The Week in Review by tyndale

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									            Issue #15 - Monday 10 May 2010

            Page 1       The Week in Review by Michael Heffernan, Austock Securities
            Page 4       Asset Class Returns by Austock Financial Planning
            Page 5       Stock Selections by Austock Research




The Week in Review
In soccer it’s called an “own goal” and in the vernacular it’s called “shooting yourself
in the foot”.
Some might describe the Governments response to the Henry tax review with its proposal for the “Resources Super
Profit tax” at 40% to apply from July 2012, in those terms.

But first a few key observations:

 Increasing taxes are not an incentive for increased activity or mineral production
 Minerals in the ground are an asset owned by us all, but are worth nothing until extracted by companies prepared
   to risk millions of dollars in the process.
 The Prime Minister’s statement that “over the last decade, the mining companies generated $80 billion in higher
   profits; and at the same time governments, on behalf of the people received only an additional $9 billion”, is at
   best misleading, and at worst wrong. And with all due respect, the Prime Minister simply doesn’t know what he is
   talking about.
 On the contrary over the last decade a total of $64 billion was paid in company tax by just two Australian
   resource companies alone namely BHP and RIO – and that’s not even counting substantial state royalty taxes.
 In 2008/2009 just these two miners alone contributed $9.6 billion of company tax to the Government -
   equivalent to 17% of total company tax raised from all Australian companies last year.
 In response to the Prime Minister’s comments, BHP advised that the total effective tax rate on the groups profits
   earned from its Australian operations would increase to 57% from 2013 if this new tax went ahead, from the
   current level of 43%!.
 Finally the comment in the Prime Ministers statement that the changes announced “were expected to increase
   Australia’s GDP by 0.7%” is something to write on the white board - I’ll believe it when I see it! Higher taxes
   reduce incentive and activity. If the government wanted to encourage investment in mining it should have
   reduced tax not increased it.

The unfortunate timing of this Super Tax, is that it came when there is increasing uncertainty in the world economic
and financial markets about the seemingly intractable Greek debt fiasco. As a result, last week saw the main index
fall by 4% but more particularly the share prices of BHP and RIO fell by around 8 and 10% each respectively.
The Week Newsletter
Austock in Review                                                               13 October 2008
                                                                                        Issue #39

                           It is significant to note that the fall in the share prices of just these two companies
                           wiped $12 billion from their market value in the space of just 5 days - more than
                           the total amount of extra revenue expected to be raised from this new proposed
                           tax in two full years (2012 and 2013)!

                           Moving more broadly to the market overall, there were some impressive results by
                           three major listed companies last week, which were treated harshly in share price
                           terms. First we had Westpac, which advised that its cash earnings increased 30%
                           in the March half year compared with same time last year, with the best
                           performing business unit being the business banking and institutional banking. The
                           retail bank’s performance was lack lustre.

                           In it’s outlook statement Westpac advised that while the “recent period has seen a
                           turning point for the Australian Banking System, the Bank expects the effects of
                           the Global Financial Crisis to be with us for many years yet, and that the recent
                           issues in Europe have highlighted the fragile nature of recovery in some global
                           markets”.

                           On the following day the National Australia Bank also produced a solid result with
                           cash earnings up 20% in the half year to March compared to the same time last
                           year.

