&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS ^%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
!z Overview In Australia, the private sector is undergoing a relatively ‘orderly’ deleveragingcycle – with private (non-financial) gross debt-to-GDP falling by almost 10%pts since 2009 (to 169%) – a feat difficult to achieve without triggering a sharpeconomic downturn and/or asset price drop (based on recent global experience). That said, this deleveraging cycle has been mostly driven by business (-8%pts peak-to-trough to 59%), while households have only de-levered slightly (-2%pts to 110%). We expect a trend of orderly deleveraging to continue in the next year or so(as income growth outpaces debt) – amid support from RBA ‘comfort cuts’ in the face of easing house prices and a modest rise in unemployment. However, private sector deleveraging has been partly offset by increasing publicsector leverage – with total (public + private) debt-to-GDP falling by a less significant 5%pts (to 198%). But, this is still a ‘good’ outcome, as many economiesincreased total leverage in recent years. Hence, while Australia’s private leverageis close to the middle of the advanced economy pack – due to low Government debt (29%, albeit more than doubling since the GFC) – total leverage is still among the lowest of the advanced economies. Notably, Australia has also managed to deleverage in the ‘less painful’ way ofGDP outpacing credit growth, rather than a ‘debt deflation trap’ where debtcontracts faster than GDP. This has important longer term implications because itallows Australia to have a more dynamic economy and asset price environment.
The Week Ahead: The RBA October Minutes may give some guidance on what it wouldtake for the Bank to cut rates. Otherwise, only second string data are due, including NABQ3 business survey (capex intentions is the highlight), car sales, and trade prices. In theUS, the NY and Philly Fed PMIs are due, as Bernanke speaks. China’s GDP growthprobably moderated in Q3. In Europe, Germany’s Ifo is due, as EU Leaders meet.
‘Orderly’ private deleveraging continues In Australia, the private sector is undergoing a relatively ‘orderly’ deleveraging cycle – with private (non-financial) gross debt-to-GDP falling by almost 10%pts since 2009 – a feat difficult to achieve without triggering a sharp downturn and/or asset price drop (based on recent international experience, Chart 1). That said, this deleveraging cycle has been mostly driven by the business sector (-8%pts peak-to-trough), while households have only de-levered slightly (-2%pts). Broadly, we expect this orderly deleveraging to continue in the next year or so, with economy-wide income growth outpacing debt.
However, this private sector deleveraging has been partly offset by increased public sector leverage. Hence, total (private & public) debt-to-GDP has fallen by a less significant 5%pts peak-to-trough. Nonetheless, by international standards this is a ‘good’ outcome – with many major economies seeing an increase in total leverage over recent years, driven by the public sector, which has more than offset the drop in the private sector (Charts 14 and 15).
Private sector leverage down 10%pts since Q409
In Q211, the (non-financial) private debt-GDP ratio declined further to 168.6% – the lowest level since Q406 (from 169.0% in Q111). Indeed, peak-to-trough, the ratio has declined by almost 10%pts since Q409 (Chart 1).
Households only very slowly deleveraging (if at all?)
Within the private sector, households are only very slowly deleveraging (if at all), with the debt ratio falling less than 2%pts since peaking in Q110. Indeed, households initially leveraged-up post the GFC – stimulated by record low interest rates (and the first home owner grant) – to be above the Q408 trough by 6%pts. Notably, the level of household debt grew 6.5% y/y in Q211, albeit just above the GFC low of 5.5%. (More recently, household credit slowed in August to 4.3% y/y, just above the GFC record low of 3.9% y/y, Chart 2.) Admittedly, the lack of noticeable household deleveraging may reflect an ‘asset allocation’ decision towards building a ‘deposits buffer’ (Chart 3), rather than directly repaying debt – seeing the households savings rate lift to a multi-decade high.
Looking forward, we expect only a modest pick-up of credit growth, with household debt remaining muted. For now, house prices are falling (Chart 4) and lending is subdued amid stretched housing affordability (Chart 5), especially with worries of rising unemployment. That said, we don’t expect rapid deleveraging – as our view of modest RBA rate cuts are set to improve housing affordability, and clearly decrease the interest payment burden (Chart 6).
Meanwhile, the business (private non-financial corporate) sector is driving the private sector deleveraging (with gross debt -1.6% y/y). Business has dropped peak-to-trough by 15%pts to 58.7% in Q211 – the lowest since Q405 (Chart 1), helped by large equity capital raisings around the GFC (Chart 8). More recently, since the household debt ratio peaked in Q409, business decreased by 9%pts.
Business leverage seems set to fall near-term given that business credit has been flat or modestly falling in recent months (Chart 2), likely weighed down by the hit to confidence from European sovereign debt crisis. However, strong capex intentions over the coming few years suggests a pick-up of credit growth ahead, that would moderate this deleveraging phase (Chart 7).
More broadly, overall business external funding – combining non-intermediated debt, credit and equity – was negative in Q211, for the first time since the early 1990s recession (Chart 8). This contrasts to the GFC, where equity raisings more than offset contracting debt. Arguably, this could be a negative sign for investment, but probably reflects a lack of demand for credit, rather than overtly restricted supply. As the RBA notes (Financial Stability Review, September 2011), the business sector has been able to finance a larger share of its investment via internal funding in recent years, largely because investment has been concentrated in mining, where profitability has increased the most.
National general governmentNational public non-financial corporationsState & local public general governmentState & local public non-financial corporations
% of nominal GDP
Source: RBA, ABS, UBS Source: ABS, UBS
These trends have also seen the level of listed corporate sector gearing (Chart 9) – and interest payments as a share of profit (Chart 10) – fall to lows not seen since the early 1980s. This already large adjustment suggests the desire of corporates (and their lenders) to continue deleveraging may abate, barring a further hit to confidence (for instance from a disorderly European default).
Public sector up 16%pts since Q107; but only 3%pts y/y
In contrast to the private sector, the Government debt-to-GDP ratio has increased to the highest since the late 1990s. However, the rate of increase has slowed, and the ratio is expected to fall in a few years from now once the Federal (National) Government budget returns to surplus. (Meanwhile, the level of gross debt slowed sharply to 20% y/y, from a peak of 45% y/y in Q309.)
Specifically, Government sector leverage rose to 29.0% in Q211, more than doubling from the pre-GFC trough of 13.3% in Q107 (Chart 12). However, the rate of increase has slowed materially to 2.8%pts y/y in Q211, around half the pace in the prior two years (up 6.5%pts in Q210, and 4.9%pts in Q209).
Putting aside intra-Government transfers, this increase remains largely driven by the National Government – up from 5.2% in Q407 to 14.7% in Q211. Meanwhile, the State & Local Government debt ratio steadied in recent quarters – albeit still up from 8.1% in Q407, to 14.2% in Q211. (Note overseas data on Government debt typically refers to General Government only, while for Australia we also included State & Local and public non-financial corporations.)
Australia’s total debt is low compared to overseas
Australia’s total debt-GDP ratio is low compared to many advanced economies – and in 2010 was 85%pts lower than the ‘benchmark’ of the US (197% vs 282%). This mainly reflects much higher Government debt in the US (94%) vs Australia (27%). However, private sector ratios are more similar – with Australia at 170%, compared with the US at 188% (Chart 12).
Source: ABS, Haver, UBS Source: ABS, RBA, National sources, UBS
However, as part of the private deleveraging in the US is due to debt ‘write-offs’, we also extend our analysis beyond the US. For instance, the household debt-income ratio (putting aside data definition issues) argues that the US (at 115%) is an ‘outlier’ – while Australia, NZ, UK and Canada are bunched at a higher range of 150-155% (Chart 13).
More broadly, Australia’s total (non-financial) debt-to-GDP ratio is among the lowest of advanced economies (Charts 14 and 15). That said, Australia’s private debt-GDP ratio is closer to the middle of the pack.
Total (non-financial) Govt Household Business Private
Japan 371 200 75 97 172
Eurozone 306 93 72 142 174
UK 302 88 100 114 214
US 282 94 96 92 188
Canada 235 84 94 56 150
Australia 197 27 110 60 170
China 178 44 28 106 134
Source: ABS, Haver, UBS * Australian Government includes State & local Source: ABS, Haver, UBS * Australian Government includes State & local
Conclusions
Our Senior Global Economist Andy Cates (“When will the deleveraging end?” 29/9/11) argues that US deleveraging ought to end soon, if it hasn’t already, barring a hit to confidence from Europe. But he does not expect a vigorous releveraging-related expansion either. For Europe, where fundamentals are less positive than the US, deleveraging will probably continue in the months ahead.
Australia has been experiencing ‘orderly’ private sector deleveraging over recent years. We expect this trend to continue over the next year or so, with RBA interest rate ‘comfort cuts’ supporting the economy – given a modest rise in the unemployment rate – and keeping the deleveraging orderly. Supporting this notion, Australia’s total debt-GDP ratio – including public debt – is among the lowest of advanced economies.
Notably, Australia has also managed to deleverage in the ‘less painful’ way of GDP outpacing credit growth, rather than a ‘debt deflation trap’ where debt and GDP race to contract at a faster pace. This has important longer term implications because it allows Australia to have a more dynamic economy and asset price environment.
Arguably, this has already occurred in the Australian housing sector, with house prices 10% above the pre-GFC peak, whereas the US is down ~30% and the UK is down ~10%. Despite the outperformance of house prices, Australian housing affordability has still improved noticeably from the pre-GFC level (helped by lower borrowing rates), with the price to income ratio falling back to a level similar to 2003 (Chart 5).
This backdrop has also seen Australia avoid a self-reinforcing banking crisis/ recession/ unemployment spike often associated with a house price crash. Nonetheless, given that Australian house prices have decreased over the last year (with the 3% fall a record for Australia, but hardly a ‘crash’), we will continue to watch these trends carefully. However, our view of 50bp of ‘comfort cuts’ by the RBA by early-2012 should add to the likelihood that the private sector deleveraging remains orderly, rather than accelerating into something more ‘nasty’.
Australian Forecasts: What & Why? Recent forecast changes ! On 30 September, in response to our global team’s expectation
of (an ‘orderly’) Greek default in early 2012, we moved to forecasting two 25bp RBA cuts in February and March 2012 (thereafter ‘on hold’), with a risk of an earlier move. We also cut our 2012 GDP growth forecast from 3.8% to 3.3%, trimming exports and capex.
“Bottom Line” on UBS Economic Forecasts ! Should catastrophe be avoided in Europe, we expect the
economy to pick-up to at least trend pace over the coming year, driven by strong capex and exports (much more so than housing and consumers). The key catalysts are the strong business investment outlook and a gradual recovery of the global economy. The post-floods reconstruction in Queensland should provide an additional boost.
! Inflation is uncomfortably high and wage pressures have gradually risen in some sectors. However, given the growing downside risks around the global outlook and little evidence so far that the benefits of the mining boom are flowing to other parts of the economy, we look for rates to be trimmed by 50bp, most likely in Q1 2012 (with the risk of an earlier move).
! Modestly lower rates should provide some support for interest rate sensitive sectors that have struggled thus far. Falling house prices, poor affordability, and some negative wealth effects have leaned against both housing and consumer spending. We expect consumption growth to recover modestly through 2011, but not to an ‘above-trend’ rate. Dwellings are unlikely to be a major driver of growth, and we expect housing starts to be subdued, slowing from 167k in 2010 to 149k in 2011 and 2012.
! Employment growth has slowed after a very strong period in 2H 2010, consistent with leading indicators. The jobs slowdown looks likely to persist for some time, and we think the unemployment rate will probably drift up to 5½% by year-end. Nonetheless, we expect the jobs outlook to improve, allowing the unemployment rate to fall to 5¼% by end-2012.
! After recent revision, core inflation now looks to be less than previously thought, at 2.6% y/y mid-2011 (was 2.7%). We expect core inflation to drift up towards the top of the 2-3% band by year-end and rise slightly above this as the carbon tax takes effect in mid-2012.
! The AUD should remain supported, though we expect AUD/USD to moderate to 0.90 by end-2011, before rising back to parity by end-2012.
Major Growth Risks ! A near term (GFC style) liquidity and funding crisis – the
ongoing failure of political processes in the US and Europe to calm markets appear to be pushing the world closer to an ‘end game’. This would have negative impacts on the global
recovery, likely to lead to further sharp declines in stock markets and commodity prices, hitting confidence and jobs.
! Consumers ‘repent’ from their new found caution, driving spending freely in post Christmas sales and drawing down the saving rate. This would likely see us reverting to a stronger growth profile, raising the risk that the RBA holds, rather than cut as currently expect.
! China inflation keeps rising, leading to a more aggressive tightening measure than we forecast, slowing China growth materially and undermining commodity prices, the AUD, export demand, and potentially threatening some capex plans.
in the price of bulk commodities. Key to 2012 will be the extent of moderation from here, if any.
! Leading indicators that signal ongoing, but moderating, demand for labour, providing evidence that a significant rise in the unemployment rate is unlikely.
! Credit growth improving, as an indicator of consumers’ and businesses’ desire to re-leverage and credit bank funding availability.
! A sustained pick up in capital goods imports should signal the arrival of the long anticipated capex boom.
Positions on Some Key Controversies ! Don’t give up on the consumer - Retail trade has been dismal.
But strong household cash flow, high savings, elevated confidence and a low unemployment rate provide scope for the consumer to regain a trend pace of growth over the coming year. We nonetheless remain structurally bearish the retail subsector on a 2-3 year view, given persistent high interest rates, the high AUD and more rapid growth in services prices.
! The capex cycle is broader than just mining - While the mining sector will do the bulk of investment over the coming couple of years, we expect some broadening out to other sectors.
! Credit growth will pick-up in 2012 - We look for credit growth to pick-up to a 5% y/y system-wide pace in 2012, almost twice its current 3% pace. Key is the broadening of the capex cycle beyond mining, which should help business credit recover, while stable house prices should provide a ‘floor’ to housing credit growth.
! Cash: We now see a 50-70% probability that Greece will default by early 2012. Default will be focused around a non-compliant Greece at the next IMF review mid-December. While our base case is an orderly default, it still embodies a marked intensification of the crisis into end year, as rising risks of a disorderly default are needed to deliver the political outcome. And while we judge the world should avoid (just) a recession, with consensus at trend, 2012 growth expectations have further to fall. It now seems more likely that with several months of volatility ahead, an eventual default in Greece, and a weaker world economy in 2012, that a further modest rise in unemployment will be added to a cautious, low credit, and weak house price environment. The case to ease rates has not been made, and we doubt enough evidence will appear before end year. But by Q112, lower commodity prices, a trough in China growth, and 5½% unemployment will argue the case amid a Greek default to ‘trim rates’ to ‘insure’ the economy’s deleveraging and disinflation path remains orderly, even as overall growth and capex is firm. We target two 25bp cuts in Feb/Mar 12 (thereafter ‘on hold’) with a risk of an earlier move.
Aussie 10yrs - staying expensive…target 4½% mid 2012 ! US 10yrs: The US 10yr yield fell sharply through 2% on US & euro debt
crisis worries, the US Fed’s commitment to keep the funds rate near zero until mid 2013, and the recent ‘operation twist’. Recent US data has been broadly consistent with a 1½%-2% GDP growth, not a double-dip recession. While Euro risks will keep yields near 2% into end year, 10yr treasuries look expensive on a ‘no double dip scenario’, we target 2½% 1H12 (Chart A).
! Aussie 10yrs: Aussie 10yr yields (Chart B) have collapsed in line with their global peers, to around 4¼%, well below ‘fair value’ at end 2012, assuming some ongoing fiscal consolidation. Given likely stress around Europe, we see yields remaining around 4¼% into end 2011. We target a rise to above 4½% through 1H12, rising to 5¼% end 2012, as global and domestic growth regains a firmer footing, and credit event risks are less prevalent (while strong offshore demand keeps Aussie bonds well bid).
Aussie 3yrs - staying expensive…rising over 4% mid 2012 ! Aussie 3 years: Our model suggests 3yrs (Chart C) are trading expensive –
driven by expectations for large RBA rate cuts by end year. Given our expectation that the RBA will cut in Q112, we target 3¾% end 2011 (unchanged), rising to 5.00% end ‘12 as growth firms and risk aversion eases.
Yield Curve - staying steep, before 2H12 bias to flatten ! Yield curve: The curve, having bull-steepened as aggressive rate cut
expectations dominated, has now flattened to around 60bp as long yields have dropped anew. Looking ahead, we see the curve little changed into end year, as rate cut expectations and crisis fears remain. For 2H12, we see both short and longer dated yields rising, and the curve flattening toward 30bp.
Aussie - US 10yr spread: holding 225bp ! Aussie-US spread: The delay in our US Fed rate hike view from early 2012
to mid 2013 suggests any spread compression is now likely limited, particularly if only modest RBA rate cuts appear (against aggressive pricing). We target 225bp, with a risk it drifts higher in 2H12 met by offshore demand.
The data maintained last week’s positive tone. Employment bounced 20k in September, and the unemployment rate ticked down to 5.2%. NAB business conditions and confidence rebounded (though the level remained low), and consumer confidence held on to last month’s 8% jump, though again, remained below average. Finally, home loan values (ex-refi) were flat in August, but lending for construction picked up noticeably.
Equities rallied on hopes that a ‘comprehensive strategy’ to tackle the crisis will be reached at the next EU Summit (23/10). Slovakia was the final euro zone member to ratify the expansion of the EFSF. In the US, the FOMC minutes revealed that QE3 was discussed. China’s exports to Europe slowed markedly and inflation moderated, as the government announced ‘targeted easing’ aimed at small businesses. Indonesia delivered a surprise rate cut, but Korea held.
In the week to noon, the ASX200 rose 1.0% to 4199; the AUDUSD appreciated to 1.02 from 0.98e 10 year yields jumped 15bp to 4.41%.
! The NAB survey of business conditions index improved to +2.0 in September, after falling to -2.9 in August – the lowest since June 2009 (excluding flood-hit January). Business confidence also bounced sharply to -1.5 from -8.7 (was -7.7) in August (which was the lowest since April 2009). That said, confidence still remained in negative territory (and well below +6 average), likely reflecting negative news on the European debt crisis. The employment component bounced to +2.9 from -1.7, which is not consistent with a sharp rise in unemployment. But other components were less strong. Capex weakened to the equal lowest level since November 2009, and forward orders remained weak (-4.2). Indicators of price pressures moderated (see Charts of the Week).
! Housing finance (values, ex refis) was flat in August – to be down by 1.6% y/y – after a 1.0% rise in July (was 0.7%). Investors bounced again (1.8%, after 1.9%), though owner-occupiers fell (-0.9%, after +0.4%). The number of owner-occupier loans rose by 1.2% m/m in July – to be up 6.9% y/y – after 1.9% in July (was 1.0%). Importantly, construction loans jumped 10%, confirming an uptrend that’s been evident since early this year (see Chart).
! The unemployment rate inched lower to 5.2% in September (UBS & mkt: 5.3%), from 5.3% last month, following an uptrend from 4.9% in April. Jobsbounced 20k, offsetting falls in August (-10k) and July (-5k). The trend remains soft with an average +4k over the last 10 months, below ~40k though most of 2H10 – and below the ~14k per month needed to hold the unemployment rate steady. However, leading indicators suggest jobs growth (which at 1.1% was at a near 2-year low) has probably troughed (see Chart).
