Meeting the challenges in 2009 by Kylie Macdonald

Special Bulletin | Meeting the challenges in 2009

10 December 2008

Meeting the challenges in 2009

Income Focussed Investors

2008 has been a challenging and turbulent year for investors and companies alike as the impact of the global credit crisis created market wide funding issues. Looking ahead into 2009 we believe the risk/return outlook will improve as we expect the crisis to gradually unwind, but not before leaving some companies with more bruising as they struggle to secure capital in a tight market. Coupled with a falling interest rate environment, investors seeking safe income streams need to be selective in their portfolio investments. In this Special Bulletin we focus on the opportunities that exist to optimise income in the short to medium term. Table 1 below highlights some cash strong, dependable, dividend paying companies which we believe are of value now. Table 1 : Income returning opportunities Code

Rating

FY09 Yield

Franking (%)

Tatts Group

TTS

Buy

7.6%

100

Woolworths

Company

FY09 Gross Yld 10.9%

Sector Consumer Discretionary

WOW

Buy

3.9%

100

5.6%

Consumer Staples

Goodman Fielder

GFF

Buy

10.1%

11.8%

Consumer Staples

QBE Insurance

QBE

Buy

5.4%

5.8%

Financials

WH Soul Pattinson

SOL

Buy

4.6%

100

6.6%

Financials

Sonic Healthcare

SHL

Buy

4.2%

100

6.0%

Healthcare

BHP Billiton

BHP

Buy

4.6%

100

6.6%

Resources

Telstra Corporation

TLS

Buy

6.7%

100

9.5%

Telecommunications

SP AusNet

SPN

Buy

12.3%

Utilities

Figure 1: US Corp spread risk

4 % 3

Source: ABN AMRO Morgans estimates

1 94

02 Y ear

Source: ABN AMRI Morgans, US Federal Reserve

Figure 2: Aust. 90 Day Bank Bills 14 12 10 8 6 % 4 2 0 88

98 00 Year

Source: ABN AMRO Morgans, RBA

Bailouts have not been catalyst to renewed corporate spending

The crisis and its impact on banks around the world has lead to a reduction in the availability of traditional debt funding for Australian companies. Contrary to expectations, the Government sponsored bailouts of foreign banking systems has not been a catalyst to renewed corporate lending as capital continues to be hoarded. This is illustrated in Figure 2 (opposite) where Corporate risk spreads have dramatically increased. These spreads seem to reflect rising bank lending standards and tightening credit. This risk spread is now the highest since April 1933. Worse still for Australian businesses is that foreign banks are now aggressively repatriating funds back to their home markets further restricting funds available. This move alone is reported to have created a $50bn funding hole for Australian companies that rely on multi-bank syndicates to fund their operations. Tighter cash flow management will continue…. In the face of this very challenging environment Australian companies are now being forced to rethink how they will finance their businesses, reviewing investment opportunities and capex programs in an effort to better manage their balance sheets. The order of the day is tighter cash flow management, DRPs, dividend reductions and new equity capital raisings. ….as will reducing interest rates The global credit crisis is also impacting income investors as interest rates are slashed aggressively in an effort to support economic activity. Figure 2 shows the rapid decline in 90 day bank bill rates following the RBA cash rate cuts in recent months. With more cuts expected we believe this will force investors to look beyond traditional deposits and hybrids to support their lifestyle and retirement.

ABN AMRO Morgans Limited (A.B.N. 49 010 669 726) AFSL235410 A Participant of ASX Group

Consequently, dependable income returning investments look increasingly attractive ABN AMRO Morgans views the demand by many high quality companies for new equity capital as an opportunity for investors seeking dependable dividend income in the period ahead. Remember, notwithstanding the difficult times, quality companies with dependable earnings will prove their

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worth. In 2009 we believe continued funding issues and reducing interest rates will drive investment into companies such as those listed in Table 1 above. Our regular publication “Investing for Income” will continue to review this portfolio as relative risk/returns change.

Important disclosures regarding companies that are the subject of this report and an explanation of recommendations and volatility can be found at the end of this document.

