rbs round up: 20 october 2010

8/8/2019 RBS Round Up: 20 October 2010

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Equity Structured Products and Warrants

This material has been produced by RBS sales and trading staff and should not be considered independent.

The Round Up

20 October 2010Issue No. 430

The Round Up is a comprehensive

daily note produced by the RBS

Warrants team providing an overview

of market movements along with

quality ideas for warrant traders and

investors.

Daily Monitor

Global Market Action Scoreboard, commentary

Aussie Market Action SPI Comment, Events & Dividends

Telstra Corp. (TLSKZD) MINI Trading Buy TLS underperforms globalpeers

Santos (STOKZD) MINI Trading Buy You don't get something for

nothing

Origin Energy (ORGKZC) MINI Trading Buy Cashflow set to surge

Australian Strategy Monthly Market Review - August 2010


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Overnight CommentaryUnited States Commentary

The US traded in the red as concerns around mortgage foreclosure returned to the forefront of investors minds and globaldemand concerns were re-ignited as China raised its interest rates by 25bps.

ECO - Housing Starts were better than expected at 610k vs 580k but Building Permits were lower at 539k vs 575kexpected.

Movers - BOA was fell 4.4% after it was reported that bond heavyweights were seeking to have BOA buy back $47B inbad mortgages. IBM fell 3.4% despite reporting better than expected results and raising FY guidance and Apple wasweaker after missing a relatively conservative sales forecast for the ipad. Alcoa shed 3.6% on demand fears and oilmajors tracked crude lower with Chevron off 2%.


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United Kingdom and Europe Commentary

UK - The FTSE as weaker as gains in the financials were offset by weaker miners who were sold off as China increasedits interest rates in an attempt to slow its booming economy. Standard Chartered and HSBC posted gains of 2% and0.1% respectively as BOA and GS reported better than expected earnings and defensives were in demand with Diageo,Severn Trent and National Grid adding 1.3% to 2.5%. On the downside Fresnillo, Xstrata, Vedanta, Antofagasta, RIO,Randgold and Kazakhmys all shed 3% to 5.3% on demand concerns and energy majors BG and RDSA fell 0.7% and 1%

as the price of crude slipped. In Germany the DAX fell 0.4% with ZEW survey of economic sentiment and currentsituation both beating expectations.Commodities Commentary

Last % MoveGOLD 1331 -2.7%OIL 79.50 -4.3%NI 1062 -1.5%AL 105 -2.2%ZN 107 -1.5%CU 374 -2.2%GOLD 1331 -2.7%

SPI Commentary

The SPI traded up 22pts to 4669. Open at 4647 with a high of 4700 and a low of 4638. Volume 35,626. Overnight the SPI traded down

34 pts to 4633.

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 Industrial Production (MoM)

Tuesday AUS Monetary Policy Meeting Minutes

US Housing Starts (MoM)

Wednesday AUS

US

Thursday AUS

US Beige Book , Initial Jobless Claims (MoM)

Friday AUS

US Philadelphia Fed Manufacturing Index

*Dates are indicative only and may change


4/8


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 peersOur 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 12.1xThe 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 catalystsWhilst 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 maintainedWe 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 MINI

TLSKZD 2.1131 2.32 Long 1 1 Long MINI


5/8


MINI Trading Buy:Santos (STO.AX): You don't get something for nothing

Santos has finally announced a long-awaited sell-down and off-take deal inrespect of GLNG. However,some concessions had to be given and this has disappointed the market. We still believe there is value

in Santos to be unlocked over time and maintain our Buy rating.

Source: IRESSTotal emerges with a 20% equity stake in GLNG and 1.5mtpa of off-take STO has sold-down 15% for A$650m, which was well below the A$850m implied by the Petronas deal. Unfortunately,STO has also been forced to forgo its US$500m second train FID payment, in return for Petronas agreeing to up its off-take to 3.5mtpa (from 2mtpa with a 1mtpa option). On top of this, STO has vended in some more of its CSG acreage at nilcost, although management wasn't able to put a contingent resource number on the size.