! ANZ job ads decreased by 2.1% m/m in September – the sharpest fall since May – following two consecutive 0.7% falls. The y/y pace moderated further to 3.1% – the slowest since early 2010 – from 6.1%. While remaining soft, the data still do not indicate a spike in the unemployment rate.
! Consumer confidence edged up 0.4% m/m in October to a decent 97.2, after an 8% rebound in September (which followed a 15% drop in the prior four months). While the key ‘family finances one-year ahead’ component rose 3% to 98.1, it does not provide a strong direction signal for retail sales or consumption. ‘Time to buy a dwelling’ dropped 10% after a jump last month to a two-year high, but it still indicates a recovery in home building activity.
!LFC7=P9=4`(A?4?N9A`U67FB6AC986F` 14 October 2011
UBS JJ
The Week Ahead: 17th – 21st October The RBA Minutes should give some guidance on what it would take for the Bank to cut rates. Otherwise, only second string data are due. We will focus on capex intentions in NAB’s Q3 business survey, which otherwise has been largely superseded by the more timely monthly surveys. Car sales probably fell modestly in September, and we expect only modest rises in import and export prices in Q3, holding the goods terms of trade broadly steady.
In the US, the first batch of regional manufacturing surveys should give some indication about the direction of the next ISM number, and we expect steady inflation. Fed Chair Bernanke speaks. Elsewhere, China’s GDP growth likely moderated to 9% in Q3 from 9.5% in Q2, with the German Ifo and BoE Minutes the other highlights. Finally, EU Leaders meet at the end of the week, where there are hopes that a bank recap plan may be announced.
NAB capex intentions (LHS, adv 2 qtrs)Underlying business investment (RHS)
Index % y/y
UBSf
'=7`F=P6F`D7?:CM`N?567=C65`94`%6BC6NE67` `
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
02 03 04 05 06 07 08 09 10 11-25
-20
-15
-10
-5
0
5
10
15
20
25
30
ABS car salesVfacts car sales
y/y %
y/y %
Sources: NAB, ABS, UBS, Vfacts
RBA Minutes (Oct) The RBA materially softened its previously hawkish stance on inflation at the October press release, downgrading its assessment of growth, and stating that an “improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary”. However, the Bank arguably retained a ‘neutral’ stance, by reiterating that monetary policy remained “appropriate” in its concluding paragraph. October’s minutes may give further guidance on what it would take for the RBA to cut rates. NAB Quarterly Business survey (Q3) Based on the monthly surveys, NAB’s (more comprehensive) Q3 business confidence and conditions indices will most likely decline. We forecast a fall to 0 from 2.7 for conditions, and to -2 from 6 for confidence (both the lowest since Q2 2009). Capex intentions rose to a 4-year high in Q2 – given the growth outlook has deteriorated compared to three months ago, there is a chance that intentions have weakened (see Chart). International trade prices (Q3) Export and import prices probably rose a modest 1% in Q3, holding the goods terms of trade steady at an all time high. Car sales (Sep) Vfacts industry data indicates a modest 1-2% fall in September car sales, following a 14% rise across three months (which followed a Japan supply-related slump in April and May). A 1.5% fall would see the y/y pace drop to 0.7% from 4.4%.
!LFC7=P9=4`(A?4?N9A`U67FB6AC986F` 14 October 2011
UBS JV
Australian Economic Calendar: October/November 2011 MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
------- 10 Oct------- ------- 11 Oct ------- ------- 12 Oct ------- ------- 13 Oct ------- ------- 14 Oct------- `!/`!"q`[,0`!-%`;%6B<``Act: -2.0%, Pre: -0.7% r
/%`',#/Z0/%`-!$`2,#*-!$ Bond market closed, Stock market open`
!z Overview You could say that the time of reckoning has arrived in respect of the Rugby WorldCup…not only are the All Blacks facing traditional foes, the Wallabies, in thisweekend’s second semi-final but we have also completed the September quarter,which is expected to capture an economic boost from the tournament. It would be fair to say that the anecdote hasn’t been that encouraging, especially outside those cities that have been hosting games, while the just-released Electronic Card Transactions data for September presented a softer picture thanhad been anticipated. However, not all Rugby World Cup related spending will becaptured by this data. Ticket sales have all-but reached the $268.5mn target set by organisers, with thevast majority having been bought in advance. This spending will only be recordedas ‘activity’ when the service is ‘consumed’. For NZ residents this will be captured as ‘private final consumption’ and for non-residents ‘exports of goods & services’.So, while there are doubts about the economic contribution that the Rugby WorldCup will make, we have no reason to alter our estimates at this point.
There is not much on the calendar for this coming week but the common thread amongst the releases is that we will be looking for evidence of the anticipated economic boost from the Rugby World Cup. The service sector is benefitting from the spending associated with the games (at least in the cities concerned), while tourist arrivals must have spiked as the pool-play started and spending on overseas-issued credit cards will undoubtedly add to credit card billings.
"6:`q6=P=45`(A?4?N9A`U67FB6AC986F` 14 October 2011
UBS J_
Will RWC boost Q3 as expected? You could say that the time of reckoning has arrived in respect of the Rugby World Cup…not only are the All Blacks facing traditional foes, the Wallabies, in this weekend’s second semi-final but we have also completed the September quarter, which is expected to capture an economic boost from the tournament. Our forecasts include a 0.3 percentage point contribution to real GDP growth in Q3, as part of our 0.9% q/q forecast (RBNZ had 0.8% q/q in their September MPS). We examine the data thus far to assess whether this remains plausible.
It would be fair to say that the anecdote from food & beverage providers hasn’t been that encouraging, especially outside those cities that have been hosting games. Moreover, the just-released Electronic Card Transactions (ECT) data for September presented a softer picture than had been anticipated. The total value of electronic card transactions in September increased just 0.2% m/m (after a 0.5% m/m fall in August), in retail industries the increase was 0.4% m/m (after a 0.5% m/m fall in August) and for core retail industries 0.6% m/m (after a 1.0% m/m fall in August). By industry group, hospitality fared slightly better, with a 1.2% m/m lift in transaction values, after a 0.5% m/m decline in August.
The ECT data does not bode well for Q3 retail sales – Chart 1 shows how the quarterly rates of change have slumped since June, suggesting little growth in retail sales values in Q3, after a 2% quarterly pace in H1. However, figures from payments solution firm Paymark show foreign-card spending in September rose 29% from a year earlier, while tourist arrivals indicating the Rugby World Cup as the purpose of their visit were accelerating at the end of August. Moreover, the ECT data will not capture tourists that are using cash for their purchases, pre-paid travel/accommodation bookings, other agent bookings or advance household/non-resident purchases of game tickets themselves.
Ticket sales have all-but reached the $268.5mn target set by organisers, with the vast majority having been bought in advance. This spending will only be recorded as ‘activity’ when the service (i.e. travel, accommodation or attendance at a game) is ‘consumed’. For NZ residents this will be captured as ‘private final consumption’ and for non-residents ‘exports of goods & services’. So, while there are doubts about the economic contribution that the Rugby World Cup will make, we have no reason to alter our estimates at this point. If Q3 GDP disappoints, it is just as likely to be for non-Rugby World Cup reasons.
Source: Statistics NZ, NZ Treasury, RBNZ, Datastream, UBS estimates # Indicates changes have been made
"6:`q6=P=45`(A?4?N9A`U67FB6AC986F` 14 October 2011
UBS Vb
New Zealand Forecasts: What & Why? Recent Forecast Changes ! 14 October: Food prices fell over Aug/Sep but not as much as
expected. The end result was that Q3 food prices increased1.9% q/q in Q3 versus our 0.5% q/q forecast. We have revisedour forecast for the Q3 CPI to +0.7% q/q (from +0.5% q/q).
Global environment ! Global economy – growth downgrade: Our forecast for global
growth in 2012 has been lowered to 3.3% from 3.8%; Revisionsmostly reflect lower growth forecasts for Europe and Asia;European fiscal policy will now be more restrictive; Globalfinancial market turmoil is depressing consumer and businessconfidence; Funding issues in the European banking sector area growing concern; Our revised forecasts do not suggestrenewed US or global recession.
! Australia – 50bp of ‘comfort’ cuts in 1H12: Amid deleveragingheadwinds, and growing global risks, the 2012 growth forecasthas been cut from 3.8% to 3.3%, due to weaker exports (from13% to 9%) and business capex (from 14% to 12%). A lowercash rate profile (two 25bp cuts in Feb/Mar) should providesupport to currently soft growth in the housing and retailsectors, while a lower AUD also works to ease some of therecent ‘two-speed’ pressures across the economy.
! Trading partner growth – deeper ‘soft patch’: Consensus forecast for 2011 growth now down to 3.3%, from 3.6% inJune; For 2012, consensus forecast has fallen from 4.5% to4.1% since June; UBS still below-consensus, on 3.2% for 2011and 3.8% for 2012.
! Leveraging off Australia – natural disasters have altered thepattern of Aussie growth also: QLD floods – weak Q1, rebounding in Q2 and Q3; NZD/AUD cross rate in unusuallycompetitive range; Suggests potential ongoing double-digit export growth.
! Terms of trade – peak likely at hand: Up 22.5% since low,highest since Q1 1974; World export commodity prices downfor 4th consecutive month in Sep but just 4% cumulativedecline; Supportive of a surge in nominal GDP growth; Even if multipliers are less than normal, healthy acceleration due.
Growth outlook ! Solid H2 anticipated: Negative impact of earthquake on Q1
GDP less than anticipated; Growth momentum in the rest of theeconomy better than expected; Fundamental influences arepositive, underlying growth improving; Earthquake work plusRWC seen boosting growth over 4% y/y by mid-2012.
Consumers ! Solid growth in H1: ECT showed sustained growth through Q1
and Q2; Q2 retail activity +0.9% q/q, after +1.1% q/q Q1, core+1.0% q/q; Signs of a retail rebound in Christchurch, led byhardware, building and garden supplies; Westpac-McDermott Miller up 8pts to 111 for Q2, ANZ-RM consumer confidencesteady, below average.
` Housing ! Signs of improvement, from extremely low levels: Net migration
outflows post-quake, less supportive of housing; House sales up 34.8% since the low in October last year; Dwelling consents jump 28.6% over July and August; Residential investment down in H2 2010 and Q1 2011, building activity down 11.6% q/q (-24.4% y/y) in Q2.
! House prices – rising building costs likely to dominate: QV House Price Index +0.3% q/q in Q1, -1.5% y/y; REINZ HPI momentum back to the upside for first time since 2009; Drop in migration a weak signal, rising sales positive; Higher construction costs (capacity & standards) anticipated.
y/y), -0.1% q/q part-time, +0.2% q/q full-time; Unemployment rate unchanged at 6.5% in Q2 (Q1 revised down from 6.6%); Canterbury region employment fell 3.6% y/y; Profit expectations dropped in Q1 (QSBO), rebounded in Q2 to near average, consistent with modest business capex growth.
Canterbury earthquake ! Capacity constraints mean rebuilding could take 5-10 years:
Estimated total cost $15bn (7½% GDP) - $9bn residential, $3bn commercial, $3bn infrastructure; Infrastructure work ongoing, residential to begin by year-end, mostly demolition activity inCBD for rest of this year. Estimated cost of reconstruction being revised higher, slower to start, take longer.
Wage inflation ! Wage inflation rising but still modest: LCI private sector salary
& wage rates +0.6% q/q in Q2 s.a.; Reduced skilled worker availability suggests higher wage pressure; ‘Cost of living’ the dominant reason for rising wages; Wage setting behaviour through inflation spike still a risk.
Inflation outlook ! Headline inflation to peak over 5%, core to rise steadily: Core
inflation hit a low at the start of 2010, now over 1½%; Core forecast to be 2¼% late this year, 2½% next year; Wages, commodity prices, oil/fuel, lower NZD, construction costs; Headline peak at 5.3% y/y in Q2, still above 2½% a year later.
Monetary policy ! Global financial market turmoil: Risks have worsened to the
downside for trading partner growth.
! Domestic recovery theme: Likely intact but stronger data-flow will await Q3 indicators, only available in Q4.
! Inflation expectations: Most surveys suggest near, or above, 3% i.e. of concern for the RBNZ.
! RBNZ on hold, for now: Intensification of global economic and financial risks suggests it is prudent to leave the OCR at 2.5%.
! 25bp hike at December MPS, cautious 25bp moves per MPS thereafter, with OCR at 3.75% by end-12.
"6:`q6=P=45`(A?4?N9A`U67FB6AC986F` 14 October 2011
"6:`q6=P=45`(A?4?N9A`U67FB6AC986F` 14 October 2011
UBS VJ
The Week in Review: 10th – 14th October The Government’s operating deficit before gains and losses (OBEGAL) was $18.4bn (9.2% of GDP) for the 12-months to June 2011 (Canterbury earthquakes at a cost of $9.1bn), versus $16.7bn forecast in the Budget. The Crown recorded net gains of $5.0bn, resulting in an operating deficit of $13.4bn (6.7% of GDP), compared with a deficit forecast of $9.4bn in the Budget. Net core crown debt was 20.0% of GDP as at 30 June, less than the Budget forecast of 20.8%.
! The monthly QV Residential Price Index (a three-month moving average) reported that house prices had increased 0.7% y/y in September (led by Auckland, up 3.4% y/y), to now be 4.6% below the late 2007 peak.
! The total value of electronic card transactions increased 0.2% m/m (+6.5% y/y) in September, with transactions in retail industries up 0.4% m/m (+7.5% y/y) and core retail industries up 0.6% m/m (+6.3% y/y).
! Our seasonally adjusted estimates of REINZ house sales show a 3.7% m/m decline in September (+21.2% y/y), after a 5.9% m/m rise in August. The REINZ Monthly Housing Price Index increased 1.7% m/m in September, to be up 2.7% for the year – the highest annual increase since June 2010.
! The BNZ-BusinessNZ Performance of Manufacturing Index stood at 50.8 in September, down 1.9 points on August, and the fourth consecutive monthly decline but the sixth straight month in expansion above 50.
! Food prices fell 1.0% m/m (+4.7% y/y) in September, driven entirely by an 8.6% m/m drop in fruit & vegetable prices.
! The ANZ-Roy Morgan Consumer Confidence measure eased from 112.6 to 112.2 in October, while our seasonally adjusted estimates suggest an 1.1 point decline from 111.7 to 110.6 i.e. below average but well above GFC lows.
The Week Ahead: 17th – 21st October There is not much on the calendar for this coming week but the common thread amongst the releases is that we will be looking for evidence of the anticipated economic boost from the Rugby World Cup. The service sector is benefitting from the spending associated with the games (at least in the cities concerned), while tourist arrivals must have spiked as the pool-play started and spending on overseas-issued credit cards will undoubtedly add to credit card billings.
In Australia, the RBA Minutes may give some guidance on what it would take for the Bank to cut rates. Otherwise, only second string data are due, including NAB Q3 business survey (capex intentions is the highlight), car sales, and trade prices. In the US, the NY and Philly Fed PMIs are due, as Bernanke speaks. China’s GDP growth probably moderated in Q3. In Europe, Germany’s Ifo is due, as EU Leaders meet.
! The Performance of Services Index (PSI) has come off the peak in recent months but, unlike the PMI, has not fallen much and remains above-average. The PSI and PMI are highly correlated (83%), so the risk is to the downside, although the Rugby World Cup may serve to underpin the PSI.
! While tourist arrivals in July and August increased by 8.8% m/m and 8.0% m/m, respectively (around 16.5k per month), only 4.4k in August indicated they were in NZ for the Rugby World Cup. With 85k international visitors anticipated, September should report double-digit growth.
! The data on Electronic Card Transactions for September displayed something of a bounce-back from a weak August, so we expect the same sort of picture for credit card billings.
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80
90
100
110
120
130
140
150
2004 2005 2006 2007 2008 2009 2010 2011
Index
Actual
Seasonally adjusted
Average
Source: ANZ-Roy Morgan, UBS
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50
70
90
110
130
150
170
190
210
230
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
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-10
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Source: Statistics NZ
"6:`q6=P=45`(A?4?N9A`U67FB6AC986F` 14 October 2011
"6:`q6=P=45`(A?4?N9A`U67FB6AC986F` 14 October 2011
UBS VX
UBS
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UBS Investment Research
Australian Equity Strategy
Equity Strategy In A Macro Market
!z Fundamentals Versus Fear The sell-off in global equity markets since mid-April has been driven by 2 key concerns 1) Evidence of slowing/disappointing global growth and 2) arguably thedominant driver, tail risk concerns in respect of the Euro-zone sovereign debt crisis. Cyclical and higher-beta sectors generally underperformed relative todefensive lower-beta sectors. Australia has also been influenced by some unique earnings pressures this year, namely the various headwinds emanating from astrong currency and a distinctly two-tiered economy.
!z Normalisation = Higher Valuations Risk aversion is unusually elevated in recent months, driving a significant de-rating of equities and a sharp rotation out of risky sectors. Our core view is that the selloff is overdone relative to fundamentals, notwithstanding the recent bounce and thelingering tail risks in Europe. We believe the recent rebound can ultimately run further, particularly given where risk aversion indicators and valuations arecurrently sitting.
!z Overweight Resources & Resource-Services This scenario should favour higher beta sectors with strong fundamentals such asresources and resource-services over the highly defensive outperformers of the pastsix months. Domestic cyclicals are showing signs of bottoming after a very poor 12months, though structural headwinds persist. Our view from these levels isrelatively neutral. We continue with a small overweight in banks but once againacknowledge the structural headwinds from subdued credit growth.
&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS V^%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
Fundamentals Versus Fear The sell-off in global equity markets since mid-April has been driven by 2 key concerns 1) Evidence of slowing/disappointing global growth and 2) arguably the dominant driver, tail risk concerns in respect of the Euro-zone sovereign debt crisis.
MSCI World index (LHS) Eurozone LIBOR spread (inv erse) (RHS)
Source: MSCI, Datastream, Bloomberg
The charts above suggest that global risk aversion swings more so than underlying fundamentals have been the dominant driver of recent market gyrations. The corollary to this is that a further improvement in the Euro-zone sovereign debt crisis (our view) should see equities rally further.
Recently we have seen sentiment towards the European situation improve, which has seen a corresponding rally in equity markets adding weight to the view the Eurozone crisis has been the dominant market driver. Underlying economic data has also showed an improving trend in recent weeks as shown by our economic surprise index, though it appears the swing in sentiment toward Europe has been the dominant driver. While there remains undeniable “tail risk” in respect of the Euro-zone, equities appear to be pricing in a more bearish economic outcome than suggested by current conditions in our view.
Looking Forward – No European Vacation
Our central case remains that near-term fear inspired by the Eurozone debt crisis should eventually subside (assuming some degree of effective policy response) allowing further normalisation of risk aversion. Equity market valuations are toward the “crisis” level end of the spectrum, reflecting very high risk aversion. A normalisation should see P/E multiples re-rate from current levels.
Australia Has Followed A Similar Trend
Global risk aversion swings have also been the dominant driver of Australian equities and relative sector moves within the market.
In Australia’s case, the recent sell off was also driven predominantly by a P/E multiple de-rating. The ASX200 index fell (-20.4%) peak to trough while the market P/E de-rated significantly from 12.0x to 9.5x. FY12 estimates have come back around 5% since the April peak.