ABN AMRO Morgans RESE ARCH TEAM ROGER LE ANING CHRIS BROWN FIONA BUCHANA N NICK HARRIS MICHA EL K NOX JAME S LAWRENCE JOSEPHINE LITTLE BELINDA MOORE

BRISBANE BUNDABERG BURLEIGH HEADS CAIRNS CALOUNDRA CAPALABA CHERMSIDE EMERALD GLADSTONE GOLD COAST IPSWICH MACKAY MILTON MISSION BEACH NOOSA REDCLIFFE ROCKHAMPTON SPRING HILL SPRINGWOOD SUNSHINE COAST TOOWOOMBA TOWNSVILLE YEPPOON SYDNEY ARMIDALE BALLINA BALMAIN

Head of Resea rch Sen ior A nalyst Sen ior A nalyst Ana lyst Director of Strategy & Chi ef Eco nomist Fixe d Interest Analyst Ana lyst Sen ior A nalyst

(07) 3334 4888 (07) 4153 1050 (07) 5520 8788 (07) 4052 9222 (07) 5491 5422 (07) 3245 5466 (07) 3350 9000 (07) 4988 2777 (07) 4972 8000 (07) 5592 5777 (07) 3202 3995 (07) 4957 3033 (07) 3114 8600 (07) 4088 6188 (07) 5449 9511 (07) 3897 3999 (07) 4922 5855 (07) 3833 9333 (07) 3808 7588 (07) 5479 2757 (07) 4639 1277 (07) 4771 4577 (07) 4939 3021 (02) 8215 5000 (02) 6770 3300 (02) 6686 4144 (02) 8755 3333

SCOTT POWER TOM SARTO R TAMARA STRETCH TANYA SOL OMO N PAUL STEV ENSO N REBECCA SULLIV AN SAM TURNER

ABN AMRO MORGANS OFFICES CHATSWOOD COFFS HARBOUR GOSFORD HURSTVILLE MERIMBULA NEUTRAL BAY NEWCASTLE NEWPORT ORANGE PARRAMATTA PORT MACQUARIE SCONE WOLLONGONG MELBOURNE BERWICK BRIGHTON CAMBERWELL GEELONG TRARALGON WARRNAMBOOL CANBERRA ADELAIDE PERTH BUNBURY DARWIN HOBART

Senior Analyst Analyst Analyst Analyst Analyst Re tail Strateg y Analyst

(02) 9411 8988 (02) 6651 5700 (02) 4325 0884 (02) 9570 5755 (02) 6495 2869 (02) 8969 7500 (02) 4926 4044 (02) 9998 4200 (02) 6361 9166 (02) 9615 4500 (02) 6583 1735 (02) 6544 3144 (02) 4227 3022 (03) 9947 4111 (03) 9796 2676 (03) 9519 3555 (03) 9813 2945 (03) 5222 5128 (03) 5176 6055 (03) 5559 1500 (02) 6232 4999 (08) 8464 5000 (08) 9261 0888 (08) 9791 9188 (08) 8981 9555 (03) 6236 9000

