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
22 November 2010
Issue No. 447

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) BHP Billiton (BHPKZJ) Origin Energy (ORGKZC) Australian Strategy

Scoreboard, commentary SPI Comment, Events & Dividends MINI Trading Buy – It's all in the timing MINI Trading Buy – Deploying the cash 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 chalked up a win Friday night despite lingering concerns around Irish debt woes and another 50bps rate hike by the Chinese, the second in two weeks. Some strong company earnings and outlooks provided the support for the market which appears to be range bound for the moment. Movers - Marvell Technologies Group added 6.1% after posting a better than expected profit number which boosted techs across the sector. SanDisk added 3.9% while on the DOW, HP and Intel added 1.9% and 0.5% respectively. Salesforce added 18% after DELL announced they were ramping up their use of the systems while on the downside Wynn Resorts shed 5.5% as Harrah's Entertainment binned their plans to raise 500m through an IPO to fund new casino projects, citing market conditions.

United Kingdom and Europe Commentary
UK - The FTSE was lower Friday night as uncertainty around Irish debt and worries about further tightening in China saw investors take some risk off the table. Standard Chartered led the banks lower off 2.7%, and miners fell on concerns of slowing Chinese demand. BHP, RIO and ENRC off 1.2% to 1.8%. Vedanta fell 0.5% as it finalised funding to purchase Cairn Energy's Indian arm while Sage was the worst performer, off 3.1%, tracking US peers.

Equity Structured Products and Warrants
Commodities Commentary
Last GOLD OIL NI AL ZN CU CRB 1358 81.98 21807 2241 2160 8404 % Move 0.1% -0.5% 0.0% -2.1% -1.2% -0.2% -1.2%

SPI Commentary
The SPI traded down 11ts to 4649. Open at 4660 with a high of 4694 and a low of 4629. Volume 31,030. Overnight the SPI traded up 7pts to 4655. 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
*Dates are indicative only and may change

GDP (QoQ), Existing Home Sales , FOMC Meeting Minutes CB Leading Index (MoM) Core Durable Goods Orders (MoM), Initial Jobless Claims (MoM) , Personal Spending (MoM) , New Home Sales

RBA Governor Stevens Speaks

Equity Structured Products and Warrants

MINI Trading Buy:
Telstra Corporation (TLSKZD) - It's all in the timing
The CSS bill, a key condition precedent for Telstra's NBN deal, has passed the lower house, but the vote in the upper house is less certain with two independent Senators more likely to support Coalition amendments that would force greater regulatory scrutiny. Buy TLSKZD MINI and play up to RBS Research Target Price of $3.06.

Source: IRESS

CSS Bill passes lower house but real test is in the Senate The Government's revised telecommunications bill was voted through the House of Representatives on Tuesday. Amendments proposed by the Coalition opposition parties were not supported. These amendments would have subjected the ACCC to more routine scrutiny and also would have allowed the ACCC to apply proper scrutiny to the Telstra NBN deal. The legislation now goes to the Senate where two independent senators appear more supportive of the amendments. It seems unlikely that the legislation will pass in this sitting. If legislation is not passed until August 2011, a vote may not occur until Nov 2011 If the legislation doesn't pass in November the Government will wait until a new Senate sits after June 2011 where the more supportive Greens hold the balance of power. The Government can't allow the ACCC to rule on the deal until the legislation has passed; so months of evaluation post legislation would mean a shareholder vote would not occur before about November 2011. Another year of NBN disclosures may be enough to highlight inherent inconsistencies However, the passage of a further 9-12 months is likely to allow further inconsistencies inherent in the NBN business model to be considered by an increasingly sceptical carrier industry. Delayed legislation may lead to the NBN stalling and the deal not going ahead. The resulting uncertainty would likely lead to further price weakness. The CSS Bill is one of several potential catalysts. Maintain Hold Passage of the legislation would be an important catalyst and may have some rerating effect. However, there are still several other catalysts that need to occur and the timeline to deal approval is still at least six months away, possibly longer. We expect the market to want more certainty over the NBN deal and clearer evidence of success in the turnaround strategy before a more substantial rerating of the stock. We retain our Hold rating and A$3.06 price target (10% discount to our 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:
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 Buy recommendation.

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 market and for Plc shares (at this stage there is no off-market purchase of Ltd shares). When completed the buyback will increase RBS Research’s FY11F and FY12F EPS by 2%. We view the reinstatement as an interim measure in terms of capital management. We believe the BHP board will review further capital management initiatives ahead of the interim results in February 2011. RBS Research forecast BHP will be in a net-cash position by the end of FY11, leaving directors with 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 an FY11 dividend yield of only c2%. The US$0.93 dividend equates to about US$5.1bn, which compares to operating cash flow 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 pursued straight 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 be overweight BHP going into the next reporting season, as further capital management initiatives may provide another positive catalyst for a re-rating. RBS Research reinstate full research coverage with a Buy recommendation and A$51.15 target price (was A$51.48). RBS MINIs over BHP
Security BHPKZJ ExPrc 32.1971 Stop Loss 35.28 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

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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 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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