Risk-Off/Risk-On Also Dominating Sector Performance
Sector relative performance during the sell-off to a large extent reflected the underlying theme of “risk-off”. Cyclical and higher-beta sectors generally underperformed relative to defensive lower-beta sectors. The clearest example of this was the underperformance of the Mining & Metals sector (one of the worst performers) despite the lack of any meaningful earnings downgrades during the sell-off. Likewise, the higher beta sectors that underperformed during the sell off have generally outperformed since September 26th.
Australia Has Had Its Own Sub-Plot
While global risk aversion swings have been dominant Australia has had some unique earnings pressures this year, namely the various headwinds emanating from a strong currency and a distinctly two-tiered economy. This has also influenced sector performance this year.
Transitory Or Persistent Headwinds?
The performance of the Discretionary Retail sector (and most other domestic cyclicals) reflected both a large P/E de-rating as well as large earnings downgrades, itself a function of the sluggish domestic retail environment in evidence this year. The A$ has had a variety of negative impacts on earnings over the past year both direct/translational as well as more difficult to measure impacts in relation to consumer spending patterns and corporate costs structures. In terms of the easier to measure translational impacts a sector like Health Care (whereas overseas earnings are a large portion of the earnings base), despite its
!LFC7=P9=4`(aL9CS`%C7=C6DS` 14 October 2011
UBS Wb
defensive credentials, endured reasonably large earnings downgrades likely a result of the high average A$ over the period.
Equity Strategy – In A Risk Averse Phase
Risk aversion is unusually elevated in recent months, driving a significant de-rating of equities and a sharp rotation out of risky sectors. Our core view is that the sell off is overdone relative to fundamentals, notwithstanding the recent bounce and the lingering tail risks in Europe. We believe the recent rebound can ultimately run further, particularly given where risk aversion indicators and valuations are currently sitting. This scenario should favour higher beta sectors with strong fundamentals such as resources and resource-services over the highly defensive outperformers of the past six months.
China and Resources – 2004 Or 2008?
China has been an additional source of concern in regards to the resource sector but, as we discussed in our resource strategy note last week, underlying commodity demand in China continues to be robust. Fears in respect of the Chinese property market and financial system may continue to bubble along but as long as demand indicators hold (as we expect) we believe the sector should be able to recover with improved global risk aversion.
Beyond this risk normalisation call, sector and style rotation becomes less clear. We continue with a small overweight in banks but acknowledge the structural headwinds from subdued credit growth. On the positive side for banks, yields are attractive and bad-debt fears appear misplaced, in our view. Bank earnings have held up well relative to global banks and the Australian market though we do see some risk to FY12 consensus expectations.
Domestic Conditions A Tentative Bottom?
Domestic cyclicals are showing signs of bottoming after a very poor 12 months. Our view from these levels is relatively neutral. On the positive side cyclical demand indicators are improving from low levels (eg retail sales, building approvals, employment) while valuations are depressed. On the negative side structural headwinds from deleveraging and the competitive tensions stemming form the A$ do not appear to be receding. The RBA is also likely to remain on the sidelines this calendar year in our view, though the next move in rates is likely to be down (Q1 2012). In our view housing and broadcast media is better placed structurally then traditional publishing and retail, particularly department stores.
Equity market returns are influenced by corporate earnings, interest rates and investor-demanded risk premiums. The outlook for any and all of these variables is subject to change.
UBS
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UBS Investment Research
Wesfarmers Limited
Upgrading near term coal prices…
!z Upgrading near term HCC prices by ~9.5% to US$230/t UBS’ global commodities team have upwardly revised near term met-coal forecasts by 3-10%. For 1Q CY12 our HCC and SHC forecasts have increased toUS$230/t and US$165/t respectively. The revisions reflect ongoing supplyuncertainty associated with the BMA strike action (affecting 7 mines delivering~20% of seaborne supply) and constrained QLD production, with mines yet to fully recover from the floods. Beyond 1Q CY12 our price forecasts are largelyunchanged with the aforementioned supply constraints expected to normalise.
!z Modest u/g to FY12 & FY13 EPS on higher near-term coal prices… We have increased our FY12 and FY13 EPS by 1.9% and 1.1% to reflect theimpact of: i) WES 2Q FY12 HCC price settled 12% ahead of UBSe at US$280/t;ii) increases to near term price forecasts reflecting the aforementioned supplyconstraints, and; iii) benefits from reduced spot AUDUSD assumption for FY12from $1.05 to $1.01. For FY12 we forecast ~27% EPS growth for WES.
!z Maintain Buy – 1Q sales result could surprise to the upside… WES has outperformed WOW by ~12% over the last qtr with the Coles F&Lbusiness now trading at a ~22% premium to WOW F&L on a FY13 EV/EBITbasis. While we believe WES is approaching fair value, we see scope for furtheroutperformance near term with industry feedback suggesting upside to our Q1retail forecasts. With the above in mind we have Buy rating ahead of the 1Q FY12retail sales result on 20-Aug.
!z Valuation: unchanged at $31.42 – implies FY12 P/E of 14.8x Our SOTP valuation remains unchanged. Our PT = Valuation x (1 + Ke) less DPS.We note our DCF valuation of $33.53 is above our valuation.
29DMP9DMCF`;!oN< bY>Ib bY>II bY>IJ( bY>IV( bY>IW()6864L6F 51,803 54,829 58,193 61,561 63,757(0*&`;/0%< 3,220 3,240 3,985 4,156 4,284"6C`*4A?N6`;/0%< 1,811 1,928 2,441 2,562 2,641(U%`;/0%Q`!o< 1.57 1.67 2.10 2.21 2.28"6C`-U%`;/0%Q`!o< 1.25 1.50 1.95 2.05 2.11 U7?R9C=E9P9CS`m`h=PL=C9?4 XGS7`M9FC`=8O bY>II bY>IJ( bY>IV( bY>IW((0*&`N=7D94`i 7.6 5.9 6.8 6.8 6.7),*'`;(0*&<`i 11.0 10.1 11.9 12.1 12.2(h>(0*&-!`;A?76<`@ 8.6 9.8 8.1 7.7 7.5U(`;/0%<`@ 18.1 19.4 15.1 14.4 14.0"6C`59895645`S96P5`i 5.0 4.6 6.1 6.4 6.6 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of A$31.79 on 13 Oct 2011 19:43 BST Ben Gilbert Analyst [email protected] +61-2-9324 2782
&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS XI%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
The UBS global commodities team has revised their coal price forecasts to reflect recent Q4 CY11 settlements and continued support from the QLD floods and BMA strike action.
UBS now has the HCC price at US$285/t for 4QCY11 (WES settled at US$280/t), and US$230/t for 1QCY12 (previously US$210/t).
Based on WES’ production mix (46% HCC, 22% SHC, 32% PCI), our revised coal price forecasts imply a VWAP decline of ~9% for 4QCY11 (inline with WES Oct update) and a ~14% decline in 1QCY12.
Key drivers of the outlook for met-coal pricing are:
(1)z BMA labour dispute – has over the last 4mths affected 7 mines delivering >20% of seaborne’s total met-coal supply. While the tonnage impact to-date has been minimal, the issue is unsettling confidence in supply.
(2)z QLD wet weather season – starts in December, with the industry still to fully recover from the flooding events of 1Q CY11. Just a normal wet season could create significant production difficulties, in our view.
(3)z Production growth – particularly in Mongolia and Mozambique. Mongolia is currently exporting 15mtpa with this expected to lift to 50mtpa by 2015. The key constraint on Mongolia’s supply growth relates to rail infrastructure development.
Beyond the Jun-12 quarter we have left our coal price forecasts unchanged with prices trending down and bottoming out in the Dec-12 quarter.
Earnings Impact – FY12E and 13E EPS +1.9% / 1.1% respectively
Following the adjustments to our coal price assumptions, we now expect WES to achieve an average realised price of US$258/t for HCC in FY12, US$180/t for semi-hard, and US$191/t for PCI.
The revisions to our price assumptions have impacted our EPS forecasts by +1.9% in FY12E, and +1.1% in FY13E.
Impact to Valuation Following our resource price revisions our SOTP valuation remains unchanged at $31.42 reflecting the net impact of our earnings changes, and movements in peer multiples.
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` +$IJ ` ` (0*&` (h>(0*&` h=PL6` ` `Coles Food & Liquor` 1,395 12.5 17390 25% premium to WOW in FY12 Kmart` 185 8.2 1516 5% premium to DJS Target` 270 7.8 2108 Similar to DJS Officeworks` 85 7.1 604 10% premium to HVN Bunnings` 895 10.8 9688 c15% premium to ASX Industrials Resources` 695 5.1 3570 NPV using 10% discount rate Insurance` 139 13.0 1803 0.9x GWP and Broking at 10% disct. to AUB Energy` 69 10.4 717 15% discount to ORG Chemicals & Fertilisers` 164 8.6 1416 Average of ORI and IPL Industrial & Safety` 188 9.4 1768 Market Multiple Bunnings Prop Trust (23% stake)` 20 205 BWP market value Gresham` 1 91 40% discount to carrying value Wespine` 7 16.4 119 Similar to GNS Corporate overheads` -104 5.0 -517 0.5x Group average &?C=P` WQbb_` IbOI WbW^XNet Debt` 4093(aL9CS`h=PL6` ` ` VYV_J` Diluted Avg Shares ` 1160 h=PL6`U67`%M=76` ` ` oVIOWJ`
Wesfarmers is the largest conglomerate operating in Australia and NZ. It has ten separate divisions: (1) Resources (coal); (2) Food, Liquor & Convenience (Coles & Bi-Lo supermarkets plus Liquorland, Vintage Cellars & 1st Choice liquor stores); (3) Home Improvement (Bunnings hardware & Officeworks); (4) Target (discount department store); (5) Kmart (disc dept store); (6) Fertilisers & Chemicals; (7) Industrial & Safety distribution; (8) Insurance (Lumley, WFI, OAMPS); (9) Energy; and (10) Other, including a 50% interest in investment bank Gresham Partners. Wesfarmers acquired Coles Group in November 07 for $19bn.
! Statement of Risk
We believe the key risk for WES is the turnaround of the Coles Food & Liquor business (acquired November 2007). Stock performance could hinge greatly on the outcome. WES's earnings could be impacted by many factors in the domestic and global economy. We believe the key factors include discretionary retail activity, coal prices and the A$/US$ exchange rate. More than ever, WES's earnings are exposed to the cyclical global coking coal market.
UBS Investment Research
Iluka Resources Limited
Tracking ahead of volume & cost guidance
!z ILU reports September quarterly production ILU's September quarter is a strong quarter, and the month of September was thecompany's strongest month this year, both in terms of production and revenue.YTD volume suggests production guidance for 2011 will be easily met. Productionvolumes of Zircon, Rutile and Synthetic Rutile are 79%, 78% and 83% of full yearguidance with 3/4 of the year passed. Q4 11 does have a mine move in it in theMurray Basin so will likely see lower production q/q. But with YTD ahead ofguidance, we believe FY guidance should be met.
!z Sales volume maintained, 1% upgrade to FY11e NPAT from COGS Despite the stronger than expected production performance at this stage ILU hasmaintained their sales guidance for CY11. Consequently we have not changed oursale volume assumptions but have lowered our unit costs assumptions marginallyreflecting comments that ILU are racking below $560/t of Z/R/SR, UBSe is $550/t.
!z Price upside risk in TiO2 remains It would appear to use that pricing risks still remain to the upside against marketexpectations, but the macro conditions are changing and will ultimately play a rolein price formation into 2012. In our view, margin expansion may not yet be overfor Iluka, but feedstock pricing may now undertake the heavy lifting versus zirconwhich to date has been the big driver of margin expansion.
!z Valuation: $15.04ps (DCF, 10% d.r.) Our price target is based on a 30% premium to NPV due to tightness in the mineralsands market and potential for further consensus upgrades of long term prices.
29DMP9DMCF`;!oN< IJ>bc IJ>Ib IJ>II( IJ>IJ( IJ>IV()6864L6F 584 960 1,605 2,281 2,408(0*&`;/0%< (24) 86 730 1,377 1,489"6C`*4A?N6`;/0%< (21) 36 493 956 1,057(U%`;/0%Q`!o< (0.05) 0.09 1.18 2.28 2.52"6C`-U%`;/0%Q`!o< 0.00 0.08 0.61 1.14 1.25 U7?R9C=E9P9CS`m`h=PL=C9?4 XGS7`M9FC`=8O IJ>Ib IJ>II( IJ>IJ( IJ>IV((0*&`N=7D94`i 8.6 9.0 45.5 60.4 61.8),*'`;(0*&<`i 4.5 4.1 33.6 59.8 64.6(h>(0*&-!`;A?76<`@ 8.6 8.6 7.8 4.4 3.7U(`;/0%<`@ 18.4 62.7 14.4 7.4 6.7"6C`59895645`S96P5`i 1.3 1.5 3.6 6.7 7.4 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of A$16.99 on 13 Oct 2011 19:43 EST 1PS4`#=:A?AK Analyst [email protected] +61-2-9324 3675
&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS X^%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
ILU reports September quarterly production ILU's September quarter is a strong quarter, and the month of September was the company's strongest month this year, both in terms of production and revenue.
Zircon production was very strong at 157kt, +24% q/q and 15% ahead of UBSe. TiO2 production was also ahead of estimates, with Rutile production of 79kt better than expected (+8% q/q, +14% vs UBSe) offset by Synthetic Rutile of 64kt (-26% q/q and -9% vs UBSe). Maintenance on the kiln is causing the reduced output.
CY 11 production guidance should be easily met in our view
YTD volume suggests production guidance for 2011 will be easily met. Production volumes of Zircon, Rutile and Synthetic Rutile are 79%, 78% and 83% of full year guidance with 3/4 of the year passed. Q4 11 does have a mine move in it in the Murray Basin so will likely see lower production q/q. But with YTD ahead of guidance, we believe FY guidance should be met.
2011 guidance is zircon (550kt), rutile (275kt) and SR (260kt).
Iluka is also maintaining sales volume guidance for 2011, which is zircon (520kt), rutile (230-240kt) and SR (240-245kt).
Sales Revenue for the September quarter was $533m, and YTD sales revenue sits at $1,103m. UBS does not model ILU P&L on a quarterly basis, our estimate for H2 11 revenue is $930m. So well on track to make our estimate.
Sales volumes were not reported for September quarter, so some of the very strong revenue line is likely to be attributed to higher than normal shipments. Recall that ILU had some June quarter shipments which carried over into the September quarter due to issues at the Geraldton Port at the end of June.
On COGS, ILU indicated on their current run rate cost will be within guidance of $560/t of Z/R/SR.
Market commentary neutral in our view
ILU characterised overall demand for Zircon as solid during the quarter. ILU highlighted that policy tightening in China has led to some customer caution about future demand commitments. European and US demand has also been solid, and ILU believes that some of this reflects a reorientation of end user demand for Ceramic manufacturers to non European emerging markets.
In our view, it is clear that customers are concerned about the current environment and that today it is more an issue of confidence than any fundamental change in Iluka's physical flow of material. But then we would point out that producing companies generally do not have too much more visibility than what their order books are telling them. And the visibility is only as good as up to the day the phone rings to say stop sending product. But it feels as though we are a ways off that yet.
Demand in the high grade titanium feed stock market remains solid, with sales volumes in line with expectations and with overall industry supply remaining tight.
Consensus earnings supported by quarterly
ILU's comments about maintaining sales volume guidance indicates that consensus revenue may not be changed much post today’s quarterly for 2011, with ILU looking to rebuild a degree of inventory. Depends on if the market wants to include some of the higher volume.
Where the stronger performance may benefit 2011 earnings is the COGS front. With production year end inventory potentially higher than expected, more of ILU's cash costs for 2011 may be capitalised into working capital, rather than expensed into the P&L. In addition, ILU's comments that unit costs are within
*PLK=`)6F?L7A6F`#9N9C65` 13 October 2011
UBS Yb
prior guidance of $560/t of Z/R/SR (potentially due to more tonnage over a portion of fixed cost base) this may also help profitability.
Overall we do not anticipate material upgrades to consensus post the quarterly, but the strong quarterly does at least support current estimates.
ILU’s Q4 Zircon price rise Yesterday Iluka advised that it expects to achieve an increase in the weighted average price for zircon of approximately 10% for the December 2011 quarter (commencing 1 October 2011), relative to a weighted average price in the third quarter of approximately US$2,200/t. Thus implying a price of US$2,420/t for Q4 11.
How does this compare to expectations?
UBS were forecasting a zircon price of US$2,400/t for Q4 11, while consensus we understand was looking for a price of US$2,387/t. Thus the outcome of US$2,420/t is slightly ahead of expectations. We also believe that the market in recent weeks had been concerned that a price rise was becoming less likely (despite Iluka's comments to the contrary) given the deteriorating economic conditions particularly in Europe. Manufacturing indices and investor confidence across Europe and the US have been falling since earlier this year.
What is happening physically?
We have had the chance to chat with Iluka post release of the pricing outcome and we note that volume offtake remains firm with all customers taking delivery of their committed tonnes and paying committed price. However, it is clear that customers are concerned about the current environment and that today it is more an issue of confidence than any fundamental change in Iluka's physical flow of material.
But then we would point out that producing companies generally do not have too much more visibility than what their order books are telling them. And the visibility is only as good as up to the day the phone rings to say stop sending product. But it feels as though we are a ways off that yet.
What next for pricing? Zircon.
Prior to today's release we are forecasting a further price rise for zircon on 01 Jan 12 of US$250/t up to US$2,650/t, based on our forecast of US$2,40/t for Q4 11. We then hold this price for the next 2 years, before trending down towards our long run zircon price of US$1,250/t in 2016. Consensus we understand for 2012 is US$2,628/t.
While we are yet to change our price forecast for 2012, it is not inconceivable that Iluka may look to give their zircon customers some respite from price rises, which have been consistently rising every 3 months since the beginning of 2010. So we may see prices unchanged going into 2012, but Iluka in our view is keen to ensure investors that price rises are not over, should world economies hold together.
*PLK=`)6F?L7A6F`#9N9C65` 13 October 2011
UBS YI
Rutile/SR.
Prices are currently set every 6 months with the last price rise occurring on 01 July 2011. At that time, Rutile/SR prices went up 70-75%, which at the time was well above market expectations. Based on H1 11 prices for rutile and SR of US$770/t and US$640/t, respectively, this implied prices for H2 11 of US$1,300/t and US$1,100/t were achieved.
It is our view that rutile and SR prices are ultimately driven by what happens to pigment pricing, and a good rule of thumb is that rutile and SR prices can go up by 80% and 75%, respectively of the move in pigment pricing without impacting the margin of the pigment players.
Looking at pigment prices, they are around ~US$3,600/t for Q4 11 assuming the recently announced US$500/t increase sticks. Over the last 2 years, this suggests pigment prices are up US$1,600/t and would thus support a US$1,280/t increase in rutile and a US$1,200/t increase in SR prices. Based on 2010 rutile and SR pricing of US$550/t and US$450/t, respectively, the full pass through of the rise in pigment pricing would imply rutile and SR pricing of US$1,800/t and US$1,650/t, respectively. This implies upside of 40-50% for feedstock pricing in 2012 cf H2 11 prices. Consensus is calling for +11-12%.