Key hurdles now funding, proving up T2 reserves and environmental approvalsSTO is still targeting FID by the end of CY10 and plans to update the market on funding plans and capex numbers aroundthat time. Management today suggested that a further sell-down of equity and some off-take appears likely before FID,but wasn't a necessity. We still think Santos will need at least A$1.5bn of fresh equity for GLNG in order to keep the ratingagencies happy.

No change to RBS Researchs Santos valuation and target price just yetRBS Research will be refining the valuation assumptions over the coming weeks as the project moves closer to FID. Inisolation, the second train FID payment would remove about A$0.66/share from current valuation, but RBS Research hadbeen factoring in extremely conservative LNG pricing for any future volumes signed up. If anything, RBS ResearchsA$2.65/share valuation for GLNG may need to increase slightly (pre 15% sell-down).

Buy maintained post pull-back, but an investor in STO needs patienceIn our view, the biggest disappointment was having to give up the US$500m second train FID payment in exchange for'project certainty'. While we believe this was a necessary step in getting the project closer to the finish line and unlockingvalue for shareholders, the market had not been expecting it after recent press speculation that Shell might get involvedwith GLNG in some form of project consolidation. Overall, we still think there will be some upside as GLNG comes tofruition. RBS MINIs over STO

Security ExPrc Stop Loss CP ConvFac Delta Description

STOKZD 928.95 10.22 Long 1 1 MINI Long


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MINI Trading Buy:Origin Energy (ORGKZC) Cashflow set to surgeORG'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 forecastEBITDA 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 Researchs expectations (A$840m), but the 25c dividend was in line.

ORG has guided for 15% NPAT growth in FY11FY11 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 Researchs 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 workORG'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 accretive

acquisition 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 ORGSecurity ExPrc Stop Loss CP ConvFac Delta Description

ORGKZC 1100.32 1198 Call 1 1 MINI Long


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RBS Round Up Corner:Monthly Market Review - August 2010

The S&P/ASX 200 Accumulation Index lost momentum finishing down 1.2% in August. Reporting season finished

on a stronger note with net positive NPAT surprise and positive outlook comments. However, market concernswere focused on slowing global growth and the impact of a downgrade cycle.

The top- and bottom-performing sectors in AugustThe best performers for the month (in terms of total return) were Consumer Staples (+6.3%), Property (+3.7%) andIndustrials (+2.3%). The worst performers were Telecommunication Services (-9.1%), Financials ex Property (-3.5%) andInformation Technology (-3.5%).

S&P/ASX 200 top- and bottom-performing stocks in AugustThe top five performers in August were AWB Ltd (+46.0%), Elders (+42.2%), Perseus Mining (+31.6%), LynasCorporation (+28.9%) and Prime Infrastructure Group (+28.8%). The bottom five performers were Cudeco (-54.3%),

Murchison Metals (-24.0%), Mirabela Nickel (-20.4%), James Hardie (-18.1%) and Ten Network Holdings (-18.0%).

S&P/ASX 200 top- and bottom-performing sectors for the 12 monthsThe Consumer Staples sector topped the pack, with a strong 15% rise over the past 12 months. Other strong performerswere Utilities (+10.9%) and Industrials (+8.1%). Telecommunication Services (-8.2%) was the worst performer during theperiod.

S&P/ASX 100 performanceThe S&P/ASX 100 Index was down 1.4% in August. The top-performing stocks were Newcrest Mining (+13.9%), Alumina(+12.1%), JB Hi-Fi (+10.5%), Aristocrat Leisure (+9.7%) and Caltex Australia (+9.4%). The bottom-performing stockswere James Hardie (-18.1%), Billabong (-17.1%), Downer EDI (-16.7%), Primary Health Care (-10.5%) and TelstraCorporation (-10.2%).


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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]

Disclaimer

The 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 clients 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).

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Copyright 2009. RBS Equities. A Participant of the ASX Group.

Explanation of Warrant Tables

Security 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: 20 october 2010

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