This material has been produced by RBS sales and trading staff and should not be considered independent. The Round Up 10 November 2009 Issue No. 214 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. In today’s issue Global Market Action Scoreboard, commentary Aussie Market Action SPI Comment, Events & Dividends DJS (DJSSZX) SFI Investment Buy – Upgrade QAN (QANKZJ) MINI Trading Buy – Beneficiary of high AUD QBE (QBESZX) SFI Investment Buy – Investor Update Round Up Corner RBS Monthly Market Review - October Equities Move Last % Move Range Volume ASX 200 +80.9 4674.9 +1.8% +81 to +81 $5.5 bn(A) SPI - yesterday +83.0 4684.0 +1.8% +14 to +92 32,842(A) Dow Jones +203.8 10227.2 +2.0% -3 to +205 Low S&P 500 +23.8 1093.1 +2.2% +3 to +24 Low Nasdaq +41.6 2154.1 +2.0% +16 to +42 Low FTSE +92.5 5235.2 +1.8% u.c to +97 Avg Commodities Move Last % Today % Past Month Oil-WTI spot +1.82 79.25 +2.4% +10.9% Gold Spot +8.00 1103.10 +0.7% +4.9% Nickel (LME) +3.45 787.40 +0.4% -7.1%Aluminium (LME) +1.85 87.02 +2.2% +2.4% Copper (LME) +2.15 295.60 +0.7% +4.8% Zinc (LME) -0.64 96.79 -0.7% +6.0% Silver +0.18 17.56 +1.0% -1.1%Sugar -0.05 21.79 -0.2% +5.4%
RMD (US) +1.72 +3.6% 49.15 5.29 -4.4 c JHX (US) +2.27 +6.9% 35.28 7.59 +17.9 c
PDN (CAN) +0.19 +4.8% 4.17 4.24 +5.3 c
Overnight Commentary
United States Commentary
A promise from the G20 to maintain stimulus had defence on the back burner overnight. A big showing from theheavyweight cyclicals and financials has the Dow heading toward c13month highs, up 180pts.The S&P around 2% higherand the Nasdaq up 1.7%.
Cyclicals - Anything leveraged to growth outperformed. Caterpillar up 4% and the biggest pt contributor, GE up 3.5%,Alcoa 3.2% higher, Boeing 3.1%, Dupont 3% and Intel heading toward a 2.5% gain. All of the aforementioned featuring inthe Dow's top10.
Financials - Comments from the Fed that fewer banks tightened lending standards in Q3, helped confirm liquiditycontinues to free-up. Amex and BofA both up over 4% and the Dow's best performers, Wells up 4%, Morgan Stanley puton 3.5%, Citi, US Bancorp and Regions all around 2-3% higher.
Retail - Radioshack up 15%(S&P500's best) along the way hitting 2 year highs post a broker upgrade and mgmt flaggingplans to sell iPhones in the US next year.
Retail - Abercrombie&Fitch nearly 8% higher after two broker upgrades. One upgrade from "neutral" to "outperform" andthe other, citing potential upside from international sales, saw the stock added to the brokers "Conviction Buy" list.
FX - The DXY index down 0.7c hitting a new 15month low and the AUD nearly 2c higher and back flirting with the 93clevel.
United Kingdom & Europe Commentary
The FTSE, up 1.8% or 92pts, hit its highest close in more than 2 weeks with the continued stimulus packages pledged atthe G20 helping investor sentiment. The FTSE Eurofirst 300 jumped 2%, the DAX was up 2.4% and the CAC ended 2.1%higher.
UK Banks - The G20 pledge to continue support until recovery was assured helped the banks. RBS soared 6.3%, Lloydswas up 0.5% and Standard Chartered climbed 0.8%. Positive 3Q trading statements from HSBC and Barclays, up 1.3%and 1.9% respectively, also helped.