So in summary, there exists upside surprise for feedstock pricing against market expectations for 2012, but we caution that feedstock pricing will depend on the extent to what pigment producers can get their Q4 11 price rise to stick. Even if only 50% of the recently announced pigment price rise were to stick, it would still suggest upside to feedstock pricing against market expectations.
*PLK=`)6F?L7A6F`#9N9C65` 13 October 2011
UBS YJ
UBS are looking for a ~20-25% rise in 2012 for rutile and SR against H2 11 pricing.
Earnings changes Despite the stronger than expected production performance at this stage ILU has maintained their sales guidance for CY11. Consequently we have not changed our sale volume assumptions but have lowered our unit costs assumptions marginally reflecting comments that ILU are racking below $560/t of Z/R/SR, UBSe is $550/t. This leads to a 1% upgrade in our FY11e earnings to $493m.
Investment view It would appear to use that pricing risks still remain to the upside against market expectations, but the macro conditions are changing and will ultimately play a role in price formation into 2012. Worth keeping an eye on the pigment producers as they report Q3 results this month, as their commentary is likely to drive Iulka's performance.
In our view, margin expansion may not yet be over for Iluka, but feedstock pricing may now undertake the heavy lifting versus zircon which to date has been the big driver of margin expansion.
*PLK=`)6F?L7A6F`#9N9C65` 13 October 2011
UBS YV
MARKET INFORMATION COMPANY DESCRIPTIONRating: Buy;%(6*zQ&#z,:zLE4=6$4LLRO L`W__zzPrice Target (12 months): 20.00 9##"*3z2&+($&'O dL\WYI&%J*$z2&+($&'(#&$(,-O `Sd\_W_!1.Wz3&('8z$"%-,1*%zQ5/V7R YXWMU*&%z*-3Oz j*6zMXLLB*C#($*O N$$+O^^@@@W('"J&W6,7W&"I&n,%z/N&%*N,'3*%#O 4
]&Fz*F+*-#* Q`XR QLdMR QdR QMXMR QdLXR QdaEREPS SENSITIVITIES 0H"($8z!##,6(&$*3z?;!] X X X X X XCommodity Base 2011E 2012E 2013E I(-,%($8z9-$*%*#$# X X X X X X
Change EPS Change j(1(3*-3#ze+%*:*%%*3f X X X X X XNet Profit [reported] 146 347 36 493 956 1057!C-,%7&'zi&(-^Qp,##Rz&:$*%z]&F X X X X X X
Iluka Resources (ILU) is one of the world's largest producers of mineral sands products, with operations in Western Australia, Queensland and the US. ILU is the world's largest producer of zircon and second largest titanium minerals producer. ILU also has a royalty stream over BHP Billiton's Mining Area C iron ore project in Western Australia.
! Statement of Risk
Investment risk inherent in the resource sector includes, but is not limited to movement of commodity price and currency which may differ materially from the assumptions used in this report. Furthermore the sector is subject to political, financial and operational risks, each of which has the potential to significantly impact industry performance.
UBS Investment Research
PanAust Limited
Weather softens CY11 outlook; exploration firms up future growth
!z Event: September quarterly production report PanAust has reported Q3 production from Phu Kham of 13.0kt Cu and 11.7kozgold, down 13% and 16% respectively on the UBS-e of 15kt Cu and 14koz gold. Cash costs for the period were reported at US$1.12/lb, 11% above UBS-e of US$1.01/lb. The Ban Houayxai project remains on track for commissioning in late2011 and first gold output in the March quarter of 2012. Drilling at Phu Khamconfirms deposit at depth implying potential for future underground development.The Inca de Oro study remains on track for an interim update before year end.
!z Impact: CY11 production guidance downgraded marginally Lower Q3 output and the recent fall in commodity prices has seen full yearguidance downgraded to 60kt Cu with EBITDA guidance lowered to US$280-305m. Our CY11e EPS has been downgraded by 21% due to a combination oflower commodity price assumptions for Q4 and the downgraded productionprofile.
!z Action: Buy maintained – growth options from Chile and Laos We maintain our Buy call on PanAust with a view that it offers significant leveragefor investors with a strong production growth profile over the next 3-years and substantial exploration upside potential from its tenement packages in Laos andChile.
!z Valuation: US$4.75/sh (DCF, 10% discount rate) Our valuation has been lowered by 7% and our target price by 2%. Our target priceof A$5.70/sh is derived from a 1.2x P/NPV multiple.
29DMP9DMCF`;/%oN< IJ>bc IJ>Ib IJ>II( IJ>IJ( IJ>IV()6864L6F 346 572 598 866 826(0*&`;/0%< 82 246 235 414 347"6C`*4A?N6`;/0%< 18 143 139 264 234(U%`;/0%Q`!o< 0.04 0.26 0.22 0.41 0.37"6C`-U%`;/0%Q`!o< 0.00 0.00 0.00 0.00 0.00 U7?R9C=E9P9CS`m`h=PL=C9?4 XGS7`M9FC`=8O IJ>Ib IJ>II( IJ>IJ( IJ>IV((0*&`N=7D94`i -15.5 42.9 39.3 47.8 41.9),*'`;(0*&<`i - 46.4 35.9 53.1 45.9(h>(0*&-!`;A?76<`@ 12.1 5.4 6.3 3.5 3.3U(`;/0%<`@ NM 11.6 14.0 7.5 8.5"6C`59895645`S96P5`i 0.0 0.0 0.0 0.0 0.0 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of A$3.11 on 12 Oct 2011 23:51 EST [?`0=CC67FM9PP Analyst [email protected] +61-2-9324 2834
&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS YX%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
September quarterly production report PanAust today released its September quarterly production report. The general theme was one of slightly weaker output due to extreme rains in the annual wet season. However, extensional exploration around Phu Kham appears to be proving up continuity at depth suggesting an underground reserve is possible over time.
Phu Kham Production
PanAust has reported September quarterly production from Phu Kham of 13.0kt Cu and 11.7koz gold, down 13% and 16% respectively on the UBS estimates of 15kt Cu and 14koz gold.
Copper and gold production was below forecast due to extreme rainfall in June and July preventing access to high grade ore within the pit. So far, the mine has received 3.1m of rain through until the end of September. The company anticipates that production in the December quarter should return to previous levels once access to the high grade ore has been re-established. The head grade is expected to lift from 0.61% to 0.68% by the end of the December period. The company has pumped the water out of the pit and is now in the process of removing the associated sediment.
Encouragingly, mill throughput was maintained above nameplate rates over the course of the September quarter.
Historical wet season impacts (May to October)
We have reviewed the historical mining volumes from both PanAust’s Phu Kham operation and also from Minmetal’s Sepon and Khanong gold and copper mines (previously owned by Oz Minerals). While the historical data only goes back as far as 2005/2006, a clear trend of lower mining rates is evident through the wet season (Chart 1). We believe the underperformance of the September quarter of 2008 is masked by the ramp up of Phu Kham (Sepon actually saw lower production q-o-q).
Our PNA model assumes a 10% reduction in mining volumes during the September quarter for each forward year.
Costs
Cash operating costs for the period were reported at US$1.12/lb, which is 11% above our forecast cash costs of US$1.01/lb. Given the higher portion of metallurgically complex transitional ore in the feed blend, the cost performance should be considered a relative success. Recoveries were 66% compared to around 72% in the previous period.
Upgrade project
The Phu Kham project, lifting throughput rates from 12Mtpa to 16Mtpa, is running ahead of schedule with commissioning and ramp up still expected within the June quarter of 2012. As well as the lift in throughputs, the project will also increase grinding and flotation capacity, which is expected to result in higher recoveries.
Capex is estimated at US$95m with US$18.5m committed to date.
Exploration
The company has announced additional results from the extensional exploration programme at Phu Kham. Best results include 104m at 0.72% Cu and 0.3g/t Au from 478m (Figure 1).
Management commentary during the conference call suggested that this extension could ultimately result in a resource equivalent to 25 – 50% of the current open pit reserve, which implies a potential resource of between 280 – 560kt of contained copper. The depth and higher grade nature of the drill intersections would also imply this could be an underground extension to the existing open pit operation.
U=4!LFC`#9N9C65` 14 October 2011
UBS Y_
While it remains at an early stage, the company intends embarking on scoping studies over the next 12 – 18 months to determine the best approach to monetising the resource. However, this backs our previous view that the resource is likely to get bigger resulting in future mine life extensions.
Ban Houayxai The Ban Houayxai development remains on track for commencement of commissioning in late 2011 and first gold production in the March quarter of 2012. The company is suggesting that gold production during the first 12-months could exceed 100,000oz due to the soft nature of the ore, while silver production would be below the life of mine average (the near surface material is depleted in silver). We leave our current mine schedule unchanged and wait for the company’s updated resource estimate, mine plan and reserve expected in Jan/Feb 2012.
To date, project expenditure has totalled US$148m (from a budget of US$183 – 195m).
Inca de Oro Feasibility work is ongoing with a completion date anticipated in the June quarter of 2012. However, the objective is to get an interim update out to the market before the end of the current year. We believe this could be to target a Board decision to order the long lead items prior to year end.
Company guidance Based on the weaker than forecast September quarter and the recent fall in commodity prices, full year guidance has subsequently been marginally downgraded to 60kt with costs unchanged at US$0.95 – 1.05/lb and EBITDA guidance downgraded to US$280 - $305m. Prior to today’s release, UBS-e were at 61.8kt with an EBITDA of US$350m. Subsequently, the lower production guidance equates to a minor downgrade to our production estimate (-2.9%). The EBITDA guidance is a larger downgrade but is related more to commodity prices, clearly out of the control of management. Our previous EBITDA estimate assumed a copper price of US$4.10/lb, a gold price of US$2000/oz and a silver price of US$39/oz.
We are now forecasting production of 60.1kt Cu, 54.6koz gold and 549.7koz silver at cash operating costs US$1.01/lb (net of by-product credits). After lowering our production estimates and reviewing our commodity price assumptions, our EBITDA forecast for CY11-e is now $290m.
Summary of changes The table below highlights the summary of changes to our production and financial forecasts (Table 1).
The key change is the downgrade to CY11-e earnings (-21%). This is primarily driven by the combination of our lower copper and gold price assumptions for the final quarter and the downgrade to production estimates for the full year.
Our NPV has been downgraded by 7% to US$4.75/sh but our target price of A$5.70/sh is only downgraded by 2% due to a change in our AUDUSD currency assumptions.
Investment thesis We maintain our Buy recommendation on PanAust with a view that it offers significant leverage for investors with a strong production growth profile over the next 3-years and substantial exploration upside from its tenement packages in Laos and Chile.
]&Fz*F+*-#* QLdR QdMR Qa`R Q`MR QLMdR QLX_REPS SENSITIVITIES 0H"($8z!##,6(&$*3z?;!] X X X X X XCommodity Base 2011E 2012E 2013E I(-,%($8z9-$*%*#$# Q`R QLLR QLYR QLYR QMaR QMXR
Change EPS Change j(1(3*-3#ze+%*:*%%*3f X X X X X XNet Profit [reported] 47 96 143 139 264 234
2,++*%zmLXk LXk LEk L`k L\k !C-,%7&'zi&(-^Qp,##Rz&:$*%z]&F X X X X X Xi,'3zmLXk LXk Mk `k \k2"%%*-68 a| 4dk 4ak 4ak Net Profit [adjusted] 47 96 143 139 264 234
EBITDA margin (%) 52.4 48.5 57.4 53.6 z Net Interest Cover [EBIT] (x) (8.2) (20.5) (207.7) 22.6
Tax Rate (%) 26% 28% 30% 30%CASH FLOW EBIT/Total Assets (%) 27.9 21.0 29.9 21.4 (US$m) 2010A 2011E 2012E 2013E NPAT/Equity (%) 21.1 15.8 23.0 16.9 =+*%&$(-.z(-6,7*ze0P9]Sz5P/f Md` MEa dLd EdYj*+%*6(&$(,-zbz!7,%$(#&$(,- ad aa \E _`?*$z6N&-.*z(-z@,%J(-.z6&+($&'z L` X X X BALANCE SHEET [Selected Items] =$N*%zQ,+*%&$(-.Rzz QE`R QLER QMaR QMXR (US$m) 2010A 2011E 2012E 2013EPre-tax op cash flow 279 277 473 423 ?*$zB,%J(-.z6&+($&'z QLdR QMER QMER QMER9-$*%*#$zQ+&(3Rz^z%*6*(1*3 QLdR Q_R QMR La T(F*3z!##*$# EEE dE\ dMX Eda]&Fz+&(3zz X QaaR QLMdR QLX_R ?*$z=$N*% MLY EYL E_L dLL=$N*% X X X X Capital Employed 535 786 788 734Operating cash flow 265 213 347 330 ?*$zz2&#Nz^zQj*C$R LdM _Y E`X `dY2&+($&'z*F+*-3($"%*zz QEaR QLEdR Q`aR QMMR Total Equity [incl. minorities] 678 884 1147 1381Free cash flow 231 79 282 308 I(-,%($(*# aX LXE LXE LXE?*$zQ&6H"(#($(,-#Rz^z3(#+,#&'# X X X Xj(1(3*-3#z+&(3zQ2,77,-R X X X X Net Debt / Equity (%) (21.0) (11.0) (31.3) (46.9)/N&%*#z(##"*3^Q%*+"%6N&#*3R X M X X Book Value per Share($) 1.15 1.49 1.93 2.33 Source: Company accounts, UBS estimates. UBS valuations are stated before goodwill, exceptionals and other special items. Note: The data represents an extract of the full company accounts.
PanAust Limited owns and operates the recently commissioned Phu Kham Copper-Gold project located in Laos. The base case 12Mtpa operation at Phu Kham can sustain a 13-year mine life producing 65kt Cu and 65koz Au per annum at costs of ~US¢90/lb. We expect the operation will be expanded to 12Mtpa from mid-2011. Other potential development assets in the pipeline include the Ban Houayxai gold-silver project, also in Laos, and the Puthep copper project in Thailand. A significant recapitalisation in mid-2009 has positioned the company with minimal debt. Guangdong Rising Asset Management owns 19.9%.
! Statement of Risk
Investment risk inherent in the resource sector includes, but is not limited to movement of commodity price and currency which may differ materially from the assumptions used in this report. Furthermore the sector is subject to political, financial and operational risks, each of which has the potential to significantly impact industry performance.
UBS
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UBS Investment Research
Perseus Mining Limited
Capital raising to fast-track Tengrela
!z Event: Raising up to C$93.4m in Canada PRU have sold 25m shares at C$3.25/sh under a bought deal arrangement inCanada, with the underwriters granted an over-allotment option to purchase a further 3.75m shares at the same price. Whilst the Company states the proceedswill be to “…fund development of the Company’s projects and generally workingcapital purposes”, we understand the Tengrela Project is progressing with the potential to be approved sooner than originally anticipated. We believe the capexprofile is likely to be brought forward and long lead items ordered.
!z Impact: FY12e EPS lower due to dilution and lower gold price forecasts We have diluted for the share and option issuance and taken the opportunity toadjust FY12 operating costs into line with the current ramp-up stage at Edikan. However, we have also updated our commodity price and currency assumptionswith FY12e gold price lowered by 3% to US$1974/oz. The net impact has loweredFY12e, FY13e and FY14e EPS by 23%, 3% and 5% respectively.
!z Action: Maintain Buy – Tengrela might be 6 months ahead of forecasts We maintain our Buy rating. With commissioning at Edikan progressing to plan, a move to fast-track Tengrela would allow the re-deployment of construction/commissioning personnel to Tengrela soon after completion atEdikan. Moving Tengrela forward by 6 months would be ~4% NPV accretive.
!z Valuation: $4.74/sh (6% discount rate) Our NPV has been lowered by 6% and our price target, derived from 1.1x P/NPV,has been reduced by 5%. Our NPV assuming a flat $1900/oz gold price is $6.49/sh.
29DMP9DMCF`;!oN< bY>Ib bY>II bY>IJ( bY>IV( bY>IW()6864L6F 0 0 376 457 599(0*&`;/0%< (12) (54) 226 248 311"6C`*4A?N6`;/0%< (10) (51) 159 183 231(U%`;/0%Q`!o< (0.03) (0.12) 0.35 0.40 0.51"6C`-U%`;/0%Q`!o< 0.00 0.00 0.00 0.00 0.00 U7?R9C=E9P9CS`m`h=PL=C9?4 XGS7`M9FC`=8O bY>II bY>IJ( bY>IV( bY>IW((0*&`N=7D94`i - - 60.1 54.2 51.9),*'`;(0*&<`i - (32.4) 99.7 80.7 80.9(h>(0*&-!`;A?76<`@ - -22.4 5.0 4.2 2.6U(`;/0%<`@ - NM 9.3 8.1 6.4"6C`59895645`S96P5`i - 0.0 0.0 0.0 0.0 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of A$3.25 on 13 Oct 2011 18:43 BST [?`0=CC67FM9PP Analyst [email protected] +61-2-9324 2834
&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS ^V%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
ENTERPRISE VALUE =$N*%# QdLR QER QdaR MEX MaM QdaR(A$m) 2011A 2012E 2013E 2014E /i! QER Q`R Q_R QdR QdR QdREnterprise Value 1,194 1,433 1,351 1,174 EBIT (44) (10) (54) 226 248 311EV/EBITDA (x) }X `WL aWL EWE ?*$z(-$*%*#$ M L M M LE L_EV/Operating Free Cash Flow (x) }X LMWY LaWY `W\ Profit before tax (42) (9) (51) 228 261 330
]&Fz*F+*-#* X X X Q`\R QY\R Q__REPS SENSITIVITIES 0H"($8z!##,6(&$*3z?;!] X X X X X XCommodity Base 2012E 2013E 2014E I(-,%($8z9-$*%*#$# X X X X X X
Change EPS Change j(1(3*-3#ze+%*:*%%*3f X X X X X XNet Profit [reported] (42) (9) (51) 159 183 231
i,'3z+%(6* LXk 4\k 4Eak 4Mdk !C-,%7&'zi&(-^Qp,##Rz&:$*%z]&F X X X X X X2"%%*-68 a| 4Mak 4dYk 4E_k
Net Profit [adjusted] (42) (9) (51) 159 183 231
EBITDA margin (%) NM 62.9 57.6 58.6 z Net Interest Cover [EBIT] (x) (21.9) 122.7 18.9 16.4
Tax Rate (%) NM 30% 30% 30%CASH FLOW EBIT/Total Assets (%) (13.9) 37.6 33.4 32.1 (A$m) 2011A 2012E 2013E 2014E NPAT/Equity (%) (24.1) 34.5 28.3 26.4 =+*%&$(-.z(-6,7*ze0P9]Sz5P/f QadR MM` Md\ ELLj*+%*6(&$(,-zbz!7,%$(#&$(,- X LX L` dX?*$z6N&-.*z(-z@,%J(-.z6&+($&'z QER X X X BALANCE SHEET [Selected Items] =$N*%zQ,+*%&$(-.Rzz d\ X X X (A$m) 2011A 2012E 2013E 2014EPre-tax op cash flow (8) 236 263 351 ?*$zB,%J(-.z6&+($&'z QMYR QMYR QMYR QMYR9-$*%*#$zQ+&(3Rz^z%*6*(1*3 QER M LE L_ T(F*3z!##*$# MEL MY` E`E dX\]&Fz+&(3zz X Q`\R QY\R Q__R ?*$z=$N*% QYR _ MM EM=$N*% X X X X Capital Employed 196 257 357 412Operating cash flow (11) 170 198 271 ?*$zz2&#Nz^zQj*C$R L` MXa M\\ d`d2&+($&'z*F+*-3($"%*zz QLdER QaaR QLXER Q\aR Total Equity [incl. minorities] 212 462 645 876Free cash flow (154) 114 95 187 I(-,%($(*# QYR QYR QYR QYR?*$zQ&6H"(#($(,-#Rz^z3(#+,#&'# X X X Xj(1(3*-3#z+&(3zQ2,77,-R X X X X Net Debt / Equity (%) (7.7) (44.4) (44.6) (53.0)/N&%*#z(##"*3^Q%*+"%6N&#*3R _ _L X X Book Value per Share($) 0.50 1.01 1.42 1.92 Source: Company accounts, UBS estimates. UBS valuations are stated before goodwill, exceptionals and other spcieal items. Note: The data represents an extract of the full company accounts.
