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
21 October 2010
Issue No. 431

The Round Up is a comprehensive

daily note produced by the RBS Global Market Action
Warrants team providing an overview Aussie Market Action
of market movements along with Telstra Corp. (TLSKZD)
quality ideas for warrant traders and
investors.
Santos (STOKZD)
Origin Energy (ORGKZC)
Australian Strategy
Scoreboard, commentary
SPI Comment, Events & Dividends
MINI Trading Buy – TLS underperforms global
peers
MINI Trading Buy – You don't get something for
nothing
MINI Trading Buy – Cashflow set to surge
Monthly Market Review - August 2010

Daily Monitor
 Equity Structured Products and Warrants

Overnight Commentary

United States Commentary

The US recovered most of the previous sessions losses as a raft of company earnings beat expectations and fears
around mortgage foreclosures were again pushed to the side.

ECO - Consumer Confidence was -46 and Mortgage Apps fell 10.5%

Movers - Boeing added 3.2% as it returned to profit and lifted its FY guidance and Delta followed suit adding 11% for the
same reasons. Peers rode the wave with the DOW Jones Transport Avg gaining 2.3%. Intel added 2.8$ after
announcing a capex spend of $6-8b to upgrade its plants while Alcoa and CAT both added ~2.2%. BOA slid 0.4% and
MS surprised the market, falling 0.4% after reporting weaker than expected numbers.
 Equity Structured Products and Warrants

United Kingdom and Europe Commentary

UK - It was a complete reversal in London overnight as miners were back in favour and banks were pushed to the side.
Metal prices rallied as the risk trade was back on and the $US weakened against global currencies. Miners dominated
the leader board with Xstrata, Anglo, RIO, Vedanta and BHP adding 2.5% to 3.4% with news RIO approved a $3.1b iron
ore expansion to cope with demand muting the previous sessions fears as China raised rates. Banks were weaker as US
peer Morgan Stanley missed earnings and the British finance minister pledged to seek maximum sustainable revenue
from the sector as the austerity package was released.

Commodities Commentary
Last % Move
GOLD 1345 1.0%
OIL 81.77 2.9%
NI 1083 2.0%
AL 105 0.3%
ZN 109 2.1%
CU 377 1.0%
GOLD 1345 1.0%

SPI Commentary
The SPI traded down 35pts to 4632. Open at 4667 with a high of 4690 and a low of 4587. Volume 37,406. Overnight the SPI traded up
25 pts to 4656.

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
 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 5-
yr 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 ExPrc Stop Loss CP ConvFac Delta Description

TLSKZC 2.4588 2.57 Long 1 1 Long MINI
TLSKZD 2.1131 2.32 Long 1 1 Long MINI
 Equity Structured Products and Warrants

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 nil
cost, 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 around
that 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 rating
agencies 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. In
isolation, the second train FID payment would remove about A$0.66/share from current valuation, but RBS Research had
been factoring in extremely conservative LNG pricing for any future volumes signed up. If anything, RBS Research’s
A$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 unlocking
value for shareholders, the market had not been expecting it after recent press speculation that Shell might get involved
with GLNG in some form of project consolidation. Overall, we still think there will be some upside as GLNG comes to
fruition. RBS MINIs over STO

Security ExPrc Stop Loss CP ConvFac Delta Description

STOKZD 928.95 10.22 Long 1 1 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 ExPrc Stop Loss CP ConvFac Delta Description
ORGKZC 1100.32 1198 Call 1 1 MINI Long
 Equity Structured Products and Warrants

RBS Round Up Corner:

Monthly Market Review - September 2010

September was a good month for equities with the S&P/ASX 200 up over 4%. The ongoing
surge in the AUD was a key feature, particularly during the past two weeks. With expectations
of a sustained period of currency strength, there was increased focus at month-end on the
earnings implications of an AUD at parity.

Australia's performance vs the world

In local currency, the All Ordinaries (+4.5%) underperformed the US S&P 500 (+8.8%), the World MSCI ex Australia
Index (+9.0%) and the regional MSCI ex Japan Index (+11.6%).

The best- and worst-performing sectors

The best performers for the month were Industrials (+6.7%), Materials (+6.3%) and Utilities (+5.9%). The worst
performers were elecommunication Services (-4.4%), Property (-1.1%) and Health Care (+0.7%).

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 Sundance Resources (+72.4%), Lynas
Corporation (+39.3%), Carnarvon Petroleum (+29.9%), Virgin Blue (+26.1%) and Ausenco (+25.7%). The bottom-five
performers were PaperlinX (-20.7%), TPG Telecom (-13.1%), iSoft Group (-10.7%), Carsales.com (-10.6%) and Santos (-
9.8%).

Consensus earnings revisions

The top-five upgrades were Intoll Group (+26.8%), Spark Infrastructure (+13.9%), Map Group (+11.6%), Duet (+4.3%)
and Commonwealth Property Office Fund (+2.4%). The topfive downgrades were Macquarie Group (-16.3%), Paladin
Energy (-15.0%), Aquarius Platinum (-9.0%), Ten Network Holdings (-8.6%) and AWE (-5.5%).
 Equity Structured Products and Warrants

Strong balance sheets to drive investment and acquisitions

Over the past couple of years, we have consistently highlighted the strength of corporate Australia’s balance sheet.
Reporting season again supported this, as evident in the charts below.

We forecast net debt will decline in absolute terms over the next few years. However, as shown in the chart below, M&A
activity has been quite muted in Australia over the past 12 months.

But this conservative approach has created some unique expansion opportunities
Due to the capital raising/preservation policies, corporate Australia is now well placed to expand over the next 6-18
months. We believe corporate thinking might go along the following lines:
Despite some setbacks, the worst of the global financial crisis looks to have passed. The Asian economies (Australia in
particular) look to be strong. We don’t expect a double-dip in the US, although growth may be slow.
The balance sheet is strong as a result of the conservative capital policies adopted.
Debt markets are freeing up, making funding increasingly available on improving terms.
Asset values are generally still well off their highs and/or a number of key growth projects (eg, PNG LNG) are
approaching investment phase. Private equity is also likely to be looking to divest assets acquired in the last cycle.
 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 1800 450 005 www.rbs.com.au/warrants
Trading Products Team
Ben Smoker 02 8259 2085 ben.smoker@rbs.com
Ryan Corrigan 02 8259 2425 ryan.corrigan@rbs.com
Investment Products Team
Elizabeth Tian 02 8259 2017 elizabeth.tian@rbs.com
Tania Smyth 02 8259 2023 tania.smyth@rbs.com
Robert Deutsch 02 8259 2065 robert.deutsch@rbs.com
Mark Tisdell 02 8259 6951 mark.tisdell@rbs.com

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
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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