Looking ahead on the       As with Westpac Bank, the business banking and wealth management areas were
corporate front we         the major contributors to the good result, whereas personal banking cash earnings
will see on Monday         decreased. This was due, as the Bank said, to fee initiatives, mortgage rate
Incitec Pivot’s interim    decisions and higher deposit and funding costs. These lack lustre retail/private
result and CBA’s           banking retail banking results from NAB and Westpac, disappointed the market-
March quarter trading      but the share price declines in response, seems an overreaction - at the end of the
update on                  day its profits that count and both delivered in spades!.
Wednesday.
                           The third major company to announce results was Orica which advised that “profit
On the economic front      excluding material items was up 11% compared with the previous year.” At the
we have the ANZ            same time Orica advised that they are proposing to demerge the Dulux Group
Bank Job                   which Orica says is a natural evolution of Orica’s Strategy and “should create to
Advertisement series       even better companies, each free to capitalise on its strategic strengths”. The
on Monday, with the        market applauded this initiative and Orica’s share price rose 4% in the immediate
highlight of the week      aftermath of the announcement.
being the Federal
Budget on the next         On the economic front the highlight/lowlight was the decision by the Reserve Bank
day, in which one can      to again increase interest rates by 0.25% to 4.5%.
expect to see the
announcement of a          The silver lining of this decision is that it now appears that the Reserve Bank will
significant reduction      “sit on their hands” for some time and not raise rates for at least several months.
in the level of deficit.   The akin in many respects to the “boiling frog syndrome” i.e. the relatively small
On Wednesday               but inexorable creep up in rates represent an incredible 50% hike since October
figures on home loans      last year with cash rates moving from 3% to 4.5%.
will be available,
while on Thursday          Support for this “sit on their hands” thesis comes from the banks statement that
figures on the             increases in interest rates over the last seven months has been an “endeavour to
employment and             adjust interest rates to levels that would be consistent with interest rates to
unemployment are           borrowers being close to the average experience over the past decade or more”.
due out, and it is         The Board stated further that “as a result of this (last weeks) decision rates for
likely that the            most borrowers will be around average levels”. In other words the Bank would
unemployment rate          seem to believe that it has achieved its goal for the time being.
remained unchanged
in April from the          The only event that could alter the above thesis is if inflation, (which seems to
previous month.            be “sticky” at an annual rate at about 3%) jumps up; there is a continuing strong
                           rise in the terms of trade (i.e. higher coal and iron ore prices) and housing prices
                           continue to increase sharply. Unless all these three factors act in an adverse
                           direction then interest rates are likely to remain on hold for several months.

                           Elsewhere on the economic front, building approval figures showed a slight
                           increase which is consistent with the trend of recent months, and retails sales rose
                           at a low annual rate of around 3%.


Austock Newsletter                     10 May 2010      Issue #15                                              2
The Week Newsletter
Austock in Review                                                                                           13 October 2008
                                                                                                                    Issue #39

                                  Also last week The Australian Industry Group released its index for the manufacturing
                                  sector which showed a slight pickup in pace in April, and the services sector survey also
                                  showed an expansion in April following a lack lustre start to this year.

                          Looking ahead on the corporate front we will see on Monday Incitec Pivot’s interim result
and CBA’s March quarter trading update on Wednesday.

On the economic front we have the ANZ Bank Job Advertisement series on Monday, with the highlight of the week
being the Federal Budget on the next day, in which one can expect to see the announcement of a significant
reduction in the level of deficit. On Wednesday figures on home loans will be available, while on Thursday figures on
the employment and unemployment are due out, and it is likely that the unemployment rate remained unchanged in
April from the previous month.

In the United States there is an unusually low number of important economic pieces of data scheduled for release.
On Wednesday we have the ABC Consumer Confidence Survey, and on Friday, figures on retail sales, industrial
production, capacity utilisation, and the University of Michigan Confidence Survey. One can anticipate that the
momentum for increases in economic activity, will continue despite the problems in Greece.

As was stated last month, the current environment where international uncertainty overhangs the market, and now
with the Australian Government “shooting itself in the foot”, and where good shares have shown a significant decline
in share price over recent times, presents attractive opportunities for investors that have a medium term outlook.

                                                                                                                        Michael Heffernan,
                                                                                                                        Austock Securities


                                                                                      Forecast for December 2010

       Indicator                   Level             “The AGE”           Shane Oliver1      Chris Caton1        Michael         Treasury
                                                     Consensus1                                                Heffernan

                                7 May 2010                              Forecast made at 1 January 2010                      As at 2 Nov 2009
                                                                                                                             Mid Year Economic
                                                                                                                                  Forecast

 ASX 200 Index                    4480.7                5147.3               5600               5250             5650                -

 Dow Jones Index                 10380.4               10253.1              11825              11700            11510                -

 FT 100 Index                     5123.0                5457.5               6060               6000             6200                -

 Nikkei Dow Index                10364.6               10837.5              11400              11500            12100                -

 Gross Domestic              $10824.3 billion            2.64                 3.1                 3               3.2          1.5% 09/10 FY
 Product                      (Dec Quarter                                                                                    2.75% 10/11 FY
                               annualised)
                             +2.7% over Year                                         % growth over year to December 2010

 90 day bank bill rate             4.88                  4.73*               4.75*              5.25*            5.0*                -

 10 Year bond rate                 5.475                 5.86                 6                  5.6              6.0                -

 US 30 Year bond rate              4.27                    -                   -                  -                -                 -

 Consumer Price Index             171.0                  2.26                 2.5                2.5              2.8         2.25% 09/10 FY
                            (March 10 Quarter)                                                                                2.25% 10/11 FY

                             +2.1% over Year                                         % growth over year to December 2010