Perseus Mining Limited (PRU) is a dual Australian and Canadian listed gold exploration and development company with resources of 8Moz and reserves of 4Moz. Perseus is currently commissioning its 90%-owned Edikan Gold Mine (EGM) in Ghana. The current mine plan indicates the project could produce 265koz per annum at cash costs of US$550/oz with a mine life of more than 10 years. Full-scale commercial production is anticipated in the December quarter. The company has also completed a Feasibility Study for its Tengrela gold project in Cote d'Ivoire, which could add 130koz per annum from FY13-14.
! Statement of Risk
Investment risk inherent in the resource sector includes, but it is not limited to, movements in commodity price and currency which may differ materially from the assumption used in this report. Furthermore, the sector is subject to political, financial and operational risks, each of which has the potential to significantly impact company/industry performance.
UBS Investment Research
Australian Resources
Incorporating commodity price changes
!z Changes to commodity prices, 2012-14 iron ore prices +12-14% We have updated our commodity price forecasts today, incorporating mark tomarkets for all commodities in the September quarter as well as changes toforecasts. For a full discussion on all changes and the rationale behind them, referto our Global I/O®: Commodity Price Review: “Signalling improvement”. The most material change is to our iron ore price forecasts, where we have lifted our2012-14 price forecasts (all products) by 12-14% to reflect the decline in India’sexport trade, an event that is now likely to occur at a greater rate than previouslyforecast.
!z Changes to currency forecasts We have changed our AUDUSD currency assumptions for the next 18 months to$1.00 (from $1.05 previously) which in isolation causes upgrades to our earningsfor most of our coverage near term.
!z Iron ore stocks see FY12-14 NPAT upgrades of 5-30% FMG and GBG are our preferred pure play exposures and see the largest upgradesto earnings due to high cost bases, price mechanisms and financial leverage. Wehave reduced our FMG full production rate from 155Mtpa to 140Mtpa, reflectingrisk that FMG does not gain approval to build a 5th berth. Our FMG NPV is onlydowngraded 4% to $7.86ps due to our iron ore upgrades. The major diversified seeupgrades of 5-10% for FY12-14 earnings. On a relative basis, we prefer RIO toBHP due to the larger exposure to iron ore (where we see positive trade support for3 years) and better relative valuation. Please see inside for tables showing all changes to forecasts and price targets forthe stocks we cover.
&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS ^^%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
Commodity price changes We have updated our commodity price forecasts today, incorporating mark to markets for all commodities in the September quarter as well as changes to forecasts. For a full discussion on all changes and the rationale behind them, refer to our Global I/O®:Commodity Price Review: “Signalling improvement”.
The most material change is to our iron ore price forecasts, where we have lifted our 2012-14 price forecasts (all products) by 12-14% to reflect the decline in India’s export trade, an event that is now likely to occur at a greater rate than previously forecast.
Now, Australian iron ore fines CY-average prices are forecast to remain above US$150/t fob for 2011-13 (>US$160/t fob lump); above US$110/t fob until 2014 (>US$120/t fob lump).
Brazilian fines CY-average prices are forecast to hold above US$140/t fob for 2011-14 (>US$180/t fob pellets); above US$100/t fob until 2014 (>US$140/t fob pellets).
Other price forecast changes are summarised in Table 1, 2 and 3.
We have changed our AUDUSD currency assumptions to reflect spot AUDUSD rates for the next 18 months (US$1.00), followed by a gradual step down to our long term rate of US$0.80 in FY15e. The new currency assumption for the next 18 months is $1.00 (from $1.05 previously) which in isolation causes upgrades to our earnings for most of our coverage near term.
The iron ore price changes for CY11-14e and the reduction in our AUDUSD assumption leads to high single digit upgrades for both BHP and RIO. RIO’s earnings are upgraded by more than BHP’s due to their larger exposure to iron ore. We have increased our cost assumptions in iron ore, to reflect inflation trends we have been seeing in the industry.
We maintain our Buy rating on both stocks, we highlight both stocks are trading on sub 10x CY11e and CY12e P/E and a ~30-40% discounts to NPV. Despite this attractive valuation, the equity market appears to us to be trading more global macroeconomic sentiment and risk appetite.
On a relative basis, we prefer RIO to BHP due to the larger exposure to iron ore (where we see positive trade support for 3 years) and better relative valuation (lower earnings and P/NPV multiples) as shown in Table 6.
The pure play iron ore stocks benefit the most from our commodity and currency changes. We have increased our cost assumptions, to reflect inflation trends we have been seeing in the industry.
! FMG: Our FY12e and FY13e NPAT is upgraded over 20% from the changes.
We have become cautious on FMG’s approval to build a 5th berth at Port Hedland. While FMG has not yet updated the market on the 5th berth approval timeline we believe it needed approval by September to avoid demobilising the expansion workforce at Port Hedland. FMG are confident of eventually getting approval, but we believe for now likely to go ahead with just 4 berths.
What does this mean? Most likely in our view is that capacity will be limited to 140Mtpa rather than 155Mtpa. The 5th berth was nice to have to ensure there was always a vessel to load, as the 5th berth would be used more as a lay by berth where a vessel could sit while awaiting loading. As a result we have reduced our long term production forecasts to 140Mtpa (from 155Mtpa) to reflect a more conservative view.
Our FMG NPV is downgraded 4% to $7.86ps, due to the reduction in our long term production estimates. FMG is the most leveraged large cap stock to the iron ore market due to its higher operating costs than peers (BHP/RIO), production growth (from 55Mtpa to 155Mtpa) and financial leverage. We note on our revised forecasts, FMG trades on a 6.3x FY13e P/E and a 36% discount to NPV. We maintain our Buy rating and $8.00ps price target based on our NPV.
! GBG: GBG is the most levered stock to the iron ore price in our coverage due to its higher cost position, the pricing mechanism and its financial leverage. Its pricing mechanism for concentrate is based on the benchmark index prices, adjusted for higher Fe content (68%, vs 62% for standard Pilbara fines products) and attracts a 10% premium for its value in use. Our FY13 and FY14 earnings are upgraded 30+% by the commodity and currency changes. Our NPV is upgraded 8% to $1.34ps.
With funding of Karara now largely derisked, we believe the market will begin to focus on first concentrate shipments in mid 2012 into a tight iron ore market and strong forecast cashflow. The finalisation of the debt funding for the Karara project and first concentrate production remain the key catalysts in the next 12 months. We maintain our Buy rating and increase our price target to $1.30ps (inline with our NPV).
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! MGX: Our MGX earnings are upgraded by 13% for FY12e and our NPV is upgraded by 9% to $2.09. The change to our near term forecasts has a bigger impact to NPV than peers due to the short mine lives at its 3 mines with Koolan Island due to be depleted by 2019.
We maintain our Neutral rating. We note GBG is trading at a wider discount to NPV which we look to close as it nears first concentrate production. FMG is also at a wider discount to our NPV and also provides a large liquid exposure to iron ore. Our price target is maintained at $1.50ps, which is based on a 25% discount to NPV.
! MMX: We estimate see-through value of ~A$850m (~$2ps) in MMX. The inherent theoretical value in the projects is a moot point however without funding for the projects to proceed. A view needs to be taken on the final tariff structure and material corporate transactions to occur. We maintain a Neutral rating due to significant funding and valuation uncertainty.
Coal equities
Met coal price upgrades of ~3% for CY12 and the AUDUSD reduction from US$1.05 to US$1.00 lead to upgrades to our coal coverage.
! AZT: AZT has delivered on a number of catalysts recently including a sale of 10% of Maules Creek for $370m and a medium term port deal at Newcastle. This has led to stock outperformance and we note AZT is trading at a premium to peers. We see better relative valuation in WHC and GCL (Buy) which are trading at ~30% discounts to NPV, vs AZT (Neutral) which is trading at a 10% discount to NPV. The next upcoming catalyst for AZT is mining lease approval, which may be forthcoming in Q1 CY12. We maintain our Neutral rating and $11.50 price target.
! BND: Due to 1) a lack of positive newsflow on the strategic review to date and 2) a severe reduction in global equity risk appetite, the BND share price has more than halved in 3 months. BND is not yet funded to develop Springsure Creek which is earmarked for first coal in 2014. We look for an asset sale or minority stake sale to provide funds and reduce the funding requirement for BND. Global market confidence is not facilitating this process in our view.
A sizable gap between the share price and our valuation has emerged. We highlight that there are a number of catalysts in the next few months which may reduce this gap; 1) Newsflow on the strategic review which may include an asset selldown – 2H CY11 and 2) maiden Reserves at Dingo West – 2H CY11.
We maintain our Buy rating. Our price target of $1.80 is set at our NPV for the Bowen assets and a more conservative $50m of value for the Galilee assets based on AMCI’s farm-in.
BTU: Our BTU earnings are only marginally changed (in $m’s terms) from our commodity price changes. BTU was recently granted resource consents in an open and transparent process which allowed submissions from interested parties and held public hearings. This means that BTU approaches the appeals process from a position of relative strength and we believe it is
!LFC7=P9=4`)6F?L7A6F` 14 October 2011
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more likely than not that approval is upheld. We maintain our Buy rating and price target of $1.00ps based on our NPV.
! CNA: We have included CNA’s September quarterly production report. Production was of 7.4Mt, +10% q/q and +5% vs UBSe. The mix was slightly weaker with semi soft coking at 19% of equity sales vs UBSe of 20%. Our FY12e NPAT is upgraded 8%, mainly due to currency.
UBS valuation for CNA is $124.46ps, so the takeover offer at $125ps is essentially inline with our valuation. We highlight that our NPV includes growth in production to 45Mtpa of production (100% basis) including the Mt Pleasant project, so our valuation includes their growth options unrisked. We also note that this proposal is not a change of control, but merely RIO and Mitsubishi taking out the minorities CNA and delisting it. We maintain our Neutral rating and price target of $125ps, based on our NPV.
! GCL: On a % basis, our GCL earnings are upgraded by the most in the sector in FY12-14, which reflects the skinny margin we had assumed from our A$ realised coal price compared to current cash cost base of ~A$100/t (pre royalties), and sizable D&A charge (from acquisitions) of ~$15/t. Thus with our realised coal price increasing to $143/t, our assumed profit margin expands from A$3/t to ~A$10/t in FY13e.
We maintain our Buy rating on GCL, with the stock trading on a 27% discount to NPV, production planned to double in 4 years and margin expansion expected from the phase out of legacy contracts, ramp up of met coal production, and a reduction in the cost base at Donaldson from longwall production. Our price target is maintained at $10.50ps, based on our NPV.
! GNM: GNM’s earnings are upgraded more than most in the sector, again due to a skinny margin near term. GNM’s cost based is elevated from development coaling and is planned to reduce from over A$100/t fob pre royalties to A$60/t by 2015 with 2 longwalls.
GNM’s FY12 guidance of 1.7-2.0Mtpa, includes contribution from longwall coal in the March 2012 quarter. Longwall installation remains subject to NSW government approvals which have not yet been received and we see as a key risk and the rationale for our Neutral rating. Our price target of $0.25ps is at a 70% discount to NPV to account for risks from funding, the carbon tax and NSW government approvals.
! MCC: MCC’s FY12e NPAT is upgraded 18% to $217m from the upgrades to met coal and changes to currency. MCC is under takeover offer from Peabody/ArcelorMittal for A$16ps which is the basis of our price target. We maintain our Sell rating. In the producers, we see better value in WHC and GCL.
! WHC: Our FY13e NPAT is upgraded 12%, mainly from currency changes. WHC is our preferred coal production exposure as it trades on a 34% discount to NPV, is planning to triple production within in the next 5 years, has infrastructure and a number of catalysts in the next 6 months.
Upcoming catalysts include 1) Vickery Feasibility Study in Q4 CY11 2) Delivering into last legacy contracts Q1 CY12 2) First longwall coal at
!LFC7=P9=4`)6F?L7A6F` 14 October 2011
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Narrabri in Feb/Mar-12 and 4) lodging approvals with NSW government for Vickery.
We maintain our Buy rating and price target of $8.00ps based on our NPV.
Uranium equities
Our spot uranium price assumption in FY12e is upgraded 6% to US$55/lb, which along with downgrades to producer currencies (AUDUSD) leads to earnings estimate upgrades for our uranium stocks.
! ERA: The change in our uranium price assumptions and AUDUSD assumptions leads to higher revenues for ERA in CY11-14e which drives higher revenue and reduces the losses we assume. We also wish to highlight that consensus estimates are looking for a profit in 2011 through 2015. We don’t believe this is achievable given the requirement to depreciate fixed assets over the reduced reserve life, and see this as a headwind to share price performance until consensus estimates begin to factor this in. Consensus may factor in higher D&A charges as estimates are adjusted post equity raising.
An investment in ERA is dependent on 1) Ranger 3 Deeps being proved to be economic and 2) Stakeholder support for the project. We believe there is no guarantee that stakeholder support for the underground will be forthcoming, and comments to date from the Mirrar People (traditional owners) does not paint a supportive picture in our view.
Our rating and price target are under review, pending equity raising completion.
! PDN: We have reduced our USDZAR assumption from 7.6ZAR to 8.0ZAR for CY12, which combined with our uranium price changes increases our earnings forecasts for FY12-FY13. PDN earnings on our commodity prices remain very sensitive to uranium prices as we believe it needs a price of ~US$50/lb to break even from a cashflow perspective.
The large reduction in the share price is due to both company specific (production performance, corporate cost levels and refinancing concerns) and market issues (Fukushima and general equity selloff) in our view. We highlight PDN’s strategic value and that in the past 12 months we have seen corporate interest emerge in the uranium sector. PDN is now trading at US$2.60/lb, which compares to transactions in the sector of US$10/lb. PDN’s $40-50m p.a. in group overheads highlights synergies a potential acquirer might target. We also note PDN has an open share register.
We maintain our Buy rating and price target of $2.75ps, based on our NPV.
Iluka
We have decided to reduce our Zircon price assumptions to US$2,455/t (from US$2,650/t) and US$2,100/t (from US$2,650/t) in CY12e and CY13e. Our FY12e NPAT is upgraded 2% (from currency) while our FY13e NPAT is downgraded 12% (from Zircon prices).
Alumina
Our AWC earnings for FY12e are upgraded 47% to $159m due to the reduction in our AUDUSD assumption to US$1.00 from US$1.05. Our Buy rating and price target of $2.75ps is unchanged.
!LFC7=P9=4`)6F?L7A6F` 14 October 2011
UBS __
! Alumina Limited Investment Case
The investment thesis for AWC is that the progressive migration from an alumina price that has been historically linked to the aluminium price to an index/spot alumina price will generate higher margins. This is a slow process, with the conversion to spot/index pricing for alumina expected to take five years.
! Aston Resources Limited Investment Case
AZT has delivered on a number of catalysts recently including a sale of 10% of Maules Creek for $370m and a medium term port deal at Newcastle. This has led to stock outperformance. The next upcoming catalyst for AZT is mining lease approval, which may be forthcoming in Q1 CY12.
! Bathurst Resources Investment Case
The key catalyst for BTU is successfully navigating the resource consent appeals process. BTU was granted resource consents in an open and transparent process which allowed submissions from interested parties and held public hearings. BTU advised that the court appeals process will take up to 9 months which may drag on into mid to late 2012.
! Energy Resources of Australia Limited Investment Case
An investment in ERA is dependent on 1) Ranger 3 Deeps being proved to be economic and 2) Stakeholder support for the project. We believe there is no guarantee that stakeholder support for the underground will be forthcoming, and comments to date from the Mirrar People (traditional owners) does not paint a supportive picture in our view.
! Fortescue Metals Group Ltd Investment Case
FMG is the most leveraged large cap stock to the iron ore market due to its higher operating costs than peers (BHP/RIO), production growth (from 55Mtpa to 155Mtpa) and financial leverage.
! Gindalbie Metals Ltd Investment Case
With funding of Karara now largely derisked, we believe the market will begin to focus on first concentrate shipments in mid 2012 into a tight iron ore market and strong forecast cashflow. The finalisation of the debt funding for the Karara project and first concentrate production remain the key catalysts in the next 12 months.
! Gloucester Coal Limited Investment Case
We like the growth profile offered by Gloucester Coal, with forecast volume set to double over the next four years. Risks to their growth profile include government approvals at Middlemount and Donaldson and port capacity in QLD (where Middlemount JV has 3Mtpa, but needs 4Mtpa post 2014).
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! Gujarat NRE Coking Coal Limited Investment Case
Given the potential risks and uncertainties about GNM's future while the application of the carbon tax to GNM remains unclear, we believe it is prudent to maintain a Neutral rating. We also highlight risks to achieving guidance from delays to NSW Government approvals. We believe an investment in GNM at the moment now depends on Government policy rather than coal growth and markets.
! Macarthur Coal Limited Investment Case
MCC is under takeover offer from Peabody/ArcelorMittal for an increased offer price of A$16ps. The MCC Board now recommends the revised offer, in the absence of a superior proposal. The Implementation Deed includes “no shop” and “no talk” restrictions, as well as a right for Peabody/ArcelorMittal to provide a matching offer if a superior proposal were to emerge. A break fee of A$48.3m may also be payable by Macarthur in certain circumstances. The offer remains subject to a 50.1% min. acceptance condition.
! Mount Gibson Iron Limited Investment Case
MGX provides exposure to the iron ore market with production growing from ~6.0Mtpa currently to ~10Mtpa by FY13. MGX’s pitfall is the short mine lives at its 3 mines with Koolan Island due to be depleted by 2019. MGX is well capitalised with net cash and large cashflows expected in the next few years which may be used to acquire and develop iron ore or steel feed projects.
! Murchison Metals Limited Investment Case
MMX is a high risk investment, with a corporate transaction required for value to be unlocked. The inherent theoretical value in the project exists in our view but is a moot point without funding for the projects to proceed. A view needs to be taken on the final tariff structure and material corporate transactions to occur.
! Paladin Energy Limited Investment Case
The large reduction in the share price is due to both company specific (production performance, corporate cost levels and refinancing concerns) and market issues (Fukushima and general equity selloff) in our view. We highlight PDN’s strategic value and that in the past 12 months we have seen corporate interest emerge in the uranium sector. PDN’s $40-50m p.a. in group overheads highlights synergies a potential acquirer might target. We also note PDN has an open share register.
