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
7 October 2010
Issue No. 424

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 XJO Short (XJOKZQ)
quality ideas for warrant traders and S&P500 Long (SPFKZA)
investors.
Santos (STOKZD)
Origin Energy (ORGKZC)
Australian Strategy
Scoreboard, commentary
SPI Comment, Events & Dividends
International MINIs Pairs trade
MINI Trading Buy – You don't get something for
nothing
MINI Trading Buy – Cashflow set to surge
Monthly Market Review - September 2010

Daily Monitor
 Equity Structured Products and Warrants

Overnight Commentary

United States Commentary

US indices were mixed overnight as the market paused ahead of tomorrows payrolls number. Tech stocks bore the brunt
of the selling as MS downgraded some semiconductor heavy weights driving the NASDAQ south.

ECO - ADP Employment Change came in at -39k vs 20k expected.

Movers - GE and 3M were up over 1.2%, oil majors Exxon and Chevron added 1.1% and 0.6% and Alcoa posted a gain
of 1.8% as it gets set to lead out US reporting season tonight. On the downside tech plays were weaker with Verizon,
and HP's off 0.6% and 0.2%

United Kingdom and Europe Commentary

UK - The FTSE chalked up a win with miners adding the majority of the points as MS released a bullish note on the
sector. Investors remain bullish as it seems more likely the globe will initiate another rounder of quantitative easing.
Anglo, Lonmin, Kazakhmys and Xstrata adding 3.8% to 4.2%. BA was a standout for a second day as Barclays raised
their price target...the stock finishing up 4.5% leading mid cap peer up 12% as they look to hit earnings estimates out of
the park.
 Equity Structured Products and Warrants

Commodities Commentary
Last % Move
GOLD 1349 0.2%
OIL 8318 0.4%
NI 24787 0.3%
AL 2358 -0.7%
ZN 2334 1.0%
CU 8259 1.0%
CRB 0.3%

SPI Commentary
The SPI traded up 79 pts to 4699. Open at 4620 with a high of 4713 and a low of 4612. Volume 35,620. Overnight the SPI traded up 12
pts to 4705.

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 Unemployment Rate
US ADP Nonfarm Employment Change
Thursday AUS
US Initial Jobless Claims
Friday AUS
US Nonfarm Payrolls , Unemployment Rate
*Dates are indicative only and may change
 Equity Structured Products and Warrants

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 to
profit 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 2 year highs. Buy XJO
Short 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 the
DOW/S&P500 indices by 13.1% in this period. To play this pairs trade you can Short XJO and Long S&P500 using
XJOKZQ and SPFKZA MIINIs. Both the AUD and XJO have had substantial run-ups and we recommend that you look
to 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
 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 Telecommunication 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 top-five 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
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
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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
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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 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