rbs round up: 19 october 2010

8/8/2019 RBS Round Up: 19 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

19 October 2010 Issue No. 429

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

XJO Short (XJOKZQ)

S&P500 Long (SPFKZA) International MINIs Pairs trade

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




Overnight Commentary United States Commentary

The US started the week in the black as Citigroup reported better than expected numbers and unexpectedly weak ecodata enhanced the case for a second round of quantitative easing. Markets remain fickle as the concerns over mortgage

foreclosures, which last week plagued the financial sector, appeared to ebb.

ECO - IP was lower at -0.2% vs 0.2% and Capacity Utilization was 74.7% vs 74.8% however NAHB Housing MarketIndex topped expectations at 16 vs 14.

Movers - Citgroup lead the charge posting a gain of 6% after reporting better than expected numbers and helping WellsFargo and Regions Financial post gains of 5.4% and 4.1% respectively. DOW components BOA and JPMorgan alsoposted gains over 2.8% while HP's, IBM and Microsoft added 1.1% to 1.3%. On the downside GE slipped 0.3% andHalliburton slipped 4.8% after missing analysts expectations.




United Kingdom and Europe Commentary

UK - The FTSE chalked up a win overnight with banks and energy majors providing the support. Financials were indemand as Citigroup reported strong results with HSBC, Lloyds and Standard Chartered adding 1.1% to 2.9% after beingsold off the prior week. Oil majors tracked crude higher with RDSA, BG and Tullow up 0.7% to 2.3% with strikes atFrench refineries helping their cause and BP added 1.6%. Miners were under pressure as a raft of broker downgradesand news BHP and RIO would walk away from their proposed JV hurt sentiment. RIO, BHP, Xstrata, Anglo and

Antofagasta all shedding 0.5% to 1.5%. Retailers were also under pressure as the British Government gets set to releaseits Comprehensive Spending Review which is rumoured to contain cuts to the public sector. In M&A land Blue Bay Asset

Mgmt added nearly 30% as Royal Bank of Canada bid 963m pounds for the business. Commodities Commentary

Last % Move

GOLD 1374 0.4% OIL 83.20 2.4% NI 1077 -1.0% AL 108 1.3% ZN 109 0.0% CU 382 0.5% GOLD 1374 0.4%

SPI Commentary

The SPI traded down 50pts to 4655. Open at 4705 with a high of 4720 and a low of 4646. Volume 24,939. Overnight the SPI traded up

49 pts to 4696.

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




International MINIs Pairs trade: XJO (XJOKZQ) overvalued in USD terms

To take advantage of the newly listed RBS International and FX MINIs we have recommended a trade toprofit from the recent outperformance of the XJO vs the Dow/S&P500. The Aussie market has seen

significant inflows of capital driving our market to 5mth highs and the AUD to 27 year highs. Buy XJOShort XJOKZQ and Buy S&P500 Long SPFKZA for this divergence to close.

Source: Bloomberg

XJO Vs DOW/S&P500 in USD terms

The chart above illustrates the gap that has opened up since the beginning of July. The XJO has outperformed theDOW/S&P500 indices by 13.1% in this period. To play this pairs trade you can Short XJO and Long S&P500 usingXJOKZQ and SPFKZA MIINIs. Both the AUD and XJO have had substantial run-ups and we recommend that you lookto lock-in these gains with a short XJO but maintain your market exposure with a Long S&P.

Source: IRESS

Security ExPrc Stop Loss CP ConvFac Delta Description

XJOKZY 5,308.83 5,049 Short .01 1 Short

XJOKZQ 4,949.78 4,708 Short .01 1 Short

SPFKZA $957.2631 1,004.00 Long .01 1 Long

DJXKZA $9,047.7850 9,486.00 Long .01 1 Long




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: IRESS Total 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 approvals STO 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 Research’s Santos valuation and target price just yet RBS 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 Research’sA$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 patience In 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




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 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 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 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 ExPrc Stop Loss CP ConvFac Delta Description

ORGKZC 1100.32 1198 Call 1 1 MINI Long




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 August The 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 August The 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 months The 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 performance The 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%).




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 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 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).

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

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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: 19 october 2010

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