rbs: round up for 27 august 2010

8/9/2019 RBS: Round Up for 27 August 2010

1/11

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

27 August 2010Issue No. 397

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

RIO Tinto (RIOKZG) MINI Trading Buy Iron Clad Results

James Hardie (JHXKZP) MINI Trading Sell Operating profit downgrade.

Origin Energy (ORGKZC) MINI Trading Buy Offtake and set for NSW

privatisation sale

Australian Strategy Monthly Market Review - May 2010


2/11


Overnight CommentaryUnited States Commentary

The US drifted lower as investors remain cautious about what appears to be a darkening economic outlook. The market began thesession on the front foot as initial jobless claims were lower than expected but they were not low enough to signal a change in a weaklabour market. The market fell away as the 4 week average of new claims, which is regarded as a better reflection of trend, rose to itshighest level since November. All eyes remain focused on tonight's revised GDP figure which consensus has cut to a slim 1.4% downfrom 2.4% a month ago.

Eco - Initial Jobless Claims were 473k vs. 490k exp (the market is looking for a number around 450k to signal a positive change)and Continuing Claims were 4456k vs. 4495k.

Movers - Tech stocks remain under the pump with Intel, IBM and Cisco off 1.7% to 2.2% while growth proxies were mixed with 3M andCAT both off 1.2% while Boeing added 0.9%. Energy plays were weaker, in particular coal miners, with the sector off 1.1% as it wasfeared power plants would switch to natural gas as its price continued to fall finishing at an 11 month low.

United Kingdom and Europe Commentary

Europe - The FTSE appeared more receptive to the US jobs data, adding 0.9% with miners tracking metal prices higher and adding the

majority of the points. Kazakhmys, BHP, Xstrata and Fresnillo all adding 2% to 5.2% after facing a wave of selling in the previous

session. All eyes are on revised GDP in both the US and UK which are due out tonight and will give more insight into the health of the

global economy.


3/11


Commodities Commentary

Oil +0.8%, Gold -0.5%, Nickel +1.8%, Aluminium +1%. Copper +3%, Zinc +4.5%

Metals

Gold settled lower Thursday, as investors shifted to stocks, oil and other assets seen as riskier after a drop in U.S. jobless claims

helped offset a recent rise in concerns about the economy.

Oil Commentary

Crude oil rose for a second day as applications for U.S. unemployment benefits dropped more than forecast, easing concern about the

labor market amid other signals the economy is slowing.

Currencies Commentary

FX Trends

O'night% 1mth% 3mth%

AUDUSD -0.50% -1.80% 4.10%

EURUSD -0.10% -2.20% 2.90%

USDJPY 0.10% 4.10% 7.80%

The U.S. dollar eased slightly Thursday against the euro and the yen, after U.S. initial jobless claims showed a larger-than-expected

decline for last week


4/11


SPI Commentary

The SPI traded up 45 pts to 4341. Open at 4296 with a high of 4347 and a low of 4243. Volume 33,427. Overnight the SPI traded up 1

pts to 4342.

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

US Durable Goods Orders, MBA Mortgage Applications

Thursday AUS

US New Home Sales, Intial Jobless, Continuing Claims

Friday AUS

US GDP Price Index, U of Michigan Confidence

*Dates are indicative only and may change


5/11


MINI Trading Buy:RIO Tinto (RIOKZG) Iron Clad Result

RBS MINIs over RIO

Stock: Rio TintoTicker: RIOShare price: A$73.01Target price: A$83.20NPV: A$83.20Rec. Buy

Summary

RIO reported underlying earnings of US$5.8bn, ahead of consensus at US$5.5bn and well above our forecast US$5.2bn.The difference related to iron ore where RIO achieved better prices than we had expected (we took a conservative view

on price realisations in light of the move from benchmark to quarterly contracts). A dividend of US$0.45ps was declared,inline with our forecast. Net debt at the end of the period stands at US$12bn (US$19bn YE2010), with gearing at 19%.Overall a strong result in our view.

Underlying NPAT by division

Divisional NPAT (US$m) 1H10E Consensus Actual Diff vs RBS Diff vs RBSIron Ore 3,420 3676 4108 688 20%Aluminium 387 348 358 -29 -7%Copper 1,185 1153 1062 -123 -10%

Energy 620 793 642 22 4%

Diamond and Minerals 83 81 121 38 45%Other Operations 4 -61 -2 -6 -148%Underlying NPAT (US$m) 5,188 5,515 5,767 579 11%

Iron ore remains the key swing factor for RIO, with 2/3rds of earnings coming from the division. 3Q10 iron ore prices willbe the average of the March to May spot price, implying US$147/t FOB (above the spot price of US$134/t). Thisrepresents another gain qoq, which will see positive earnings momentum continue.