Euro Banks - The G20 news also helped banks on the continent. Deutsche Bank jumped 3.4%, Commerzbank soared5.8%, BNP was up 2.8%, SocGen added 4.1$ and UniCredit ended 5.3% higher.
Insurers - The bid for AXA Aust by the parent saw traders highlight the value of Prudential's Asian business. Prudential jumped 5.2%, Aviva climbed 3%, L&G added 4.3%, Standard Life rose 3.7% and Old Mutual ended 3.8% higher.Germany's Allianz, up 4.3%, beat forecasts which helped the sector on the continent. Hannover Re was up 1.8% with thestock also benefiting from a broker upgrade and Munich Re rose 1.1%. AXA SA, up 0.4%, launched a €2bn rights issue tfund an "aggressive" acquisition strategy.
Eco - German Industrial Production surged 2.7% for the month vs 1% expected whilst the YoY number was -12.9% vs -14.4% expected. The Bank of France Business Sentiment climbed for the 8 consecutive month with the Bank saying theFrench economy will probably expand by 0.5% in Q4.
Commodiites Commentary
Miners - The sector added the most points to the index with a weak $US helping metal prices. BHP climbed 4.2%, Riowas up 4.3%, Anglo also rose 4.3%, Xstrata added 5% and Randgold ended 4% higher with gold hitting fresh all timehighs.
Energy - Crude climbed 3% rising above $80 briefly which helped the majors. Shell was up 2.3%, BP climbed 1.9%, BGroup added 0.8% and Tullow ended 2.8% higher. In Europe Total climbed 2.1%, Statoil was up 2.9% and Repsol ended1.3% higher.
SPI Commentary
The SPI traded up 83pts or 1.8% to 4684. Open at 4615 with a low of 4615 and a high of 4693. Volume 31,306. Overnight the SPIclosed up 78 to 4762.
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 RBA Gov Lowe speaks, ANZ job ads, investor home loans, owner occ housing finance
US
Tuesday AUS RBA’s Broadbent speaks, NAB business confidence, NAB business conditions
US
Wednesday AUS WMI consumer confidence
US Veterans’ Day holiday
Thursday AUS Employment and unemployment
US
Friday AUS
US Trade balance, import prices, Michigan cons confidence
RBS Research have upgraded DJS to a Buy, believing market forecasts do not sufficiently reflect the operationalleverage DJS should enjoy as consumer spending rebounds through FY11F and FY12F. Shorter term we see positivecatalysts in upgraded FY10 and 'aspirational through-the-cycle' operational guidance. Use the recent pullback to buy DJS
for a move back up through $6. Play through DJSSZX
Source: IRESS
RBS Research believe DJS is likely to surprise the market in FY10F with an increase to its through-the-cycle grossmargin guidance of 39.5-40.0% with upgraded FY10F guidance likely, from 0-5% to 5-10% underlying NPAT growth..
RBS research believe DJS can achieve a through-the-cycle sustainable gross margin of up to 41.0% (currently 39.6%)and a cash CODB of 27.5% (currently 28.1%)..
DJS is present in only 16 of Australia’s top-30 shopping centres by turnover. Excluding those to be entered as part of thepreviously disclosed store-rollout programme, RBS Research have identified a further six that we believe havedemographics attractive to DJS and that would be unlikely to significantly cannibalise the company’s existing store sales.
RBS Research upgrade NPAT forecasts as follows: FY10 +1.0% to A$170.5m; FY11 +0.4% to A$193.3m; FY12 +6.9% toA$220.5m. RBS now sit 5.5% and 10.4% above FY11F and FY12F consensus Bloomberg EPS forecasts, respectively.Target price to A$6.40
Qantas Airways (QANKZJ) – Load factor and yields improving
QAN is leveraged to an economic recovery and is a big beneficiary of the appreciating AUD/USD. Comments at QAN’sAGM suggest management is confident it has passed the worst. Updated currency forecasts result in earnings upgradesfor FY10-11F. Given strengthening economic conditions and higher currency, RBS Research maintain Buy
recommendation with $3.35 target price. September traffic statistics also highlighted increased load factors andimprovements to domestic yields. Use the recent pullback to buy QAN. Play thorugh QANKZJ
Source: IRESS
QAN management appears increasingly confident that the worst is behind the company. The next critical piece ofinformation is to see yield improvement, which RBS Research believe may become evident in 2H10 as demand hasstabilised and the worst of the discounting appears to have passed.