DISCLAIMER - ABN AMRO MORGANS LTD This report was prepared as a private communication to clients and was not intended for public circulation or publication or for the use of any third party, without the approval of ABN AMRO Morgans Ltd (“ABN AMRO Morgans”). While this report is based on information from sources which ABN AMRO Morgans considers reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect ABN AMRO Morgans judgment at this date and are subject to change. ABN AMRO Morgans has no obligation to provide revised assessments in the event of changed circumstances. ABN AMRO Morgans, its directors and employees do not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions. This report is made without consideration of any specific client’s investment objectives, financial situation or needs. Those acting upon such information without first consulting one of ABN AMRO Morgans investment advisors do so entirely at their own risk. It is recommended that any persons who wish to act upon this report consult with an ABN AMRO Morgans investment advisor before doing so. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever. DISCLOSURE OF INTEREST ABN AMRO Morgans and/or its affiliated companies may make markets in the securities discussed. Further, ABN AMRO Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this report and may, as principal or agent, sell such securities. ABN AMRO Morgans affiliates may have acted as manager or comanager of a public offering of any such securities in the past three years. ABN AMRO Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. The Directors of ABN AMRO Morgans advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our Proper Authority holders may be remunerated wholly or partly by way of commission. RECOMMENDATION STRUCTURE Absolute performance, long-term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price. A Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. The target price is the level the stock should currently trade at if the market accepted the analyst’s view of the stock, provided the necessary catalysts are in place to effect the change in perception. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value the target price will differ from ‘fair’ value. Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months. For listed property trusts (LPTs) the recommendation is based upon the target price plus the dividend yield, ie total return. A Buy implies a total return of 10% or more; a Hold 5-10%; and a Sell less than 5%. Absolute performance, short-term (trading) recommendation: The Trading Buy/Sell recommendation implies upside/downside of 3% or more. The trading recommendation time horizon is 0-60 days. Each stock has been assigned a Volatility Rating to assist in assessing the risk of the security. The rating measures the volatility of the security's daily closing price data over the previous year relative to other stocks included in either the S&P/ASX200 Index (large caps) or the Small Ordinaries Index (small caps) of which it is a member. This rating is a quantitative (objective) measure provided as an additional resource and is independent of the qualitative research process undertaken by our research analysts. A rating of Low indicates very little movement in price over the previous year (Coefficient of Variation < 4 for small caps or < 5 for large caps). A Moderate rating implies average price movement over the previous year (Coefficient of Variation of 9 - 21 for small caps or 7.25 - 15 for large caps). A High rating implies significant price movement over the past year (Coefficient of Variation greater than 25 for small caps or 35 for large caps). REGULATORY DISCLOSURES Subject companies: SPN, TTS, TLS, QBE, BHP, SHL, WOW, GFF, SOL In the ordinary course of their business, ABN AMRO and its affiliates may effect transactions for their own account or for the account of their customers and hold long or short positions in the sec urities of this company or related derivatives. In addition, ABN AMRO and any of its affiliates may engage in market-making activities in relation to the securities of this company or related derivatives and may enter into transactions in the securities of the company or related derivatives which may affect the market price, liquidity or value of the securities of this company.: TTS. In the ordinary course of their business, ABN AMRO and its affiliates may effect transactions for their own account or for the account of their customers and hold long or short positions in the securities of this company or related derivatives. In addition, ABN AMRO and any of its affiliates may engage in market-making activities in relation to the securities of this company or related derivatives and may enter into transactions in the securities of the company or related derivatives which may affect the market price, liquidity or value of the securities of this company.: TLS ABN AMRO trades or may trade as principal in the debt securities that are the subject of the research report.: TLS. An analyst or a member of any analyst’s household who participated in the preparation of this report has a shareholding/financial interest in this company: QBE In the ordinary course of their business, ABN AMRO and its affiliates may effect transactions for their own account or for the account of their customers and hold long or short positions in the securities of this company or related derivatives. In addition, ABN AMRO and any of its affiliates may engage in market-making activities in relation to the securities of this company or related derivatives and may enter into transactions in the securities of the company or related derivatives which may affect the market price, liquidity or value of the securities of this company.: QBE. This publication is intended for informational purposes only and the opinions set forth herein should not be viewed as an offer or solicitation to buy, sell or otherwise trade futures and/or options. Past performance is not necessarily indicative of future results. The risk of loss associated with futures and options trading can be substantial. Any recipient of this document wanting additional information or to effect any transaction in futures markets in the US should contact the registered futures commission merchant, ABN AMRO Inc, located at 208 S.LaSalle Street, Chicago, Illinois, 60604, Tel: (+ 1 312) 855 7600.: BHP ABN AMRO trades or may trade as principal in the debt securities that are the subject of the research report.: BHP In the ordinary course of their business, ABN AMRO and its affiliates may effect transactions for their own account or for the account of their customers and hold long or short positions in the securities of this company or related derivatives. In addition, ABN AMRO and any of its affiliates may engage in market-making activities in relation to the securities of this company or related derivatives and may enter into transactions in the securities of the company or related derivatives which may affect the market price, liquidity or value of the securities of this company.: BHP. In the ordinary course of their business, ABN AMRO and its affiliates may effect transactions for their own account or for the account of their customers and hold long or short positions in the securities of this company or related derivatives. In addition, ABN AMRO and any of its affiliates may engage in market-making activities in relation to the securities of this company or related derivatives and may enter into transactions in the securities of the company or related derivatives which may affect the market price, liquidity or value of the securities of this company.: SHL ABN AMRO is appointed by Sonic Healthcare Limited as Joint Lead Manager to A$350m institutional placement. : SHL ABN AMRO has received compensation for investment banking services from this company, its subsidiaries or affiliates during the previous 12 months: SHL. In the ordinary course of their business, ABN AMRO and its affiliates may effect transactions for their own account or for the account of their customers and hold long or short positions in the securities of this company or related derivatives. In addition, ABN AMRO and any of its affiliates may engage in market-making activities in relation to the securities of this company or related derivatives and may enter into transactions in the securities of the company or related derivatives which may affect the market price, liquidity or value of the securities of this company.: WOW ABN AMRO Morgans Limited was a participating broker to the block trade of Goodman Fielder Shares in November 2007 and received fees in this regard.: GFF.

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Meeting the Challenges in 2009 | Special Bulletin | 10 December 2008