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
29 October 2010
Issue No. 437

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 – Things can only get better
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 markets were mixed overnight however the confusion remains as a lower than expected jobless figure, a
measure that usually bodes well for an economy, sparked a bout of selling as fears the Fed may decide on less stimulus
were ignited. The market is looking to tonight's GDP to provide more direction however a strong number will most likely
trigger more selling and add more uncertainty to the Fed's decision.

Movers - 3M shed 5.9% after providing disappointing earnings numbers which lead CAT and Alcoa down 0.6% and 0.3%
respectively. Exxon continued to rally, adding 0.8%, after providing a strong result while Goodyear Tires shed 9% after
reporting weaker than expected results. Halliburton was another standout laggard shedding 8% as it was claimed they
provided poor advice to BP which may have contributed to the spill in the Gulf.

United Kingdom and Europe Commentary

UK - The FTSE was stronger overnight as the weaker $US increased demand for commodities driving gains in the mining
sector. BHP was a standout performer adding 2.7% while in the oil space RDSA added 0.5% after posting an 18%
increase in 3Q profit as the price of crude strengthened. This adds to Exxon's result the previous night and has set a
positive undertone for many of the oil majors with BG also adding 0.8% as it stated it began production in its key Brazilian
asset Tupi. Vodafone added 2.7% as French peer France Telecom reported strong results while on the downside
AstraZeneca fell 3.3% as its revenue fell 4% due to added competition in the generic drug space and financials Lloyds
and Barclays fell 1.8% and 1.4% after their recent rallies.
 Equity Structured Products and Warrants

Commodities Commentary
Last % Move
GOLD 1344 1.4%
OIL 81.94 0.0%
NI 1045 1.3%
AL 105 1.1%
ZN 112 -0.7%
CU 378 0.5%
CRB 300 0.3%

SPI Commentary
The SPI traded up 43pts to 4682. Open at 4639 with a high of 4703 and a low of 4610. Volume 30,822. Overnight the SPI traded down
8pts to 4676.

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 Fed Chairman Bernanke Speaks , Existing Home Sales
Tuesday AUS NAB Quarterly Business Confidence
US
Wednesday AUS CPI (QoQ)
US New Home Sales
Thursday AUS
US Initial Jobless Claims (MoM)
Friday AUS HIA New Home Sales (MoM)
US GDP (QoQ), Chicago PMI , Michigan Consumer Sentiment 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): $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 ExPrc Stop Loss CP ConvFac Delta Description

STOKZD 942.82 10.30 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 1116.75 12.20 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