QAN is also a beneficiary of a rising AUD/USD. With an estimated 39% of QAN’s cost base exposed to the USD,earnings are positively impacted. Given the spot price sits at $0.92, further earnings upside potential exists. On RBSestimates a 1c increase in the AUD equates to a A$14m increase in NPAT (4.3%).
RBS Research has a Buy recommendation on QAN with a target price of $3.35. With the economic environmentstrengthening and currency movements positively impacting the cost base, we think there remains momentum behind theairlines.
We believe the recent pullback in QBE is a buying opportunity. QBE has reiterated its FY09 guidance for an insurancemargin of 17-18%. Management has also said it has additional debt capacity for cA$1bn in acquisitions. RBS Researchhave a target price of $26.11. Buy QBESZX
Source: IRESS
• QBE reaffirmed its full-year FY09 guidance for an insurance margin of 17-18%.• QBE says it has cA$1bn in debt capacity available for acquisitions with gearing currently only c30%. Bolt-on
acquisitions appear to remain the most attractive, while management has not ruled out further agency purchases.• QBE has said US and UK insurance markets remain soft, although they expect rates to harden in 2H10• QBE’s track record in underwriting and acquisition execution remains excellent. The company has reconfirmed its
FY09 guidance and has a strong balance sheet with cA$1bn of debt capacity available for acquisitions. At A$22.15the stock continues to trade at a discount to RBS price target of A$26.11. We see value in QBE at these levels
The Australian market looks fully valued at present, in RBS Research view. A 12-month forward PE of 16x for the marketis pushing towards a standard deviation of 1.5 above its long-run mean. Other valuation metrics also look full. Therefore,for the market rally to be sustained, earnings growth is key from here. However, US broker revisions seem to be losing
momentum, while Aussie broker revisions are flat. From a bottom-up perspective, we are looking for earnings growth of amodest 6.3% in 2010. Increasingly, the market is likely to look towards 2011 for support; we are looking for 28.6% EPSgrowth in the S&P ASX 200.
Australia's performance vs the worldIn local currency, the All Ordinaries (-1.9%) only just outperformed the US S&P 500 (-2.0%) and in line with the WorldMSCI ex Australia Index (-1.9%), but it underperformed the regional MSCI ex Japan Index (-0.4%).
The best and worst performing sectorsThe best performers for the month were Consumer Staples (+1.4%), Utilities (+0.6%) and Telecommunication Services(+0.4). Most sectors were negative, with the worst being Property (-9.0%), Energy (-5.3%) and Healthcare (-4.1%).
The top five and bottom five performing S&P/ASX 200 stocksThe top five performers from the S&P/ASX 200 (price) Index for the month were Macquarie Media (+19.6%), Virgin BlueHoldings (+17.4%), Energy World Corporation (+16.7%), Flight Centre (+13.7%) and St Barbara (+13.0%). The bottomfive performers were Babcock & Brown Infrastructure (-30.2%), Lynas Corporation (-28.1%), Elders (-22.9%), Paperlinx (-18.5%) and Crane Group (-17.6%).
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The warrants contained in this report are issued by RBS Group (Australia) Pty Limited (ABN 78 000 862 797, AFS Licence No. 247013). The ProductDisclosure Statements relating to these warrants are available upon request from RBS Equities or on our website www.rbs.com.au/warrants
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 theexercise price, or second instalment payment, CP – tells you whether the warrant is a call or a put, ConvFac – the conversion factor of the warrantwhich 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