 Unemployment rate                 5.3                   6.06                 5.4                5.7              5.2         6.75% 09/10 FY
                               (March 2010)                                                                                   6.50% 10/11 FY

Other predictions for the ASX200 by December 2010
The ultra optimist - Neville Norman, University of Melbourne - 6300
The ultra pessimist - Steve Keen, University of Western Sydney - 3500
From left field - Chris Richardson, Access Economics - No idea 2


* Official Cash Rate
1
  The Age 1 January 2010
2
  Herald Sun 27 December 2009


Austock Newsletter                                       10 May 2010               Issue #15                                                   3
Asset Class Newsletter
Austock Returns                                                                         13 October 2008
                                                                                                Issue #39

                                      We summarise below major asset class returns over the last 3 months, 1 year, 3
                                      year, 5 year and 10 year periods to the end of April 2010.

                                               Asset Class Index Returns

  Asset Class                             3 mths         1 year         3 years         5 years         10 years
  Cash                                     1.02%         3.63%          5.66%            5.81%           5.58%
  Fixed Interest - Aust                    0.46%         3.29%          6.46%          5.77%             6.30%
  Fixed Interest – Gbl (Hedged)            1.94%         6.75%          8.49%            7.05%           7.83%
  Property – Aust #                        5.18%         37.44%        -22.78%          -6.31%           3.83%
  Property – Global (Hedged) #            16.72%         60.03%        -13.77%           1.76             n.a.
  Shares - Aust                            6.49%        34.17%         -3.75%            8.61%           8.85%
  Shares – Global (Unhedged)               2.86%         7.94%          -9.89%           0.05%           -3.98%
  Shares – Global (Hedged)                 9.03%         33.62%         -6.58%           3.46%           -0.30%

Source: Index data to 30 April 2010
# Listed property indices.


The above table to 30 April 2010 highlights the generally positive return history over the previous 12 months as
financial markets recovered from the depth of the financial crisis in March 2009.

The three year return data highlights the severity of the recessionary conditions with all growth asset markets posting
negative returns over the past three years to 30 April 2010. Interest earning assets performed strongly during this
period as investors sought security. The value of portfolio diversification is highlighted in the data.

The implications of the financial crisis will still be with investors for some time to come reflected in lower than normal
economic growth during the recovery stage of the cycle and periodic bouts of extreme volatility as experienced in the
current month of May 2010.

In the three months ended April 2010, growth asset returns ranged from 2.88% for global shares (unhedged for
currency movements) to 16.72% for global property (hedged). During the last 12 months, all major asset classes
provided investors with positive returns with growth asset returns ranging from 7.94% for global shares (unhedged) to
the 60.03% for global property (hedged). Australian listed property trusts and shares and global shares (hedged) all
experienced returns of over 33% per annum.

The strength of the Australian dollar, in general, against a number of major currencies over the last 12 months held
back unhedged global equity returns relative to their hedged counterpart. In the longer term, the differences between
hedged and unhedged global equity returns have narrowed considerably as one would expect. Australian dollar
movements have been volatile during the current month of May 2010.

The abovementioned changes in market conditions highlight the cyclical nature of financial markets and the importance
of diversification and the investment in quality assets to better manage investment risk over time.
Please note that past performance is not necessarily indicative of future performance. This is highlighted in the above
chart.

It is also important to note the concentration of returns from growth assets over short periods of time and the need to
retain appropriate exposure through the cycle so that long term investors can take advantage of these positive periods
that have such a significant impact on long term returns.

We continue to recommend that investors retain an appropriately diversified
portfolio relative to their personal circumstances and investment time
horizon. In this regard, we would expect, for example, balanced portfolios to         Your Contacts
average returns around 5% per annum above inflation over the next 10                  John Short       03 8601 1960
years. This comprises average cash and fixed interest returns of around 5%            Carol Hay        03 8601 1961
to 7% per annum, property and sharemarket average returns of around 8%
to 10% per annum and the rate of inflation of around 2.5% to 3.0% per
annum over the next 10 years.
                                                                                      Administration enquiries:
We invite you to contact your Austock adviser for an introduction to one of           Karen Chua          03 8601 1963
the Certified Financial PlannersTM to ascertain whether we can assist you             Nicole Wilmann      03 8601 1964
in relation to your financial planning including strategic asset allocation
and investment planning.