! Whitehaven Coal Limited Investment Case
WHC is planning to triple production within in the next 5 years. Upcoming catalysts include 1) Vickery Feasibility Study in Q4 CY11 2) Delivering into last legacy contracts Q1 CY12 2) First longwall coal at Narrabri in Feb/Mar-12 and 4) lodging approvals with NSW government for Vickery.
!LFC7=P9=4`)6F?L7A6F` 14 October 2011
UBS cb
! Statement of Risk
We point out to investors the potential risks inherent in the mining sector, including, but not limited to, the volatile nature of commodity prices and currencies, which may differ materially from expectations. Furthermore, the sector is exposed to political, financial and operational risks, each of which has the potential to significantly impact company/industry performance
UBS Investment Research
Australian Oil Weekly
Shell partially restarts Singapore refinery
!z Brent oil price up 3.9% to US$111.5/bbl (A$110.0/bbl) The S&P/ASX 200 Energy Index was up 5.5% for the week to Thursday 13thOctober, while the Brent oil price was up 3.9% to US$111.5/bbl (A$110.0/bbl) andWTI was down 2% to US$83.95/bbl (A$82.3/bbl). Over the same period, theS&P/ASX 200 Index up 4.3%. The top performing Australian energy stock in ourcoverage universe over the period were Karoon Gas (+17.1%) and Santos(+10.3%).
!z Global oil and LNG market commentary Shell partially restarts unit at Singapore refinery. Saudi Arabia's spare oil outputcapacity exceeds 2.5Mbpd. Libya oil output at 1Mbpd within a year. IEA revises down 2012 global oil demand forecast to 90.5Mbpd. China's September 2011crude oil imports down 12% y/y to 4.98Mbpd. Bechtel manager says AustralianLNG projects on schedule. Petrobras delays FLNG plans to post 2015.
Shell partially restarts unit at Singapore refinery Shell has partially restarted one of the three crude distillation units at its 500kbpd Singapore refinery, which was shut due to a fire ten days ago. The 210kbpd CDU will produce base oils and light distillates, which will help producing lubrication oil and will keep its chemical complex running at lower rates. Despite this, we expect gasoline and diesel margins to remain elevated until these product units are restarted. (Reuters, UBS) UBS Daily Oil News (10/10/2011)
Saudi Arabia's spare oil output capacity exceeds 2.5Mbpd The former envoy to the U.S. and a member of the Saudi royal family, Prince Turki bin Faisal bin Abdulaziz al-Saud, yesterday said that Saudi Arabia's spare oil production capacity is greater than 2.5Mbpd. (Bloomberg) UBS Daily Oil News (13/10/2011)
Libya oil output at 1Mbpd within a year Interim oil and finance minister of Libya Ali Tarhouni yesterday said that the Repsol-operated 200kbpd El Sharara oil field should restart within a few days. He expects Libya’s production to reach 1Mbpd within a year. Libya currently produces 400kbpd. (Reuters) UBS Daily Oil News (12/10/2011)
&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS cI%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
IEA revises down 2012 global oil demand forecast to 90.5Mbpd The IEA yesterday revised its demand estimates down by 50Kbpd for 2011 and by 210Kbpd for 2012 due to lower-than expected 3Q11 readings in the non-OECD and a downward adjustment to global GDP growth assumptions. The demand estimates are now for 89.2Mbpd in 2011, up 1.0Mbpd y/y, (UBSe 89.4Mbpd, +1Mbpd) and 90.5Mbpd in 2012, +1.3Mbpd (UBSe 90.8Mbpd, +1.4Mbpd). Libyan output reached 350Kbpd in early October and the IEA expects an average production of c.400Kbpd in 4Q11 and 600Kbpd by end 2011. Effective OPEC spare capacity stands at 3.31Mbpd. OECD stocks dropped counter-seasonally in August 2011 and are at 58.4 days of cover. OECD stocks have been below the five-year average since July 2011 (for the first time since June 2008). (IEA, UBS) UBS Daily Oil News (13/10/2011)
China's September 2011 crude oil imports down 12% y/y to 4.98Mbpd China's September 2011 average crude oil imports dropped 12.2% y/y to 4.98Mbpd but were up 0.61% m/m, the data from China's General Administration of Customs showed today. The imports for September 2011 in absolute terms were down 2.8% m/m to 4.99Mbpd. The imports of oil products dropped 18.8% m/m to 677Kbpd while the exports of oil products rose 3.2% m/m to 547Kbpd. (Reuters) UBS Daily Oil News (13/10/2011)
Bechtel manager says Australian LNG projects on schedule Bechtel President for Metals and Mining in a speech in Melbourne, on Friday, said that all the Queensland CBM to LNG projects are currently making their plans although not without challenges and risks. Bechtel is involved in Gladstone, Queensland Curtis and Asia Pacific LNG. There has been continued conjecture that tight labour markets, the aftermath of the Queensland floods, and the simultaneous development of 3 LNG projects would push out BG's 2014 start up target. Bechtel did note that issues with various trades might mean the need to import labour for the projects. (Reuters, UBS) UBS Daily Oil News (10/10/2011)
Petrobras delays FLNG plans to post 2015 Petrobras’ CEO Jose Sergio Gabrielli yesterday said that the company has delayed the plans to build a FLNG plant and would instead use pipelines to transport gas from the deepwater fields offshore Brazil. A pipeline is expected to come online before the end of 2014. He added that Petrobras would use the FLNG concept post 2015 for the development of large oil discoveries in the Western Hemisphere. Technip, Saipem and SBM Offshore were said to be bidding for this project. Separately, Petrobras’ CEO said the delays in rig deliveries would have no impact on Petrobras’ plans. The company had expected the delivery of thirteen rigs this year but has only received eight so far this year. (Bloomberg, Financial Times) UBS Daily Oil News (12/10/2011)
The S&P/ASX 200 Energy Index was up 5.5% for the week to Thursday 13th October, while the Brent oil price was up 3.9% to US$111.5/bbl (A$110.0/bbl) and WTI was down 2% to US$83.95/bbl (A$82.3/bbl). Over the same period, the S&P/ASX 200 Index up 4.3%. The top performing Australian energy stock in our coverage universe over the period were Karoon Gas (+17.1%) and Santos (+10.3%).
Karoon Gas (Buy, PT A$8.05) Karoon’s share price has fallen almost 50% year to date, however it has continued last weeks strong performance (+15%) and catalysts to potentially further re-rate the stock are now imminent in our view. New Browse Basin drilling is about to commence (Nov?); new South America prospective resource and contingent resource assessment by D&M is expected in 4Q11; and Santos Basin drilling is planned from 1H 2012 (April?).
Santos (Buy, PT A$17.25) The Chim Sao (STO 31.9%) oil project in Vietnam operated by Premier Oil started up on 10 Oct, on schedule and under budget. Development well drilling went very well (up to 89m net oil column) and initial production should exceed Santos expectations then plateau at 25,000 bopd (gross). We expect a future reserves upgrade at this project.
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Weekly Oil Update – Week ending 13th October 2011 Financial Data US API Data [Week ending 12th October 2011] !LFC7=P9=4`(467DS`*456@`8F`,9P`U79A6` ` /%`'7L56`,9P`*4864C?796F`
The Australian Energy Index was up 5.5% over the week to 13,651 US crude oil inventories were down 3.81 mmbbls at 340.4 mmbbls. The year to year 56R9A9C is now 22.1 mmbbls
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The A$/US$ was down 4.0% over the week at 1.0135. US gasoline inventories were down 1.19 mmbbls to 211.2 mmbbls. The year to year 56R9A9C is 13.6 mmbbls.
Brent closed at US$111.45/bbl and is pricing significant backwardation (Brent Oct' 12 $102.1/bbl Oct'13 $98.2/bbl). while WTI pricing is in contango. US distillate inventories were down 3.12 mmbbls to 151.9 mmbbls. The year to year
56R9A9C is 14.3 mmbbls. 'M=7C`WH`%94D=B?76`]69DMC65`!867=D6`)6R9467`Z=7D94F`8F`0764C`,9P`U79A6`;/%o>EEP<` ` '=PC6@`!LFC7=P9=`'?NN64C`
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The daily Singapore CTX weighted average refiner margin (SWAM) estimated by UBS is based largely on Caltex Australia’s mix of transport fuel products. Over the last week we estimate, gasoline margins have averaged around US$16.42/bbl, diesel US$12.68/bbl and jet US$12.36/bbl. The Caltex refiner margin (CRM) averaged US$7.8/bbl in 1H 2011 and was US$5.40/bbl and $8.97/bbl in July and August respectively. We estimate the SWAM and the CRM have averaged around US$12.4/bbl and US$9.8/bbl for Sept and; US$ 14.2/bbl and USD 12.3/bbl for Oct. The lower CRM relative to the SWAM is due to freight differentials, yield loss, crude premium and price lag impacts.
!LFC7=P9=4`,9P`]66KPS` 14 October 2011
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)?A`,9P $0.33 24-Oct September quarter production report
,9P`%6=7AM $5.98 25-Oct September quarter production report
06=AM`(467DS $1.12 26-Oct September quarter production report
\=7??4`1=F` $3.77 26-Oct Annual General Meeting
!](`#9N9C65 $1.15 31-Oct September quarter production report
!](`#9N9C65 $1.15 24-Nov Annual General Meeting
Source: Company reports, share prices as at 13 Oct
&=EP6`JH`'?NB=4S`=44?L4A6N64CF``
'?NB=4S %M=76`U79A6 -=C6 !44?L4A6N64CF
06=AM`(467DS $1.12 13-Oct Beach exploration success in Egypt Abu Sennan concession
06=AM`(467DS $1.12 12-Oct Beach takes position in Bonaparte Basin
%=4C?F $12.80 10-Oct First oil from Chim Sao in Vietnam
Source: Company reports, share prices as at 13 Oct
&=EP6`VH`)6A64CPS`BLEP9FM65`A?NB=4S`76F6=7AM``
'?NB=4S U79A6`&=7D6C )6Aw4 -=C6 !4=PSFC )6F6=7AM
&LPP?:` 1700p Buy 13-Oct Melanie Savage Fresh uncertainty in Uganda
06=AM`(467DS`#C5` A$ 1.12 Neutral 13-Oct Gordon Ramsay An Unconventional Investor Morning
%94?B6A` HK$ 9.7 Buy 12-Oct Peter Gastreich Accounting for resource tax
U6C7?'M94=` HK$ 12.4 Buy 12-Oct Peter Gastreich Accounting for Resource tax
17=4`&9677=` C$ 7 Buy 12-Oct George Toriola More reasons to get long
(49` € 19.5 Buy 12-Oct Jon Rigby Visibility out of the heart of darkness ? review of Congo field trip
&,&!#` € 41 Buy 11-Oct Jon Rigby Pacman revisited: TOTAL confirms downstream reorganisation
&M=9`,9P` Bt 66 Buy 11-Oct Piyanan Panichkul Already priced in a recession scenario
%G,9P` Won 105000 Neutral 11-Oct John Chung Q311 earnings likely to be flattish QoQ
%\`*44?8=C9?4` Won 195000 Buy 11-Oct John Chung Attractive valuation plus catalyst
)6BF?P`$U+` € 22 Buy 11-Oct Jon Rigby Issues for Repsol in Sacyr refinancing
,1n`U6C7?P6?`6`1=F` R$ 22 Buy 11-Oct Lilyanna Yang Eike Got 1.45% of Tot Shares at R$11.6/sh
'M687?4`'?7BO` US$ 127 Buy 11-Oct William Featherston Production Weak, but EPS beats Consensus
%94?B6A` HK$ 9.7 Buy 10-Oct Peter Gastreich Product prices cut as crude cost falls
U76N967` 430p Buy 10-Oct Melanie Savage Taking destiny back into its own hands
-=SP9DMC`(467DS` C$ 10 Buy 10-Oct Matt Donohue Sinopec Saves the DAY?
Source: UBS. Rating and price target as at time of publication
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! Statement of Risk
Investment risk inherent in the oil and gas sector includes, but is not limited to movement of commodity price and currency, which may differ materially from the assumptions used in this report. Furthermore the sector is subject to political, financial and operational risks, each of which has the potential to significantly impact on company/industry performance.
UBS
This page has been left intentionally blank
UBS Investment Research
Jetset Travelworld Ltd
Piecing it all together [extract]
!z Initiating coverage with Neutral rating Following the merger of Jetset Travelworld and Stella Travel Services in 2010,JET has become one of the largest travel distribution businesses in Australia. Thecombination has created a vertically integrated travel company, with over 2,100branded franchise travel agents and affiliates under numerous brands, a significantwholesale business, and a corporate travel management business, generating over$5.8BN in transaction value.
!z Merger benefits still to be realised in FY12 The integration of Jetset & Stella is largely complete, with part of the $10Msynergies achieved in FY11 from reduced overhead functions. Remaining synergies will be achieved once the IT separation project is complete in 2Q12. Inaddition to this, we expect improved cross sell of JET’s wholesale products acrossthe Stella retail network should enhance commissions and margins in the medium term, with increased scale also likely to lead to improved supplier terms.
!z Play on international outbound travel, strong balance sheet position Our EPS estimates imply a CAGR profile of 5% in FY12-FY14, underpinned by merger benefits and a growing outbound market. The balance sheet remains in anet cash position, placing JET well for acquisition opportunities or potential capitalmanagement initiatives. Key catalysts in our view remain achieving mergerbenefits, improved liquidity & delivery of profit growth as a merged entity.
!z Valuation We value JET using SOTP & DCF methodology. Our valuation range of $0.79-$0.91 implies an EV/EBITDA multiple range of 6.1x-7.1x. Our PT is our valuation multiplied by KE less DPS & a liquidity discount. Our liquidity discount reflects JET’s little free float given its register structure. 29DMP9DMCF`;!oN< bY>Ib bY>II bY>IJ( bY>IV( bY>IW()6864L6F - 334.4 376.8 393.5 408.3(0*&`;/0%< - 40.7 46.5 50.8 52.5"6C`*4A?N6`;/0%< - 31.0 35.3 39.2 40.9(U%`;/0%Q`!o< - 0.08 0.08 0.09 0.09"6C`-U%`;/0%Q`!o< - 0.03 0.04 0.05 0.05 U7?R9C=E9P9CS`m`h=PL=C9?4 XGS7`M9FC`=8O bY>II bY>IJ( bY>IV( bY>IW((0*&`N=7D94`i - 12.2 12.3 12.9 12.9),*'`;(0*&<`i - - 10.9 11.8 12.2(h>(0*&-!`;A?76<`@ - 6.7 5.7 5.0 4.6U(`;/0%<`@ - 10.5 9.2 8.3 7.9"6C`59895645`S96P5`i - 3.5 6.0 6.6 6.9 Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of A$0.74 on 13 Oct 2011 23:51 EST )=S`-=895 Analyst [email protected] +61-2-9324 2192
1P?E=P`(aL9CS`)6F6=7AM`Australia
Consumer Services
IJGN?4CM`7=C94D` "6LC7=P`3`` Prior: Not Rated`IJN`B79A6`C=7D6C` !obO_b>/%obO_I`` -`
&M9F`76B?7C`M=F`E664`B76B=765`ES`/0%`%6AL79C96F`!LFC7=P9=`#C5` UBS IbI%((`)(./*)(-`-*%'#,%/)(%`%('&*,"`!&`("-`,+`",&(%O`` ` 3`(@A6BC9?4`C?`A?76`7=C94D`E=45F UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.`
Investment thesis [extract] This is an extract of Jetset – Initiation of coverage published 14/10 – 34pgs
We initiate coverage on JET with Neutral rating & $0.80 price target.
Following the merger of Jetset Travelworld and Stella Travel Services, Jetset has become one of the largest travel distribution businesses in Australia. JET operates in three segments, being retail through franchised brands and affiliates, wholesale and travel management.
We expect FY12 growth to be underpinned by merger benefits from the IT separation project and growth in the outbound travel market. Beyond FY12, we expect improved product cross sell of JET’s wholesale products across the Stella retail network should enhance commissions and margins in the medium term, with increased scale also likely to lead to improved supplier terms.
In summary, we believe JET offers:
1) Merger benefits: We expect JET to report improved profitability in FY12 from further merger benefits, with synergies accounting for the majority of our forecast FY12 growth estimates.
2) Exposure to growing outbound travel: JET is largely a play on the strength of outbound travel trends in Australia, given a skew to international travel across its retail and wholesale businesses.
3) Strong balance sheet: JET had net cash of $11M as at FY11, placing the company well for potential capital management initiatives or acquisitions opportunities.
4) Valuation: JET is currently trading on a FY12E PER of 8.9x, and offers an EPS CAGR profile of 5% in FY12E-FY14E.
Jetset Travel World Overview
! JET is an integrated travel service business operating three segments. This includes 1) the Retail segment, through the operation of branded franchise travel agents and independent affiliates totalling 2,167 agents as at June 2011; 2) the Wholesale segment, which trades in both domestic outbound and inbound wholesale markets under different brands; and 3) Travel Management; operating under QBT in Australia & NZ, Atlantic & Pacific Business Travel and Atlantic & Pacific AmericanExpress in NZ.
Merger benefits yet to be fully realised
! Following the merger of Jetset and Stella Travel Services in 2010, management has been focused on integrating the businesses and achieving synergy targets and other merger benefits. A significant proportion of the integration has been completed, with $5M of the expected $10M synergies achieved in FY11 from reduced duplicated functions. We expect further cost
[6CF6C`&7=86P:?7P5`#C5` 14 October 2011
UBS IbV
synergies will be realised in FY12 once the major IT separation project is completed in December 2012.
Increased wholesale penetration to drive growth
! Beyond anticipated cost synergies in FY12, we expect growth to be underpinned by demand for outbound travel, given international travel accounts for the majority of JET’s transactions. In addition to this, improved product cross sell of JET’s wholesale businesses across the Stella retail network should enhance commissions and income margin. Improved scale should also enhance override participation as JET benefits from improved supplier terms. We note that product and revenue synergies were not included in management’s synergy estimates.
Liquidity & free float improvement a catalyst
! JET’s current share register has little free float, with the majority of stock owned by vendors of the Stella Travel Business and former Jetset Travelworld shareholders. Currently, shareholders are subject to restrictions under an escrow agreement until 31 December 2011. Current major shareholders include QH Tours, a subsidiary of Qantas (29%), Europe Voyager NV, a subsidiary indirectly majority owned by funds advised by CVC Asia Pacific (26.9%) and UBS Australia Holdings (17.9%). Other major shareholders include Sintack Pty Ltd (12.3%), one of the original Jetset share holders.
Financial forecasts
! Our EPS estimates imply a CAGR profile of 5% in FY12-FY14. While no FY12 guidance has been provided, our estimates imply 9% EBITDAI growth on an underlying basis. We expect this will be underpinned from the annualised benefits of synergies ($10M in FY12 vs $5M in FY11), a steady outbound travel market and improved margins within the retail and wholesale businesses from increased cross selling.
Net cash balance sheet position
! JET has a strong balance sheet, with net cash attributable to the company being $11M as at FY11. This places JET well for potential capital management initiatives or acquisitions should opportunities arise. JET’s favourable working capital profile should translate into strong cash flows, as evident from the FY11 cash conversion result of 1.25x.
Valuation
! We value JET using SOTP & DCF methodology. Our valuation range of $0.79-$0.91 implies an EV/EBITDA multiple range of 6.1x -7.1x. We apply a liquidity discount of 10% to reflect JET’s current register structure, which translates into a valuation range of $0.71-$0.82. We expect this discount will unwind if liquidity improves in JET’s shares.