Corporate items

RIO is about to enter a growth phase which is positive for production growth, however a significant amount of capexneeds to be spent.

+ Net debt reduced to US$12bn from US$39bn at 30 June 2009+ Full year 2010 capex to approach US$6bn (RBS US$5.7bn)

+ Full year 2011 capex to be approx US$9bn (RBS US$5.9bn) + Impairment charge of US$403m, related to Alcan Engineered Products

Security ExPrc Stop Loss CP ConvFac Delta Description

RIOKZG 51.2382 56.31 Long 1 1 MINI Long


6/11


MINI Trading Sell:James Hardie (JHX.AX): Operating profit downgrade

Event: JHX1Q11 result

Summary: Management guidance implies ~23% consensus downgrade on FY11 operating profit

Key takeaway: Underlying NPAT of US$40.5m was largely flat vs pcp, with Asia Pacific doing a lot of the heavylifting. US EBIT margins of 24.1% were weighed down by flat volumes and higher pulp and freightcosts. Management's outlook described the US housing market as "disappointing and fragile" with higher costs expectedto play a factor for the immediate future. We expect significant consensus downgrades on the back of this result. Marketis currently forecasting US$143-164m operating profit for FY11. Management guidance is now pointing to a range ofUS$110-125m implying a downgrade of ~23%.

Key results summary:

Result highlights:

Underlying NPAT of US$40.5m down slightly yoy, on flat US volumes and higher pulp and diesel cost pressures. Asia Pac provided most of the heavy lifting accounting 28% of total EBIT, on improved volumes and positive US$

earnings translation on a strong A$.

US EBIT margins dropped yoy to 24.1% (from 30.8%) due to cost pressures primarily related to pulp inputs. Net operating cash flow declined 53% to US$38.7m in the quarter vs the pcp, due to unscheduled increases in

working capital and Dutch EBIT tax.

Effective income tax rates fell to 31.4% (from 38.1% pcp). This was than indicated at the 4Q10 result. The lower

tax rate was due to the geographic shift in earnings.


7/11


Outlook commentary very weak

Management's outlook commentary was very weak, punctuated by new NPAT guidance of US$110-125m inFY11.

The new guidance implies a downgrade of ~23% from current market forecasts of US$143-164m. Management stated that the US housing market "remains disappointing and fragile".... ..."lower mortgage application rates, construction activity, and weak builders sentiment is reinforcing continued

weakness in the US housing market".

Management also believes that the US market conditions will remain at or close to the bottom found in recentmonths. Higher cost impacts from pulp and other items will also remain an impediment to earnings growth in theimmediate term.

Management stated they will be re-aligning the business to account for a slower US housing recovery thanpreviously forecast in their operational planning.

Trading impact - JHX comments throws a warning sign over US housing exposure

We expect the market to take the JHX guidance and outlook commentary very negatively. JHX has typically been conservative in their recovery expectations, so hearing that volumes are missing their

forecasts is a large negative for BLD.

We note due to the higher fixed cost leverage of BLD's brick and tiles business in the US, a stall in the UShousing recovery would have a greater relative impact for BLD.

RBS MINIs over JHX

Security ExPrc Stop Loss CP ConvFac Delta Description

JHXKZP 9.4286 8.4900 Short 1 1 MINI Short


8/11


MINI Trading Buy:Origin Energy (ORGKZC) Offtake and set for NSW privatisation saleORG's share price has come under pressure of late. In addition to general market jitters, we believeconcerns over the outlook for APLNG and the potential for an earnings downgrade have also weighed

on sentiment. In our view, the longer-term outlook hasn't changed, and we are buyers on thisweakness. Buy maintained with RBS Target Price of $18.25

Source: IRESS

Earnings should hold up in FY10...A few things have gone against ORG since the interim result in February (eg, Contact, Cooper flooding, lower oil price,weaker APLNG gas sales), but we still expect the company to meet its c15% NPAT guidance (RBS +15.3% vs market+16.6%). The key positive driver over the last half has been particularly weak electricity spot prices, which should help theretail business deliver a solid FY10 result.

... and the outlook for FY11 looks pretty robustAs shown in this note, next year seems to be loaded with a range of positive earnings drivers, so we find it hard to seeORG being unable to deliver solid profit growth. In our view, the biggest risk revolves around how the Darling Downspower station will interact with ORG's retail business. In isolation, the near-term outlook for the generator would be pretty

ugly, but we are hoping that any downside is offset by improved retail margins.