Austock Newsletter                                 10 May 2010    Issue #15                                           4
Stock Selections



Tatts Group                                                   Orica
Recommendation:              Buy                              Recommendation:                Hold
Risk Rating:                 Medium                           Risk Rating:                   Moderate
Dividend:                    $0.21/share                      Dividend:                      $1.003
Dividend Yield:              8.9% (ff)                        Dividend Yield:                3.7%
Current Share Price:         $2.37                            Current Share Price:           $27.20
12 Month Price Target:       $3.04                            12 Month Price Target:         $29.20
Analyst:                     Rohan Sundram                    Analyst:                       Paul Jensz

In Mar-10, TTS secured the NSW Lotteries (NSWL)               ORI’s HY report showed a $48m EBIT (11%)
license for $850m in a competitive tender process             improvement on our estimate of $428m with half
ahead of rival bidders such as the Ontario                    of the improvement from cost out plus synergies,
Teachers Pension Plan, Intralot and Tabcorp. Key              and half from better pricing for goods and
points below:                                                 services. (Dividend of 41cps was 1c above pcp,
                                                              record 1 June.)
   Bid price not unreasonable given our NSWL
     DCF of $999m.         We had underestimated the          This was an impressive result with flat volume
     potential synergies. The uplift on our prior valuation   improvements across the group (including minus 4% in
     of $725m was largely due to higher than expected         key Mining Services <60% of EBIT>), and tough
     synergies from corporate and IT (TTS to roll out its     economic conditions. ORI’s low volatility “formulation”
     in-house system in mid 2012 upon expiry of               model works well and enables us to lift medium NPAT
     GTECH’s contract with NSW Govt). We had                  and DCF valuation by 8%.
     previously forecast $80m EBITDA in FY’15F post
     synergies, vs. guidance for $120m.                       We stay with a Hold recommendation with 12
                                                              month price target up 8% to $29.20/share.
   Plugs in >50% of earnings hole from Vic
     Gaming expiry post 2012. We had previously               ORI now seeks to press home its high and less volatile
     estimated that NSWL would plug ~30% of the hole.         margin advantage with EBITDA growth at 11.0%pa
     As a result, TTS now trades on an est. ~13x FY’11F       (EBIT 12.5%) over the medium term and Return on
     EPS, vs. ~16x prior, with a 3 yr forecast yield of 9-    Investment (ROI) above 18%.
     9.5% to FY’12, and >7% from FY’13+.
                                                              ORI’s target growth rate would add 14% ($220m) to
   Forecast to be accretive. We estimated the               our forecast for 2014 EBIT, and give $1840m.
     transaction to be 0.4%, 2.2% and 5.2% accretive in
     FY’10, FY’11 & FY’12, assuming full debt funding,        ORI prefers organic growth options and we believe it
     and have upgraded accordingly.                           will be hard to exceed our 2014 ROI forecast of 22%.

Investment view – Retain Buy                                  Therefore, an extra $1bn of capital expenditure over
                                                              our expectation* may be spent for ~400kt of AN. (*Base
                                                              = US$550m for Bontang and A$800m for “other” Ammonium
   TTS currently trades at a >20% discount to our DCF
                                                              Nitrate <400kt>, Initiating System and minor other chemical
     based sum of the parts of $3.04/share.                   expansion.)

We believe the ‘full but fair’ acquisition price for NSWL     ORI sees opportunities for better leverage of assets via:
will be justified by management’s growth track record
and ability to extract targeted synergies.                       Minova/Excel – Attaining 18% ROI vs. our 12%
                                                                   and current 10%. This adds $100m.
We view current pricing as a compelling opportunity to
buy on the back foot of recent market related weakness           Services – ORI may do better than 50/50 split of
for long term value and yield.                                     ammonium nitrate vs. emulsion plus initiating
                                                                   systems plus services to 42/58 limit (set by our
                                                                   expectation of customer outsourcing limit).




Austock Newsletter                             10 May 2010    Issue #15                                               5
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Disclaimer

Risk Rating
Austock Securities Limited has a four tier Risk Rating System consisting of: Very High, High, Medium and Low. The Risk Rating is a subjective rating
based on: Management Track Record, Forecasting Risk, Industry Risk and Financial Risk including cash flow analysis.

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should not be used as the basis of an investment decision. Please contact your adviser to obtain a copy of the full research report on each company.

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subject companies or derivatives. Please refer to the full research reports for disclosure of any economic interests held by the author of the report.

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Disclosure of Corporate Involvement
Austock Securities Limited has not in the previous 12 months been involved in a publicly-announced transaction involving the payment of a fee to
Austock Securities Limited by the corporate issuer described in this report. Austock Securities does and seeks to do business with companies covered
in its research.




Austock Newsletter                                       10 May 2010          Issue #15                                                           6

								
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