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
15 November 2010
Issue No. 442

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.

Global Market Action Aussie Market Action Telstra Corp. (TLSKZD) Santos (STOKZD) Origin Energy (ORGKZC) Australian Strategy

Scoreboard, commentary SPI Comment, Events & Dividends MINI Trading Buy – TLS underperforms global peers MINI Trading Buy – Things can only get better MINI Trading Buy – Cashflow set to surge Monthly Market Review - October 2010

Daily Monitor

Equity Structured Products and Warrants

Overnight Commentary United States Commentary
The US finished lower Friday night, ending a 5 week winning streak, as concerns China's central bank may again raise rates in hope of curbing inflation. The move saw a bout of profit taking across the board with energy and material stocks tracking commodities lower. Lingering Irish debt problems added fuel to the fire and saw the financial sector 4% lower for the week. Movers - Boeing was the biggest underperformer on the DOW, shedding 3.5%, as it stated there was more delays around its Dream liner series, Alcoa fell 2.3% as it tracked metal prices lower while growth proxies CAT and 3M shed 1.7% and 0.3%. Fertilizer related stocks were crushed with CF, Mosaic and Agrium off 4.4% to 6.3% and homebuilders were friendless as DR Horton and Pulte gave up 5.4% and 4.8%. On the upside Fortune Brands added 7.8% on talks it would split its golf, grog and hardware businesses and Nvidia Corp added 5.3% as the release date of a new product was brought forward.

United Kingdom and Europe Commentary
UK - The FTSE pared some of its morning losses as rumours of an EU bailout package to help Ireland fuelled a recovery in the financial sector. Although the rumour was denied by an Irish Finance Ministry spokesman, Lloyds, Standard Chartered and RBS all added 0.7% to 2.2%. Rolls Royce added 4.6% after providing clarity around the engine fault and Invensys added 2.5% as the CEO stated the a Chinese player was likely to bid for them. On the downside it was the miners that littered the laggards board as fears China will take extra steps to curb inflation by raising rates and possibly allowing their currency to appreciate. Kazakhmys, Antofagasta, Xstrata, ENRC, Vedanta, BHP, and RIO all closing 2% to 3.4% lower.

Equity Structured Products and Warrants
Commodities Commentary
Last GOLD OIL NI AL ZN CU CRB 1389 8488.00 22638 2388 2394 8615 304 % Move -1.8% -3.3% -5.5% -2.2% -5.8% -2.4% -3.6%

SPI Commentary
The SPI traded down 34ts to 4708. Open at 4742 with a high of 4753 and a low of 4699. Volume 33,063. Overnight the SPI traded down 11pts to 4689. 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 Thursday AUS US Friday AUS US

Retail Sales (MoM) Monetary Policy Meeting Minutes PPI (MoM) Wage Price Index (QoQ) Housing Starts (MoM), CPI (MoM) Initial Jobless Claims (MoM) , Philadelphia Fed Manufacturing Index Fed Chairman Bernanke Speaks

*Dates are indicative only and may change

Equity Structured Products and Warrants

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 a larger than usual discount to its international peer group on both a PE multiple and dividend yield basis. Buy TLSKZD 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 global telecoms investors following its recent underperformance relative to global peers. Telstra's share price has fallen 8% over the last 2 months vs the FTSE World Telecom Index which is up 11% over the same period (eg Vodafone up 10% and BT up 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 5yr 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 above the 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 key catalysts for a rerating, including: 1) clearer evidence that the strategy to cut prices and increase spend is delivering sustained customer growth and revenue growth; and 2) Parliamentary and regulatory approval of the NBN which is required 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 and the balance of risk/reward may be starting to shift to the upside. However, we expect the market to want clearer evidence of 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 TLSKZC TLSKZD ExPrc 2.4588 2.1131 Stop Loss 2.57 2.32 CP Long Long ConvFac 1 1 Delta 1 1 Description Long MINI Long MINI

Equity Structured Products and Warrants

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 the near term. With the environmental approval now received a deal with Kogas is just around the corner.

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 of A$535m was also a touch ahead of our A$522m forecast, with a slightly higher realised crude price (A$83/bbl vs RBS A$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's quarterly. We are now looking for 50mbbls (guidance 49-52). The net change to our valuation has been a 5c fall to A$15.75 ps.

Buy maintained, we think STO is great value and has some positive potential catalysts Rightly or wrongly, the market's sole focus right now is STO's GLNG project and sentiment has been hit hard since some elements of the Total deal surprised the market (stock off 12% since then). Looking forward, we believe things can only get better from here. Post Federal environmental approvals, a pre FID deal with Kogas is still a possibility and we think the 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 final number 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 STOKZD ExPrc 942.82 Stop Loss 10.30 CP Long ConvFac 1 Delta 1 Description MINI Long

Equity Structured Products and Warrants

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 big year 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 contributions were lower than we expected with retail offsetting. Management has suggested it would have hit its 15% growth target if not for the overseas exploration write-downs, although RBS Research had these in the numbers already. OPCF of A$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 for exploration write-offs to about A$65m (from A$40m). This has been the sole driver of RBS Research’s earnings downgrade. 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 struck almost two years ago and we continue to believe that any news on that front would be well received by the market. Like all investors, we would like to see an off-take arrangement done before we get too excited about the project, but, in our view, 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 coming years. 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 ORG
Security ORGKZC ExPrc 1116.75 Stop Loss 12.20 CP Call ConvFac 1 Delta 1 Description MINI Long

Equity Structured Products and Warrants

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 and commodity 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 world In local currency, the All Ordinaries (+2.1%) underperformed the US S&P 500 (+3.7%), the World MSCI ex Australia Index (+3.7%) and the regional MSCI ex Japan Index (+2.7%). The best- and worst-performing sectors The best performers for the month were Materials (+5.6%), Information Technology (+3.4%) and Telecommunication Services (+1.8%). The worst performers were Health Care (-0.8%), Property (-0.6%) and Consumer Staples (-0.5%). The top-five and bottom-five performing S&P/ASX 200 stocks The top-five performers from the S&P/ASX 200 (price) Index for the month were Nufarm (+26.0%), Extract Resources (+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 revisions The top-five upgrades were MAp Group (+61.6%), Intoll Group (+10.9%), Qantas Airways (+7.6%), Boart Longyear (+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%).

Equity Structured Products and Warrants

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

Equities Structured Products & Warrants Toll free Trading Products Team Ben Smoker Ryan Corrigan Investment Products Team Elizabeth Tian Tania Smyth Robert Deutsch Mark Tisdell 02 8259 2017 02 8259 2023 02 8259 2065 02 8259 6951 elizabeth.tian@rbs.com tania.smyth@rbs.com robert.deutsch@rbs.com mark.tisdell@rbs.com 02 8259 2085 02 8259 2425 ben.smoker@rbs.com ryan.corrigan@rbs.com 1800 450 005 www.rbs.com.au/warrants

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 has been 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 as such. 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. RBS Equities and its affiliated companies may make markets in the securities discussed. RBS Equities, its affiliated companies and their employees from time to time may hold shares, 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 or co-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 to the 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 or invitation 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 into account 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 any recommendation 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 this report. 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 local law 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 Disclosure Statements 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 Scotland N.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 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 to exercise 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 type of warrant.
All charts taken from IRESS unless indicated otherwise

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