RSPT shouldn't have a significant impact on long-term fundamentalsWe still don't expect the current proposal to get up with no changes (eg, the uplift rate) but, even if it does, we don't see itmaking a material dent in our ORG valuation. RBS Research base-case valuation for APLNG would fall only 10% underthe RSPT, using RBS Research conservative forecasts for capex and an LNG sales price. At any rate, we believe themarket is underestimating ORG's fall-back plans if the LNG project is delayed materially (we have pushed back thetimeline by 12 months to mid 2015) or even shelved.

Buy maintained; we think current weakness provides a good opportunityIt may be difficult to pinpoint a precise catalyst for Origin's share price to re-rate but, in our view, there is no question thestock is loaded up with positive optionality that can be exercised at any time. The NSW trade sale (fingers crossed) lookspromising and we believe ORG is well positioned to make an accretive acquisition.

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 1095.88 1198 Call 1 1 MINI Long


9/11


RBS Round Up Corner:Monthly Market Review - July 2010

The focus for markets in July was on the European bank stress tests. Despite some commentators questioning

how 'stressful' the tests really were, the market reacted positively to the outcome. Strong company results in theUS and a more tame than expected outcome from Basel also helped investor sentiment.

Australia's performance vs the worldIn local currency, the All Ordinaries (+4.2%) underperformed the US S&P 500 (+6.9%), the World MSCI ex AustraliaIndex (+7.9%) and the regional MSCI ex Japan Index (+7.1%).

The best- and worst-performing sectorsThe best performers for the month were Industrials (+7.2%), Financials ex Property (+6.5%) and Materials (+4.9%). Theworst performers were Information Technology (-4.0%), Telecommunication Services (-0.5%) and Health Care (+0.9%).

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 Linc Energy (+56.4%), Intoll Group(+41.3%), Lynas Corporation (+39.4%), Downer EDI (+38.1%) and Kagara (+34.0%). The bottom-five performers wereNufarm (-29.1%), Aquarius Platinum (-19.8%), Eldorado Gold (-14.8%), iSoft Group (-14.7%) and St Barbara (-14.3%).

Consensus earnings revisionsThe top-five upgrades were Iluka Resources (+23.8%), Intoll Group (+23.4%), Newcrest Mining (+7.2%), Lihir Gold(+6.2%) and OZ Minerals (+2.7%). The top-five downgrades were Nufarm (-31.0%), Aquarius Platinum (-24.3%), Boral (-18.8%), AWE (-14.6%) and Paladin Energy (-10.6%).


10/11


Global growth and valuation appeal to drive equities

Global pressure points manageable and global economic growth to progress furtherWe have reviewed the key macro pressure points for global equity markets and are confident the gradual economicrecovery will be sustained. The market appears to be excessively discounting the prevailing structural and cyclical risks,as serious as they are. The global markets are being forced to confront many unresolved issues, creating pockets ofopportunity. In our view, this is one such opportunity. We see corporate investment as the next global growth driver andglobal corporate health is now supportive of investment resumption, following a period of capex neglect. Corporateprofitability should not be underestimated and in time is likely to be the micro issue that takes centre stage, pushingmacro issues to the background.

We believe resumed confidence in earnings will drive markets forwardAnalysts are often thought to be perennially bullish at the outset. However, following two years of savage declines inexpectations and given the fact we are entering the first year of synchronised positive global economic growth, Australianequity consensus estimates appear both defensible and achievable to us, at 24% growth forecast for FY11.

S&P/ASX 200 targets 5300 by end-2010, 5600 by mid-2011For the market as a whole, we derive our S&P/ASX 200 targets by applying a 12-month forward PE of 12.8x (about 1standard deviation cheap) to the RBS top-down assumptions for net income growth of 23% in FY11F and 14.6% inFY12F. On this basis, we forecast S&P/ASX 200 returns of 22% from 4354 currently to 5300 by year-end 2010 and afurther 5% appreciation to 5600 by mid-2011.

Our view is that there will be no default in Europe but that resolution of the crisis may still be some time off. We showbelow that while debt markets have deteriorated this is certainly no GFC event. With the Australian market trading on a12.2x forward market PE, some good buying opportunities are emerging on any sort of medium-term view.


11/11


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 anyadvice 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 may

not 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/warrants

RBS 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.

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 secondinstalment 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 for 27 august 2010

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