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Colin Hamilton's presentation at SteelOrbis Spring '12 Conference & 66th IREPAS Meeting

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Colin Hamilton's, from Macquarie Capital, presentation on the macro environment and the effect on steel at SteelOrbis Spring '12 Conference & 66th IREPAS Meeting

Colin Hamilton's, from Macquarie Capital, presentation on the macro environment and the effect on steel at SteelOrbis Spring '12 Conference & 66th IREPAS Meeting

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  • 1. IREPAS presentation p The macro environment and the effect on steel April 2012 Colin Hamilton Macquarie Capital (Europe) Limited Levell 7 28 Ropemaker St London, UK L 7, R k St, L d colin.hamilton@macquarie.com colin hamilton@macquarie comIn preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, thereader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.
  • 2. Commodities research teamLondon Jim Lennon Colin Hamilton Duncan Hobbs Ryan Belshaw Hayden Atkins Senior Strategist g Associate Director Senior Analyst y Analyst y Senior Analyst y Nickel & Steel, Copper, Base Metals Base Metals Coal, Precious Stainless Steel Iron ore, Coal +44 20 3037 4497 +44 20 3037 2732 Metals, Uranium +44 20 3037 4271 +44 20 3037 4061 +44 20 3037 4476Singapore & ShSi Shanghai h i Bonnie Liu Graeme Train Angela Bi Associate Director Senior Analyst Associate Base Metals Metals, Steel, Steel Bulks Base Metals Thermal Coal +86 21 2412 9035 +86 21 2412 9086 +65 6601 0144Agricultural commodities - London g Oil and Gas - Houston Kona Haque Chris Gadd Vikas Dwivedi Senior Analyst Research Associate Global oil and gas Softs Grains Economist +44 20 3037 4334 +44 20 3037 4433 +1 713 275 6352 Page 2
  • 3. Macro backdrop – Upturn in 2H12 if policy makers p p p ycan get it right  China demand uncertainty persists: Still uncertainty Summary of Macquarie Global IP Forecasts S fM i Gl b l F t about degree of downside risks to demand in % Change Y-o-Y 2007 2008 2009 2010 2011f 2012f China, but slowdown so far not overly alarming. Western Europe 5.4% 0.2% -10.5% 5.8% 3.0% -1.5% Eastern Europe 3.0% -1.7% -9.2% 13.6% 6.0% 0.5%  But policymakers not behind the curve. Easing so Total Europe 3.4% -2.1% -12.4% 7.3% 3.8% 1.2% far has been relatively small, but still plenty of room small Japan 2.9% -3.4% -21.8% 16.6% -3.7% 2.0% to move and we think policymakers will be effective China 17.1% 12.7% 12.3% 14.3% 13.8% 12.0% in managing slowdown. Other Asia 6.8% 4.7% -1.8% 12.0% 3.7% 3.0% Total Asia 7.6% 4.1% -4.2% 13.3% 6.6% 6.3%  Euro risks elevated but receding, with central bank g action going a long way to helping stabilise activity. USA Total NAFTA 2.7% 3.2% -3.7% -3.5% -11.2% -10.9% 5.3% 5.4% 4.0% 3.8% 2.0% 2.0%  Stronger signs of OECD trough policy makers have Latin America 6.6% 1.1% -6.1% 10.0% 2.3% 3.0% avoided creating more uncertainty. US activity remains solid solid. OECD 4.1% -1.7% 1.7% -11.7% 11.7% 7.2% 2.4% 0.7%  IP growth of 2¼% in 2012. Weakness in activity Total World 4.9% 0.3% -6.8% 8.6% 4.9% 2.3% likely to be concentrated in 1Q, with improvement through mid-year and into year end.Source: Ecowin, Macquarie Research, April 2012 Page 3
  • 4. China slowing but not collapsing, nadir may be in g p g, ysight in OECD Index Index 15% 15% China official PMI 60 60 10% 10% 55 55 5% 5% 0% 0% 50 50 2010 -5% -5% 45 2011 45 OECD IP Median 2005-2007 -10% -10% 2012 Leading indicator (6mth annualised) - 40 2008 40 -15% foward 6 months -15% -20% -20% 35 35 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Apr Aug Dec Jul Jan Feb Jun Sep Oct May Nov MarSource: CEIC, OECD, Macquarie Research, April 2012 Page 4