Risks
! Key risks for Jetset in our view include:
[6CF6C`&7=86P:?7P5`#C5` 14 October 2011
UBS IbW
— Integration risk: IT separation may result in disruptions to booking platforms, and reduced air and land sales.
— Demand for outbound travel: A reduction in demand for outbound travel will impact commission revenues and earnings.
— Commission rates: Less favourable terms with suppliers may reduce JET’s income margin and profitability.
Financials ! For the year ending June 2011, JET reported NPAT of $19.1M, up
significantly on the prior year loss of $16.8M. The prior loss reflects statutory accounts of the Stella Travel Services Holdings company.
! The result is the group’s first result as a merged entity, with FY11 reflecting the accounts of Stella Travel Services (STS) for the period 1 July 2010 to 30 Sep 2010, and the combined Jetset (JTG) and STS results post merger for 30 Sep 2010 to 30 June 2011.
— On an underlying basis, EBITDAI increased 26% to $54.9M vs the pcp $43.5M.
— EBITDAI margin improved from 11.7% to 14.7%, reflecting a flat cost base and improvement in sales.
— Income margin declined 17bps, which we expect reflects product mix shift i.e. increased Business Travel.
— Operating costs: Operating costs were flat at $327M, with $5M of synergies being realised during the period. CODB as a percentage of sales decreased from 88.3% in FY10 to 85.7% in FY11, reflecting a reduced cost base. Opex reduction was more significant in 2h11, with CODB % sales declining from 87.3% in 2h10 to 83.3% in 2h11.
! No guidance has been provided, although positive growth is expected from industry growth in outbound travel, coupled with merger benefit costs. Below we highlight our FY12 estimates imply 9% EBITDAI growth on an underlying basis.
! We highlight our divisional estimates below, with EBITDA split based on 2h11 financial accounts.
Retail (74% EBITDA)
! We forecast the retail division to grow TTV by 8.5% in FY12, followed by a modest slowdown to historical organic growth rates in FY13-FY14. Our forecasts reflect the following:
— TTV: We forecast 8.5% growth in FY12 TTV, reflecting the full 12 month contribution of merged entity. On a like for like basis, we forecast 3% TTV growth in FY12.
— Income margin: Income margin is correlated to volumes, which drives override commissions and GDS payments. We believe income margin should stay relatively strong, even in a softening environment as JET benefits from negotiating with suppliers as merged group.
— EBITDA: We forecast flat EBITDA margin in FY12. We forecast EBITDA to improve 6% in FY12, reflecting the full 12 month contribution of merged entity.
! We forecast the wholesale division to grow TTV by 13% in FY12, mainly reflecting the full 12 month contribution of JET, given its skew to Qantas Holidays. Our forecasts reflect the following:
— TTV: Beyond FY12, we forecast 5% TTV growth. This reflects our view that the wholesale division should benefit from the combination of the Jetset and Stella retail network. We expect the Stella network to be more proactive in selling Qantas Holidays packages, reflecting management’s strategy to increase the revenues of vertically integrated product.
— Income margin: Given the likelihood of improved cross selling, we expect income margin to improve to 16.5% reflecting a higher margin sales. A steady foreign exchange environment should also support a stable income margin.
— EBITDA: We forecast EBITDA margin appreciation in FY12, reflecting improved cross-selling on a fixed cost base. We forecast EBITDA to improve 21% in FY12, reflecting the full 12 month contribution of merged entity, with underlying growth of 5% on an adjusted basis.
! We assume corporate costs continue to decline as percentage of sales, reflecting the following:
— Synergies: At the time of the merger, JET estimated cost synergies to be $10M arising from duplicated functions and IT platform consolidation. In FY11, JET achieved $5M of these synergies.
— Increased efficiency from IT system consolidation: We expect once the IT project system consolidation is completed, operations should be further streamlined, translating into a lower cost of doing business. In FY10, JET paid Qantas a total of $14.6M in fees for the provision of infrastructure and administrative services.
! We note some of these synergies will be allocated on a segmental basis.
! Below we highlight our growth estimates from the statutory FY11 accounts:
— EBITDAI underlying growth of 14%: While chart 1 reflects our estimates on a statutory basis, they imply 9% EBITDAI growth on an adjusted basis i.e. FY12 EBITDAI of $59.8M vs FY11 EBITDAI of $54.9M. On a statutory basis, we expect wholesale (Qantas Holidays & Viva Holidays) to show significant growth reflecting the full 12 months of the acquisition of Jetset Travel World assets.
'M=7C`IH`+$IIG+$IJ(`(0*&-!*`E795D6``
3,046
2,639 405
5,000 (574) -
59,877
49,361
45,000
47,000
49,000
51,000
53,000
55,000
57,000
59,000
61,000
63,000
FY11 EBITDAI Retail Wholesale Business Corporate Interest Other FY12 EBITDAI
A$m
Source: UBS estimates, company reports
'M=7C`JH`+$IJG+$IV(`(0*&-!*`E795D6`
3,173
2,191 87 (776) 964 -
65,515
59,877
59,000
60,000
61,000
62,000
63,000
64,000
65,000
66,000
FY12 EBITDAI Retail Wholesale Business Corporate Interest Other FY13 EBITDAI
A$m
Source: UBS estimates, company reports
Balance sheet and cash flow analysis
! JET has a strong balance sheet, with net cash attributable to the company being $11M as at FY11. This will place the company well for potential capital management initiatives or acquisitions should opportunities arise. In October 2010, JET announced it refinanced the Stella debt on more favourable terms with Westpac.
! JET’s favourable working capital profile should translate into strong cash flows, as evident from the FY11 cash conversion result of 1.25x. This is due to the cash profile of the Wholesale Division, which receives cash in advance before payments to suppliers, enabling JET to make a positive return on cash holdings.
— Retail (6.0x – 7.0x FY12 EBITDA): This range reflects the strong cash flow nature of the franchised retail business.
— Wholesale (6.5x – 7.5x FY12 EBITDA): Our valuation range reflects the attractive working capital profile of the business and potential growth from increasing cross-selling in the merged retail network. The higher multiple relative to its peers reflects some potential upside from reduced costs in QH from migrating onto JET’s own IT platforms.
— Business (6x – 7x FY12 EBITDA): While a low margin business, we have applied a multiple of 6x – 7x, inline with other corporate travel management peers. We expect earnings growth could be augmented by reduced IT costs.
! We apply a liquidity discount of 10% to reflect JET’s current register structure, which translates into a valuation range of $0.71-$0.82. We expect this discount will unwind if liquidity improves in JET’s shares.
[6CF6C`&7=86P:?7P5`#C5` 14 October 2011
UBS III
DCF valuation methodology
! We also use DCF methodology, which implies a valuation range of $0.88cps - $0.91ps. Our DCF valuation is based on the following:
— 12.4% WACC applied to free cash flow (EBITDA less tax, maintenance and capex and changes to working capital);
— Our WACC estimate assumes a 13.7 % cost of equity (6% risk free rate, 6% market risk premium and equity beta of 1.2x ) and 9% cost of debt.
— 3.5% long term EBITDA growth beyond our forecast period to FY15.
— 1.0% - 3.0% terminal growth rate.
— Our terminal cash flows assume working capital reverses, given client cash positions.
JET is an integrated travel service business operating three segments. This includes 1) the Retail segment, through the operation of branded franchise travel agents and independent affiliates totalling 2,167 agents as at June 2011; 2) the Wholesale segment, which trades in both domestic outbound and inbound wholesale markets under different brands; and 3) Travel Management; operating under QBT in Australia & NZ, Atlantic & Pacific Business Travel and Atlantic & Pacific AmericanExpress in NZ.
! Statement of Risk
A reduction in demand for outbound travel will impact commission revenues and earnings. IT separation may result in disruptions to booking platforms, and reduced air and land sales.
Trust/Sub Indices ASX Index S&P/ASX Price Cum-Adj Cum-Adj PE AFFO Pm/Dis Price Implied Distribution per Unit Earnings per Unit Imp Cap Wghted Gearing NAV Pm/Dis 5 Yr DPU Next Next RatingCode Mkt Cap 200 Prop FY'12e FY'12e FY12 DCF DCF Target Total 2011a 2012f 2013f 2014f 2011a 2012f 2013f 2014f rate Avg Cap to NAV Growth Est. Est.
*45LFC79=PF`(=7494DFQ`-9895645`m`h=PL=C9?4`%M66C Source: UBS ASX Company/Sector Y/E Price 12 Mth F/cast ROCE Dividend Dividend Frank Price Rating
14-Oct PriceExcess Return Yield to Book
Code Target 2012e 2013e 2012e 2013e 2011a 2012e 2013e 2011a 2012e 2013e 2012e 2013e 2012e 2013e 2012e 2013e 2012e 2013e 2012e 2012e 2012e 2012e 2012e 2012e 2013e 2012e 2013e$ $ % $m $m $m $m c c c c c c x x % % c c x x c % % x c c % %
Arithmetic Average 14.5 12.8 4.1 3.0Weighted Average 14.7 12.7 3.6 2.7
EPS UBS & Consensus
Consensus Difference between
Net Profit Excl-Abnormals EPS (pre-exceptional) Ratio (norm.) (Industrials ex fin) Per Share
Price Earnings PER Relative Free Cashflow EV/EBITDAReported Rep. Net Profit Reported Adjusted EPS
*45LFC79=PF`(=7494DFQ`-9895645`m`h=PL=C9?4`%M66C Source: UBS ASX Company/Sector Y/E Price 12 Mth F/cast ROCE Dividend Dividend Frank Price Rating
14-Oct PriceExcess Return Yield to Book
Code Target 2012e 2013e 2012e 2013e 2011a 2012e 2013e 2011a 2012e 2013e 2012e 2013e 2012e 2013e 2012e 2013e 2012e 2013e 2012e 2012e 2012e 2012e 2012e 2012e 2013e 2012e 2013e$ $ % $m $m $m $m c c c c c c x x % % c c x x c % % x c c % %
EPS UBS & Consensus
Consensus Difference between
Net Profit Excl-Abnormals EPS (pre-exceptional) Ratio (norm.) (Industrials ex fin) Per Share
Price Earnings PER Relative Free Cashflow EV/EBITDAReported Rep. Net Profit Reported Adjusted EPS
Weighted Average na 8.0 6.2 6.3 11.7 10.9 10.2 9.6 7.7 6.6 6.2 5.8 6.4 6.7 7.1 7.5 P/E 0 to 50
Div Yld 0% to 20%
!PP`*45LFC79=PF`6@APL594D`+94=4A9=PF U.R. denotes Under Review. Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating
Arithmetic Average 6.5 9.7 13.9 15.1 13.7 12.2 10.8 9.7 8.6 7.0 6.3 5.8 4.9 5.6 6.4 7.3 are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation.
Weighted Average na 14.5 11.1 9.3 13.9 12.2 11.0 10.0 7.4 6.4 5.9 5.5 5.1 5.6 6.1 6.6 * All figures in NZ$. + All figures in US$.CBE: denotes Core Band Exception. The standard UBS band for Neutral stocks is -6% to +6%.
!PP`,7594=796F Any stocks with a modified band are denoted by CBE.
Weighted Average na 12.1 13.3 14.2 13.7 12.3 10.8 9.5 7.8 6.9 6.2 5.6 3.7 4.5 5.1 5.8 Div Yld 0% to 20%
U.R. dentotes Under Review. Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating
*45LFC79=PF`;&?B`Ibb< are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation.
Weighted Average na 8.0 6.2 6.3 11.7 10.9 10.2 9.6 7.7 6.6 6.2 5.8 6.4 6.7 7.1 7.5 CBE: denotes Core Band Exception. The standard UBS band for Neutral stocks is -6% to +6%.
Any stocks with a modified band are denoted by CBE.
!PP`*45LFC79=PF`6@APL594D`+94=4A9=PF Arithmetic Average 6.5 9.7 13.9 15.1 13.7 12.2 10.8 9.7 8.6 7.0 6.3 5.8 4.9 5.6 6.4 7.3 Source of Consensus EPS is Thomson Financial
Weighted Average na 14.5 11.1 9.3 13.9 12.2 11.0 10.0 7.4 6.4 5.9 5.5 5.1 5.6 6.1 6.6
% % % % x x x x x x x x % % % % Weighted Averages calculated from aggregated sample figures, e.g. P/E = (S market cap)/(S net profit).
Market Arithmetic Averages calculated as the sample mean, excluding outliers.
(N67D94D`*45LFC79=PF`;6@`Ibb< Sector Arithmetic Averages calculated as the sample mean.
Arithmetic Average 9.4 10.5 15.6 14.3 13.2 11.8 10.1 9.2 8.4 6.9 6.2 5.6 5.0 5.7 6.6 7.6 Relative P/E's for non-bank are calculated relative to the industrials Arithmetic Average excluding Banks and Insurance
Weighted Average na 12.7 18.8 11.7 14.4 12.8 10.8 9.6 6.5 5.7 5.1 4.6 4.2 4.9 5.5 6.1 Individual Sector data is weighted by market capitalisation
Ranges: EPS Growth -25% to +50%
(N67D94D`*45LFC79=PF`;6@`Ibb<`6@APL594D`+94=4A9=PF U.R. denotes Under Review. Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating
Arithmetic Average 8.9 11.8 17.9 15.2 13.8 11.9 10.2 9.3 8.4 6.7 6.0 5.5 4.6 5.4 6.3 7.4 are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation.
Weighted Average na 14.7 19.8 12.1 15.1 13.2 11.0 9.8 6.2 5.4 4.8 4.4 3.9 4.6 5.2 5.8 CBE: denotes Core Band Exception. The standard UBS band for Neutral stocks is -6% to +6%.
Any stocks with a modified band are denoted by CBE.
!PP`*45LFC79=PF`6@APL594D`+94=4A9=PF Arithmetic Average 6.5 9.7 13.9 15.1 13.7 12.2 10.8 9.7 8.6 7.0 6.3 5.8 4.9 5.6 6.4 7.3 Source of Consensus EPS is Thomson Financial
Weighted Average na 14.5 11.1 9.3 13.9 12.2 11.0 10.0 7.4 6.4 5.9 5.5 5.1 5.6 6.1 6.6
U76N9LN>;-9FA?L4C<`G`!79CMN6C9A`!867=D6F`;i<Emerging Industrials ex Fin. vs Industrials ex Fin. 2.4 2.1 4.1 0.1 0.5 (2.3) (5.3) (3.8) (2.7) (4.2) (5.7) (6.0) (6.2) (2.5) (0.4) 1.8
Sector AnalystsLP - Lachlan Parker RD - Ray David AG - Andrew Goodsall DL - David Leitch JF - John Freedman RL - Ramoun LazarMB - Martin Byers BG - Ben Gilbert HX - Han Xu LM - Lauren Moran ST - Sam Theodore
CW - Chris Williams JM - Jonathan Mott RE - Richard Eary SM - Simon Mitchell
Emerging Companies Team
)6F?L7A6F`(=7494DFQ`-9895645`m`h=PL=C9?4`%M66C Source: UBS ASX Company/Sector Y/E Price 12 Mth F/cast Net Prem / Reported Rep. Net Profit Reported Adjusted EPS Price Earnings PER Relative Free Cashflow EV/EBITDA ROCE Dividend Dividend Frank Consensus between Rating
14-Oct Price Excess Present (Disc.) Net Profit Excl-Abnormals EPS (pre-exceptional) Ratio (norm.) (Resources) Per Share Yield EPS Consensus
Prem / EPS Growth Price Earnings EV/EBITDA Dividend Weighted Averages calculated from aggregate figures, e.g. P/E = (S market cap)/(S net profit).
(Disc.) (normalised) )&$(,zQ-,%7WR U(*'3 Arithmetic Averages calculated as the sample mean, excluding outliers.
to NPV 2011a 2012e 2013e 2014e 2011a 2012e 2013e 2014e 2011a 2012e 2013e 2014e 2011a 2012e 2013e 2014e Relative P/E's for non-bank are calculated relative to the industrials Arithmetic Average excluding Banks & Insurance
% % % % x x x x x x x x % % % % Individual Sector data is weighted by market capitalisation
)6F?L7A6F Ranges: EPS Growth -25% to +50% P/E 0 to 50 Div Yld 0% to 20%
Arithmetic Average (19.9) 4.3 2.0 4.4 7.0 18.9 15.8 12.5 12.9 9.1 7.2 6.7 6.1 1.5 1.9 2.2 2.3 U.R. denotes Under Review. Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating
Weighted Average 0.8 na 15.9 4.5 (7.8) 11.0 9.5 9.1 9.8 7.1 5.6 5.1 5.3 2.2 2.7 2.9 2.9 are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation.
CBE: denotes Core Band Exception. The standard UBS band for Neutral stocks is -6% to +6%. Any stocks with a modified band are denoted by CBE.
&?C=P`!867=D6F EPS Growth Price Earnings EV/EBITDA Cash Dividend DY ?,$*#O(normalised) Ratio (norm.) Yield Gross h=PL6F`94`"q-
2009 2010 2011e 2012e 2009 2010 2011e 2012e 2009 2010 2011e 2012e 2009 2010 2011e 2012e 2011e Restricted stocks are excluded from forecast analysis % % % % x x x x x x x x % % % % % Arithmetic averages are calculated as the sample mean, excluding outliers.
!PP`"qn`'?86765`*45LFC79=PF` Weighted averages are calculated from aggregate sample figures, e.g. P/E =! (market cap))/ ! (net profit). Arithmetic Average 0.4% -3.9% 1.9% 4.5% 14.5 15.6 14.6 13.2 8.5 8.3 8.2 7.1 6.1 6.3 6.1 6.1 7.4 Relative P/Es are calculated relative to the NZX50 Weighted P/Es, excluding Finance & Property. Weighted Average 7.2% -6.2% 3.0% 7.3% 15.9 16.8 16.2 14.7 8.1 8.4 8.3 7.8 5.7 5.7 5.9 5.8 7.3 # Indicates inclusion in the MSCI Index.
