rbs round up: 30 november 2010

8/8/2019 RBS Round Up: 30 November 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

30 November 2010 Issue No. 453

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 – NBN legislation a key catalyst

BHP Billiton (BHPKZJ) MINI Trading Buy – Deploying the cash

Origin Energy

(ORGKZC)

MINI Trading Buy – Cashflow set to surge

Australian Strategy Monthly Market Review - October 2010




Overnight Commentary United States Commentary

The US clawed back a good chunk of its early morning losses as investors warmed to the idea that problems in the Eurozone may not create as many issues for US stocks as they will for their European counterparts. Volumes remain anaemicas many make their way back from Thanksgiving holidays.

Movers - On the DOW Amex, BOA and JPM added 0.9% to 2.2% while GE and Alcoa added 0.9% and 0.8%. CCLcontinued to underperform, shedding 1.3% as they host a tour of their Indonesian facility. On the S&P Halliburton added3.6% as crude rallied and Freeport McMoRan recouped yesterdays losses with gold adding 0.5%. Wells Fargo was astandout, adding 2.4%, as it was rumoured they would be the first allowed to increase payout ratios.

United Kingdom and Europe Commentary

UK - After starting the session in the black as an 85B euro Irish bailout package was approved, fears of Europeancontagion saw the FTSE erase its last 2 months of gains by the closing bell. In a flight to safety the greenback continuedits strength driving down metal prices and material stocks. Energy plays were some of the hardest hit with BG, RDSAand BP off 1.8% to 3.2% with the latter announcing plans to sell its stake in Pan American Energy to Bridas Corp for$7B. Petrofac fell 5.8% as concerns around a proposed deal in Nigeria were raised while Cairn Energy and Vedanta fell4.4% and 3.1% as they wait for approval for the transfer of assets. Barclays and HSBC were the only 2 stocks on the 100to post a win; Barclays adding 1.2% after announcing a strategic review of its businesses and HSBC adding 0.1% as it

was labelled a "stock to watch" in 2011 by JP Morgan.




Commodities Commentary

Last % Move

GOLD 1367 0.5% OIL 85.76 2.4% NI 22383 -0.6% AL 2249 0.0% ZN 2078 -1.3% CU 8220 -0.2% CRB 303 0.6%

SPI Commentary

The SPI traded down 41ts to 4619. Open at 4660 with a high of 4637 and a low of 4565. Volume 38,303. Overnight the SPI traded up

7pts to 4624.

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 GDP (QoQ) , Existing Home Sales

Wednesday AUS

US MBA Mortgage Applications , Core Durable Goods Orders (MoM) , InitialJobless Claims (MoM) , Personal Spending (MoM) , New Home Sales

Thursday AUS

US

Friday AUS RBA Governor Stevens Speaks

US

*Dates are indicative only and may change




MINI Trading Buy: Telstra Corporation (TLSKZD) - NBN legislation a key catalyst

A deal has been reached to pass key NBN legislation. We think there is now a high likelihood of ashareholder vote on the NBN deal by June 2011 and associated capital management. We believe there

are now sufficient positive catalysts to drive a rerating to our A$3.06 target price. RBS Research moveto Buy .

Source: IRESS

Deal reached to allow key NBN (competition) legislation to become law The likelihood of the NBN legislation passing the Senate this week now appears certain following the government'sdecision to release a summary of the NBN business plan and a deal with independent senators. The government hasagreed that the NBN will be overseen by a cross-house parliamentary committee over the course of its build with inputfrom the Productivity Commission. However, other aspects of the legislation that were of concern to the Opposition areunlikely to be amended: importantly, it appears the legislation will exempt the Telstra-NBN deal from the Trade PracticesAct, removing the remaining key risk.

Limited new information in publicly released business plan The publicly released version of the NBN business plan contains little new information. The project will cost A$49.5bn,with A$35.7bn in capital expenditure and A$13.8bn for decommissioning and infrastructure payments to Telstra (in linewith A$9bn post tax net present value already agreed with Telstra). NBN Co said it expects to finalise the agreement withTelstra by December 2010. It expects up to 19% of premises to be passed by December 2011 and that it hopes to beable to offer its first retail services by September 2011.

Telstra raised to Buy (from Hold). We see sufficient catalysts to drive rerating. If the NBN legislation passes, it will remove a major uncertainty and significantly improves the likelihood that Telstra canmeet its timeline for a shareholder vote by June next year. We expect it to outline capital management plans for theA$11bn NBN compensation prior to any vote. Recent confirmation by the board that it intends to pay a 28c fully frankeddividend in both FY11 and FY12 is positive and Telstra also outlined at its AGM that its turnaround strategy remains ontrack, with solid subscriber growth in the 4m to October (although there is still uncertainty on the revenue and earningsimpact). We believe that there are now sufficient positive catalysts to drive a rerating of the stock up towards our A$3.06target price (10% discount to DCF). We move to Buy (from Hold) as a result.

Security ExPrc Stop Loss CP ConvFac Delta Description

TLSKZD 2.134 2.34 Long 1 1 Long MINI




MINI Trading Buy: BHP Billiton (BHP.AX): Deploying the cash

We have come off research restriction following BHP's withdrawal of the PotashCorp bid. In

our view the stock offers a compelling investment case and we have reinstated our Buyrecommendation.

Source: IRESS Capital management a positive and probably only the start, in our view BHP has reinstated its US$13bn buyback program, which has US$4.2bn to be completed. The buyback will be on marketand for Plc shares (at this stage there is no off-market purchase of Ltd shares). When completed the buyback willincrease RBS Research’s FY11F and FY12F EPS by 2%. We view the reinstatement as an interim measure in terms ofcapital management. We believe the BHP board will review further capital management initiatives ahead of the interimresults in February 2011. RBS Research forecast BHP will be in a net-cash position by the end of FY11, leaving directorswith the options of reinvesting in the business, increasing dividends, buying back shares or all of the above.

We see plenty of room to increase dividends We believe BHP has the capacity to increase dividends substantially. Currently, RBS Research estimate BHP is on anFY11 dividend yield of only c2%. The US$0.93 dividend equates to about US$5.1bn, which compares to operating cashflow of about US$29bn. In our view, BHP could materially increase this amount on a sustainable basis. We believe this

would be another positive and that it would demonstrate management's confidence in future cash flow.

Options for M&A appear limited now that PotashCorp is off the agenda Opportunities for BHP to acquire a company that would make a meaningful impact now look limited. It seems that an oil &gas acquisition might be the easiest option for assets material to BHP. We see no reason for such a deal to be pursuedstraight away and we believe any such transaction would likely be six months away to allow for adequate due diligence.

Investment view - Buy - we think BHP offers a compelling investment case BHP is trading at a 15% discount to RBS Research’s NPV and on a PE of 10x FY12F. We advise investors to beoverweight BHP going into the next reporting season, as further capital management initiatives may provide anotherpositive catalyst for a re-rating. RBS Research reinstate full research coverage with a Buy recommendation and A$51.15target price (was A$51.48).

RBS MINIs over BHP

Security ExPrc Stop Loss CP ConvFac Delta Description

BHPKZJ 32.1971 35.28 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 now

includes a reasonably aggressive A$170m exploration programme and RBS Research have pushed up forecasts forexploration 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 Description

ORGKZC 1116.75 12.20 Call 1 1 MINI Long




RBS Round Up Corner: Monthly Market Review - October 2010

Australian equities continued to rise in October, up 1.7%, supported by the key theme of US

reflation 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%).




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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: 30 november 2010

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