797, AFS Licence No. 247013). The Product DisclosureStatements relating to these warrants are available upon request from RBS Equities or on our website www.rbs.com.au/warrantsRBS Group (Australia) Pty Limited is not an Authorised Deposit-Taking Institution and these products do not form deposits or other liabilities of The Royal Bank of ScotlandN.V. or The Royal Bank of Scotland plc. The Royal Bank of Scotland plc does not guarantee the obligations of RBS Group (Australia) Pty Limited.

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Explanation of Warrant TablesSecurity – refers to the code ascribed to the warrant, ExDate – refers to the date on which the warrant expires or is reset, ExPrc – refers to the exercise price, or second

instalment payment, CP – tells you whether the warrant is a call or a put, ConvFac – the conversion factor of the warrant which tells you how many warrants you need toexercise in order to take possession of 1 share, Delta – tells you how much the warrant will move for a 1c move in the underlying security, Description – Tells you the typeof warrant.All charts taken from IRESS unless indicated otherwise

rbs round up: 05 november 2010

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