!PP`"qn`'?86765`%C?AKF Sample filters are tested each year. Arithmetic Average 1.4% -0.6% 2.9% 3.0% 14.1 14.9 14.0 13.0 9.0 8.7 8.7 7.8 6.1 6.3 6.1 6.1 7.5 Stocks are excluded if the related test statistic range cirteria is not satisfiedWeighted Average 5.0% -3.4% 3.8% 5.7% 15.4 16.0 15.4 14.2 8.4 8.6 8.6 8.2 5.7 5.7 5.9 5.8 7.4 Summary statistic ranges:
EPS Growth -25% to +50% EV/EBITDA 0 To 20\6S`-6R949C9?4F PE 0% to 50% Div Yld 0% to 15%(CBE) Core Banding Exception - Exception to the standard rating band for these companies.(UR) Under Review - Stocks may be flagged as UR by the analyst, indicating that the stock's price target and /or rating are subject to possible change in the near term. NOTICE:
This spreadsheet is provided by UBS Securities Australia Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG is referred to as UBS SA. This spreadsheet is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. The values generated by this spreadsheet do not represent the values or prices at which UBS would be willing to purchase, sell, enter into, assign, terminate or settle transactions in relevant securities. The spreadsheet methodology relies on models, empirical data and assumptions and as such no representation or warranty, either express or implied, is provided as to the accuracy or appropriateness of our methodology and spreadsheet. The figures produced by the spreadsheet are not intended to be used for valuation or accounting purposes and consequently parties using this spreadsheet should not rely on any figures produced for valuation or accounting purposes!33($(,-&''8Sz:(."%*#z+%,3"6*3zC8z$N(#z#+%*&3#N**$z#N,"'3z-,$zC*z"#*3z:,%z$%&3(-.z+"%+,#*#z&-3z#N,"'3z&-8z"#*%z,:z$N(#z#+%*&3#N**$z@(#Nz$,z$%&3*z&-8z,:z$N*z#*6"%($(*#z6,-$&(-*3zN*%*(-Sz$N*8z7"#$z6,-#"'$z$N*(%z"#"&'z%*+%*#*-$&$(1*z,%z$%&3(-.z6,-$&6$Wz5P/z&66*+$#z-,z'(&C('($8z:,%z&-8z',##z&%(#(-.z:%,7z$N*z3(%*6$z,%z(-3(%*6$z"#*z,:z$N(#z#+%*&3#N**$Wz5P/z&-3z($#z&::('(&$*#z&-3z*7+',8**#z7&8zN&1*z',-.z,%z#N,%$z+,#($(,-#Sz$%&3*z&#z+%(-6(+&'z&-3zC"8z&-3z#*''z(-z(-#$%"7*-$#z,%z3*%(1&$(1*#z(3*-$(:(*3zN*%*(-Wz5-($*3zs(-.3,7z&-3z$N*z%*#$z,:z0"%,+*Oz0F6*+$z&#z,$N*%@(#*z#+*6(:(*3zN*%*(-Sz$N(#z7&$*%(&'z(#z6,77"-(6&$*3zC8z5P/zp(7($*3Sz&z#"C#(3(&%8z,:z5P/z!iSz$,z+*%#,-#z@N,z&%*z*'(.(C'*z6,"-$*%+&%$(*#z,%z+%,:*##(,-&'z6'(*-$#z&-3z(#z,-'8z&1&('&C'*z$,z#"6Nz+*%#,-#Wz]N*z(-:,%7&$(,-z6,-$&(-*3zN*%*(-z3,*#z-,$z&++'8z$,Sz&-3z#N,"'3z-,$zC*z%*'(*3z"+,-zC8Sz%*$&('z6'(*-$#Wz5P/zp(7($*3z(#z&"$N,%(#*3z&-3z%*."'&$*3zC8z$N*zT(-&-6(&'z/*%1(6*#z!"$N,%($8zQT/!RWz5P/z%*#*&%6Nz6,7+'(*#z@($Nz&''z$N*zT/!z%*H"(%*7*-$#z&-3z'&@#z6,-6*%-(-.z3(#6',#"%*#z&-3z$N*#*z&%*z(-3(6&$*3z,-z$N*z%*#*&%6Nz@N*%*z&++'(6&C'*WzT%&-6*Oz;%*+&%*3zC8z5P/zp(73(#$%(C"$*3zC8z5P/zp(7($*3z&-3z5P/z/*6"%($(*#zT%&-6*z/!Wz5P/z/*6"%($(*#zT%&-6*z/W!Wz(#z%*."'&$*3zC8z$N*z!"$,%($�z3*#zI&%6N�#zT(-&-6(*%#zQ!ITRWzBN*%*z&-z&-&'8#$z,:z5P/z/*6"%($(*#zT%&-6*z/W!WzN&#z6,-$%(C"$*3z$,z$N(#z%*+,%$Sz$N*z%*+,%$z(#z&'#,z3**7*3z$,zN&1*zC**-z+%*+&%*3zC8z5P/z/*6"%($(*#zT%&-6*z/W!Wzi*%7&-8Oz;%*+&%*3zC8z5P/zp(7($*3z&-3z3(#$%(C"$*3zC8z5P/zp(7($*3z&-3z5P/zj*"$#6N'&-3z!iWz5P/zj*"$#6N'&-3z!iz(#z%*."'&$*3zC8z$N*zP"-3*#&-#$&'$z:"%zT(-&-o3(*-#$'*(#$"-.#&":#(6N$zQP&T(-RWz/+&(-Oz;%*+&%*3zC8z5P/zp(7($*3z&-3z3(#$%(C"$*3zC8z5P/zp(7($*3z&-3z5P/z/*6"%($(*#z0#+&�&z/rSz/!Wz5P/z/*6"%($(*#z0#+&�&z/rSz/!z(#z%*."'&$*3zC8z$N*z2,7(#(�-z?&6(,-&'z3*'zI*%6&3,z3*zr&',%*#zQ2?IrRWz]"%J*8Oz;%*+&%*3zC8z5P/zI*-J"'zj*.*%'*%z!/z,-zC*N&':z,:z&-3z3(#$%(C"$*3zC8z5P/zp(7($*3Wz)"##(&Oz;%*+&%*3z&-3z3(#$%(C"$*3zC8z5P/z/*6"%($(*#z2t/2Wz/@($o*%'&-3Ozj(#$%(C"$*3zC8z5P/z!iz$,z+*%#,-#z@N,z&%*z(-#$($"$(,-&'z(-1*#$,%#z,-'8Wz9$&'8Oz;%*+&%*3zC8z5P/zp(7($*3z&-3z3(#$%(C"$*3zC8z5P/zp(7($*3z&-3z5P/z9$&'(&z/(7z/W+W!WWz5P/z9$&'(&z/(7z/W+W!Wz(#z%*."'&$*3zC8z$N*zP&-Jz,:z9$&'8z&-3zC8z$N*z2,77(##(,-*z?&o(,-&'*z+*%z'*z/,6(*$�z*z'&zP,%#&zQ2=?/=PRWzBN*%*z&-z&-&'8#$z,:z5P/z9$&'(&z/(7z/W+W!WzN&#z6,-$%(C"$*3z$,z$N(#z%*+,%$Sz$N*z%*+,%$z(#z&'#,z3**7*3z$,zN&1*zC**-z+%*+&%*3zC8z5P/z9$&'(&z/(7z/W+W!WWz/,"$Nz!:%(6&Oz5P/z/,"$Nz!:%(6&zQ;$8Rzp(7($*3zQ)*.(#$%&$(,-z?,WzL__a^XLLLdX^XYRz(#z&z7*7C*%z,:z$N*zt/0zp(7($*3Sz$N*z/,"$Nz!:%(6&-zT"$"%*#z0F6N&-.*z&-3z$N*zP,-3z0F6N&-.*z,:z/,"$Nz!:%(6&Wz5P/z/,"$Nz!:%(6&zQ;$8Rzp(7($*3z(#z&-z&"$N,%(#*3zT(-&-6(&'z/*%1(6*#z;%,1(3*%Wzj*$&('#z,:z($#z+,#$&'z&-3z+N8#(6&'z&33%*##z&-3z&z'(#$z,:z($#z3(%*6$,%#z&%*z&1&('&C'*z,-z%*H"*#$z,%z7&8zC*z&66*##*3z&$zN$$+O@@@W"C#W6,Wo&Wz
This package has been prepared by UBS Securities Australia Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliatesare referred to herein as UBS.
This package contains summaries of UBS research content. For a complete copy of the non-summarized version, please contact your UBSsales representative.
/0% %M?7CG&67N )=C94D )=C94D '=C6D?7S '?867=D6xVy *0 %6789A6FxWy0LS Buy P6FF CM=4 Ii 0%%6PP Sell P6FF CM=4 Ii 20%
1:Percentage of companies under coverage globally within the 12-month rating category.2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.3:Percentage of companies under coverage globally within the Short-Term rating category.4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12months.Source: UBS. Rating allocations are as of 30 September 2011./0% *486FCN64C )6F6=7AMH 1P?E=P (aL9CS )=C94D -6R949C9?4F
/0% IJGZ?4CM )=C94D -6R949C9?40LS FSR is > 6% above the MRA."6LC7=P FSR is between -6% and 6% of the MRA.%6PP FSR is > 6% below the MRA.
/0% %M?7CG&67N )=C94D -6R949C9?4
0LSBuy: Stock price expected to rise within three months fromthe time the rating was assigned because of a specificcatalyst or event.
%6PPSell: Stock price expected to fall within three months fromthe time the rating was assigned because of a specificcatalyst or event.
\($ -(+*"*&*,"%
+?76A=FC %C?AK )6CL74 ;+%)< is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months.Z=7K6C )6CL74 !FFLNBC9?4 ;Z)!< is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, theequity risk premium)./4567 )6896: ;/)< Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject topossible change in the near term, usually in response to an event that may affect the investment case or valuation.%M?7CG&67N )=C94DF reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in thefundamental view or investment case.(aL9CS U79A6 &=7D6CF have an investment horizon of 12 months.
(n'(U&*,"% !"- %U('*!# '!%(%
/\ =45 (L7?B6=4 *486FCN64C +L45 7=C94DF =45 56R949C9?4F =76H Buy: Positive on factors such as structure, management, performancerecord, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors suchas structure, management, performance record, discount.'?76 0=4594D (@A6BC9?4F ;'0(<H Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC).Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks
&M6 !LFC7=P=F9=4 -=9PS Monday, 17 October 2011
UBS
deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, theywill be identified in the Company Disclosures table in the relevant research piece.
Company DisclosuresCompany Name Reuters 12-month rating Short-term
2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of thiscompany/entity or one of its affiliates within the past 12 months.
3a. UBS AG, Australia Branch is acting as Corporate Adviser to Bathurst Resources Limited and will be receiving a fee for acting inthis capacity.
3b. UBS AG, Australia Branch is acting as Financial Adviser to Bandanna Energy on a strategic review of the company and will bereceiving a fee for acting in this capacity.
3c. UBS AG, Australia Branch is acting as financial adviser to Peabody Energy Corporation in relation to a joint proposal withArcelorMittal S.A to acquire Macarthur Coal Limited. UBS AG, Australia Branch will be receiving a fee for acting in this capacity ifthe offer proceeds and is successful.
3d. UBS AG, Australia Branch is acting as financial adviser to Wesfarmers Limited on the sale of its Premier Coal business to AustarCoal Mine Pty Limited, a wholly owned subsidiary of Yancoal Australia Limited and will be receiving a fee for acting in thiscapacity.
4a. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services fromthis company/entity.
4b. Within the past 12 months, UBS Securities Canada Inc or an affiliate has received compensation for investment banking servicesfrom this company/entity.
5a. UBS AG, Australia Branch or an affiliate expect to receive or intend to seek compensation for investment banking services fromthis company/entity within the next three months.
5b. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from thiscompany/entity within the next three months.
6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking servicesare being, or have been, provided.
6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services arebeing, or have been, provided.
7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investmentbanking services from this company/entity.
8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long commonstock position in this company.
13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company s common equity securities as oflast month s end (or the prior month s end if this report is dated less than 10 days after the most recent month s end).
16a. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company.
16b. UBS Securities LLC makes a market in the securities and/or ADRs of this company.
18. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in BHPBilliton.
19. Because this company is an announced takeout candidate, UBS believes the security presents lower-than-normal risk. We havewidened its rating band to +6%/-10% compared with +6%/-6%, respectively, under the normal rating system.
20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds theMRA by 10% (compared with 6% under the normal rating system).
22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month s end (or theprior month s end if this report is dated less than 10 working days after the most recent month s end).
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!"
&M6 !LFC7=P=F9=4 -=9PS Monday, 17 October 2011
UBS
UBS Securities Australia Ltd Australian Equities Research Australian Equities SalesDavid Wilson 61 2 9324 2319 Head of Research Gary Head 61 2 9324 3824 Co-Head of EquitiesCynthia Hopkins 61 2 9324 3823 Chief Operating Officer Robert Vanderzeil 61 2 9324 2490 Co-Head of EquitiesFiona Mobbs 61 2 9324 2186 "The Australasian Daily" Manager
SydneyStrategy & Quantitative Research Sales David Cassidy 61 2 9324 3721 Head of Strategy & Quantitative Research George Kanaan 61 2 9324 2570 Head of Australian SalesDean Dusanic 61 2 9324 3785 Strategist John Spencer 61 2 9324 2390 Head of Sydney SalesPaul Winter 61 2 9324 2080 Quantitative Research Michael Conway 61 2 9324 2845Oliver Antrobus, CFA 61 3 9242 6467 Database Infrastructure Craig Stafford, CFA 61 2 9324 2277Vyas Balasubramanian 61 2 9324 2728 Quantitative Research Rob Taubman 61 2 9324 2685
Craig Webb 61 2 9324 3290Financial Services Craig Haskins 61 2 9324 3787 Corporate BrokingJonathan Mott 61 2 9324 3864 Co-Head of Banks & Fincl Svcs Clinton Wong (Emerging Cos) 61 2 9324 2770 Head of Emerging Companies SalesChris Williams, CFA 61 2 9324 3968 Co-Head of Banks & Fincl Svcs Paul Barton (Emerging Cos) 61 2 9324 2291Adam Lee 61 2 9324 2998 Banks Michael Walsh 61 2 9324 3579James Coghill 61 2 9324 2821 Insurance Darren Cohen 61 2 8121 5719 International SalesScott Olsson 61 2 9324 2820 Insurance
Sales TradingHealth Care & Pharmaceuticals David Singer 61 2 9324 2575 Head of Sales TradingAndrew Goodsall 61 2 9324 3574 Healthcare & Pharmaceuticals Stuart Brownrigg 61 2 9324 2956Dan Hurren 61 2 9324 3575 Healthcare & Pharmaceuticals Paul De Lange 61 2 9324 3546
Tim Leahy (Real Estate) 61 2 9324 2950 Head of Real Estate Sales & ExecutionInfrastructure & Utilities Rob Nash 61 2 9324 2065David Leitch 61 2 9324 3870 UtilitiesHan Xu 61 2 9324 3726 Infrastructure & Utilities International Sales TradingHannah Dent 61 2 9324 2665 Utilities Steve Parsons 61 2 9324 2848 Head of International Sales TradingEric Choi 61 2 9324 2356 Infrastructure Rue Liu 61 2 9324 2652
FacilitationMedia & Telecommuncations Frik Kriek, CFA 61 2 9324 2130Richard Eary 61 2 9324 2869 Head of Media & Telecommunications Jason Dick 61 2 9324 2511Lauren Moran 61 2 9324 2833 Media Chris Gardener 61 2 9324 2842Eric Choi 61 2 9324 2356 Media & Telecommunications Rory Lucas 61 2 9324 3608Lance Reynolds 64 9 913 4819 Telecommunications
Portfolio TradingGaming & Contractors James Chen 61 2 9324 3748Sam Theodore 61 2 9324 2503 Head of Gaming & Contractors Steven Hammerton 61 2 9324 2819Rohan Sundram, CFA 61 2 9324 3708 Gaming & Contractors Matt Junee 61 2 9324 2818
Retailing, Food & Beverage Direct ExecutionLindy Newton 61 2 9324 2172 Food & Beverage David Ryan 61 2 9324 3501 Head of Direct ExecutionBen Gilbert 61 2 9324 2782 Retail Goutham Bharadwaj 61 2 9324 2097Paul Wong 61 2 9324 3493 Retail Jim Groves 612 9324 2817
Transport, Chemicals and Paper & Packaging Institutional Funds GroupSimon Mitchell 61 2 9324 3573 Transport & Chemicals Andrew Dalgleish 61 2 9324 2857Ramoun Lazar 61 2 9324 3156 Transp, Chemicals, Paper & Packaging Tim Whiteoak 62 2 9324 2234Joshua Golombick 61 2 9324 2852 Transp, Chemicals, Paper & Packaging
MelbourneEmerging Industrials Research SalesLachlan Parker 61 2 9324 3671 Head of Emerging Companies Tony Rule 61 3 9242 6443 Head of Melbourne SalesMartin Byers 61 2 9324 3174 Emerging Companies Ian Keys 61 3 9242 6855Ray David 61 2 9324 2192 Emerging Companies Joe Mahony 61 3 9242 6446Reji Eapen 61 2 9324 3848 Emerging Companies
Sales TradingReal Estate Peter Milne 61 3 9242 6867John Freedman 61 2 9324 2453 Head of Real Estate & LLCGrant McCasker 61 2 9324 3626 Real Estate Wholesale BrokingJames Besson 61 2 9324 3568 Real Estate Ian Keys 61 3 9242 6855
1800 060 446 Metals & Mining International Equities SalesGlyn Lawcock 61 2 9324 3675 Head of Metals & Mining UK/EuropeJo Battershill 61 2 9324 2834 Metals & Mining Rustam Moman 44 20 7568 4221 Desk HeadBrett McKay 61 2 9324 3623 Metals & Mining Alex McGee, CFA, Andrew DempsterAndrew Moller 61 2 9324 2156 Metals & Mining Sales Trading: Tim Clifford 44 20 7568 4254Daniel Morgan 61 2 9324 3844 Metals & MiningBen Wilson 61 2 9324 2392 Metals & Mining AmericasTom Price 61 2 9324 2189 Commodities Sophie Johnson, CFA 1 212 713 2290 Desk Head
David Lack, Jeremy Koch, Millie MorseSteel Sales Trading: 1 203 719 8300Andrew Moller 61 2 9324 2156 Steel Steve Parsons 61 2 9324 2848
Energy AsiaGordon Ramsay 61 3 9242 6631 Energy Thomas Buchanan, Manuel Anton 852 2971 7527 Desk HeadCameron Hardie 61 3 9242 6383 Energy Tim Chegwin (SIN) 65 6495 8186
Sales Trading: Rue Liu 61 2 9324 2652
New Zealand Equities ResearchWade Gardiner 64 9 913 4864 Hd of NZ Research, Util, Infra, Transp New Zealand Toll Free Line:
Lance Reynolds 64 9 913 4819 Strategy, Quant, Property Campbell Stuart, David Lane, 0800 244 9855 Country Head
Stephen Jancys 64 9 913 4890 Building Materials, Manufacturing, Retail Stephen JancysTristan Joll 64 9 913 4863 Telcos, Media Sales Trading: 64 9 913 4807
David Somervaille
Economic ResearchScott Haslem 61 2 9324 3663 Chief Economist Hedge Fund ServicesGeorge Tharenou 61 2 9324 3520 Economist Thomas Anglin, CFA 61 2 9324 2712 Head of Hedge Fund SalesAlvin Pontoh 61 2 9324 3849 Economist David Birrell 61 2 9324 3724Robin Clements (NZ) 64 3 358 9150 Senior Economist Sean Satha 61 2 8121 5769
Derivative SalesEquity Capital Markets Andrew Fitter 61 2 9324 2488
Robert Vanderzeil 61 2 9324 2490 Head of Global Capital Markets Stuart Trueman 61 2 8121 5760Simon Cox 61 2 9324 2442 Co-Head of Equity Capital Markets Stephanie Pow 61 2 8121 5763
Andrew Stevens 61 3 9242 6440 Co-Head of Equity Capital Markets Edward Burns 61 2 9324 3329Jamie Adamson 61 2 9324 3625 Peter Mermelas 61 2 8121 5748Rebecca Bone 61 2 9324 3654 Michaela Bryan 61 2 9324 2630Grant Wearin 61 2 9324 2347
Richard Sleijpen 61 2 9324 2979 Equity Trading & DerivativesSarah Rennie 61 2 9324 2538 Steve Boxall 61 2 9324 2138 Head of Equity Deriv Trading