  • 5. Euro area growth forecasts We are forecasting growth of -0.4% this year and 1.3% next year. This is broadly similar to the IMF and Consensus for 2012, but above for 2013. The balance of risks to our forecasts is now to the upside. upside Euro area growth forecasts: Macquarie, Consensus and the IMF % Macquarie Consensus IMF 1.5 1.30 0.90 1.0 0.8 0.5 0.0 -0.5 -0.30 -0.40 -0.5 -1.0 -1 0 2012 2013Source: IMF, Consensus, Macquarie Research, April 2012
  • 6. External demand has driven the recovery… y Europe’s recovery has been overwhelmingly driven by external demand – net exports have accounted for 2.2pts of the 3.6% growth in GDP since the trough. Exports have driven the recovery Much more than is the case elsewhere Index, 2Q09=100 ppt Ho useho ld Co nsumptio n Go vernment 125 Ho useho ld co nsumptio n Go vt co nsumptio n 8 B usiness Investment Net expo rts GFCF Expo rts Invento ries 7 120 6 15 1 5 10 1 4 3 105 2 100 1 0 95 -1 90 -2 M ar 07 Dec 07 Sep 08 Jun 09 M ar 10 Dec 10 Sep 11 US Japan Euro area UKSource: Eurostat, Macquarie Research, April 2012
  • 7. …particularly when compared to the BRICs… p y p In the BRICs, the recovery has been driven by private final domestic demand. This is much less the case in the developed world, particularly the UK and Euro area. The recovery in GDP since the trough by component ppt 35 Household Consumption Government Business Investment Net exports Inventories 30 25 20 15 10 5 0 -5 -10 10 Brazil Russia India US Japan UK Euro areaSource: CEIC, Macquarie Research, April 2012
  • 8. …but this is normal for Europe Exports lead Europe’s economic cycle E t l dE ’ i l YoY % YoY % Exports (LHS) GDP (RHS) 20 6 15 4 10 2 5 0 0 -5 -2 -10 -4 -15 -20 -6 Mar 92 Jun 94 Sep 96 Dec 98 Mar 01 Jun 03 Sep 05 Dec 07 Mar 10 Jun 12 Europe’s business cycleSource: Eurostat, Macquarie Research, April 2012
  • 9. Europe’s industrial core has re-oriented its exportexposure Europe, particularly its industrial core, has been successful at re-orienting its export exposure. exposure Exports to emerging economies Exports to advanced economies % o f to tal % o f to tal UK Germany France 35 UK Germany France 90 Italy Spain Italy Spain 30 85 25 80 20 75 15 70 10 65 Jan-90 A ug-93 M ar-97 Oct-00 M ay-04 Dec-07 Jul-11 Jan-90 A ug-93 M ar-97 Oct-00 M ay-04 Dec-07 Jul-11Source: IMF, Macquarie Research, April 2012
  • 10. C a st the core ocus o steelChina still t e co e focus for stee - NPC po cy targets in C policy ta gets2012 more subdued, but how relevant are they?  Lower GDP target suggests that policy makers expect weaker growth, although this is not new news to the market. 2011 2011 2012 (ann chg) Target Actual Target  I fl ti t Inflation target of 4% iin a year where it is t f h i GDP 8% 9.3% 7.5% coming down suggests policy makers will be a bit more tolerant of price pressure than the last CPI inflation 4% 5.4% 4% 24 months. M2 16% 14.7% 14 7% 14%  We are forecasting a 22% increase in FAI and FAI 18% 23.8% 16% the lower target for 2012 does raise some questions about how willing policymakers will be to use this as a tool to reinvigorate growth growth. But against the backdrop of achieved FAI in 2011, this target may not be particularly meaningful.Source: NBS, Macquarie Research, April 2012 Page 10
  • 11. China construction – rolling over, some support from social g pphousing 80% 100% Floor area sold 70% Total Commodity Real Estate Floor area under construction Economic Housing 80% 60% Floor area completed 60% 50% YoY, 3mma YoY, 3mma 40% 40% 30% 20% 20% 0% 10% -20% 0% -10% -40% n-07 n-08 n-09 n-10 n-11 May -07 p-07 May -08 p-08 May -09 p-09 May -10 p-10 May -11 p-11 -20% Jan-07 7 May-07 7 Jan-08 8 May-08 8 Jan-09 9 May-09 9 Jan-10 0 May-10 0 Jan-11 May-11 Sep-07 7 Sep-08 8 Sep-09 9 Sep-10 0 1 Sep-11 Jan Jan Jan Jan Jan Sep Sep Sep Sep SepSource: CEIC, Macquarie Research, April 2012 Page 11
  • 12. With real estate, is important to distinguish between top tier estate top-tiercities and the rest of the market Tier-1 and 2 cities have had very difficult years recently but they are only 20% of the market Top tier cities have been underperforming in Clearly a bubble in tier 1 cities, less obvious sales for a while else where nnual household 40% 17 1-tier 2-tier 3-tier 30% 20% 15 operty sales, 3mma YoY 10% a, ffordibilty ratio - house price/an 0% 13 income -10% 11 -20% -30% Pro 9 -40% Tier 1+2 cities -50% Total China 7 -60% r-10 y-10 Jul-10 v-10 n-11 r-11 y-11 Jul-11 v-11 p-10 p-11 5 Af May Nov May Nov Jan Mar Mar Sep Sep 2011 E 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: NBS, Macquarie Research, February 2012 Page 12
  • 13. C ese es eChinese investment in infrastructure crashes – room as uc u e c as es oofor 2012 improvement YoY changes in Chinese fixed asset investment 60 50 % change % change % change 40RMB bn 2009 2010 2011 2009/08 2010/09 2011/10 % change yoy 30Equipment/IT/light manufg 1,910 2,543 3,734 29% 33% 47%Other manufg/mining/metals 4,757 5,841 7,660 24% 23% 31% 20Transport infrastructureT ti f t t 2,198 2 198 2,616 2 616 2,508 2 508 49% 19% -4% 4% 10Utilities infrastructure 3,201 3,772 4,042 38% 18% 7%Total infrastructure 5,399 6,388 6,550 42% 18% 3% 0Real estate 4,401 5,872 7,731 23% 33% 32% -10 Nov-088 Nov-099 Nov-100 Nov-11 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 May-08 Sep-08 May-09 Sep-09 May-10 Sep-10 May-11 Sep-11 Mar-08 Mar-09 Mar-10 Mar-11Tertiary & Rural 2,947 3,497 4,518 39% 19% 29% Equipt/IT/light manufg Other manufg/ming/metalsTotal Fixed Asset investment 19,414 24,141 30,193 31% 24% 25% Total infrastructure Real estateSource: NBS, Macquarie Research, April 2012 Page 13
  • 14. China autos and machinery – looking for recovery on easier y g ycredit Vehicle output Output of excavators 23 350 21 300 19 m units annualised k units, annualised 250 17 15 200 13 s, 150 , 11 9 100 7 50 5 - May Jan n Feb b n Jun Aug g Sep p Nov ul ct ar pr Dec Ju Oc Ma Ap Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011Source: CEIC, Macquarie Research, April 2012 Page 14
  • 15. China’s big risk is the rise of sticky inflation China’s previous inflation problems have been linked to surges in money supply or food supply shocks. A wage/price spiral would be a new challenge – machinery/automation would be a solution C hinese money supply grow th (M2) Labour market demand/supply 30% 12.5% 28% 10.0% 26% $ chnage yoy: CPI % change yoy: M2 7.5% 24% 5.0% 5 0% y 22% 20% 2.5% 18% 0.0% 16% -2.5% 14% 12% -5.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Money supply growth (M2) Inflation (CPI) Source: NBS, MOHRSS, Macquarie Research, February 2012 Page 15
  • 16. Our steel survey shows sentiment is holding up  Outlook remains positive after a difficult Feb, helped by improving conditions in March Are you positive or negative on the market over the next three months? 100 Increasing number of respondents p g p positive 90 80 70 60 50 40 30 20 Mills Steel traders 10 Iron ore traders Increasing number of respondents negative 0 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12Source: Macquarie China Steel Sector Survey, April 2012
  • 17. The biggest change has been improving orders  Traders registered a significant MoM change in orders  Mills also saw improvement, although less dramatic Traders Mills Have sales volum es increased or decreased? Have dom estic orders increased or decreased over the Increasing no . o f traders seeing sales rise last m onth? 100 To tal Increasing no . o f mills seeing o rders rise 90 Large Traders (>1mtpa) 100 M edium Traders (0.5-1mtpa) 90 To tal 80 Small Traders (<0.5mtpa) Large M ills (>10mtpa) 70 80 M edium M ills (5-10mtpa) 70 Small M ills (<5mtpa) 60 60 50 50 40 40 30 30 20 20 10 10 Increasing no . o f traders seeing sales fall Increasing no . o f mills seeing o rders fall 0 0 Jul-11 Aug- Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Jul-11 Aug- Sep- Oct-11 Nov- Dec- Jan-12 Feb-12 Mar-12 11 11 11 11 11Source: Macquarie China Steel Sector Survey, April 2012
  • 18. Improvement has co e ac oss most e d use po e e as come across os end sectors  Biggest change has been construction and infrastructure Net change in orders at mills - end use sectors Construction Infrastructure Machinery 30 Autos White goods 20 Shipbuilding p g 10 0 -10 -20 -30 -40 Jul-11 Jul 11 Aug-11 Aug 11 Sep-11 Sep 11 Oct-11 Oct 11 Nov-11 Nov 11 Dec-11 Dec 11 Jan-12 Jan 12 Feb-12 Feb 12 Mar-12 Mar 12Source: Macquarie China Steel Sector Survey, April 2012
  • 19. Profitability is c eep g bac into the sec o , o ab y s creeping back o e sector,although there are regional variations  North China mills are making money What is the current level of profitability? Increasing no . o f mills making mo ney 100 90 80 70 60 50 40 30 To tal No rth 20 Central So uth 10 So uth East West Increasing no . o f mills lo sing mo ney 0 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12Source: Macquarie China Steel Sector Survey, April 2012
  • 20. Steel margins – the perennial problem forsteelmakers Raw material costs for a "typical" Steel price minus raw material costs steelmaker 700 1100 1000 600 900 500 800 700 400 $/tonne $/tonne 600 500 300 400 300 200 200 100 100 0 0 Nov-08 Nov-09 Nov-10 Nov-11 May-08 May-09 May-10 May-11 Jan-08 Mar-08 Jul-08 Sep-08 Jan-09 Mar-09 Jul-09 Sep-09 Jan-10 Mar-10 Jul-10 Sep-10 Jan-11 Mar-11 Jul-11 Sep-11 Jan-12 Mar-12 Nov-08 Nov-09 Nov-10 Nov-11 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 May-08 Sep-08 May-09 Sep-09 May-10 Sep-10 May-11 Sep-11 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Using contract prices Using spot prices Using contract raw material costs Composite HRC price (E /US) C i i (Eur/US) Using spot raw material costsSource: Platts, CRU, Macquarie Research, April 2012 Page 20
  • 21. $/tonn CFR Turkey ne, y 100 150 200 250 300 350 400 450 500 550 Sep-08 N Nov-08 Source: Platts, Macquarie Research, April 2012 J Jan-09 M Mar-09 May-09 J Jul-09 Sep-09 N Nov-09 J Jan-10 M Mar-10 May-10 J Jul-10Page 21 Sep-10 N Nov-10 J Jan-11 Metal spread - Rebar over scrap M Mar-11 May-11 J Jul-11 Sep-11 N Nov-11 J Jan-12 M Mar-12 Conversion margins remain pretty slim for rebar
  • 22. Small Chinese mills have adapted much better to poperating as cyclical, low margin converters… Cash margins at Chinese mills 200 150 Rebar HRC 100 $/tonne 50 US$ 0 -50 -100 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 J J J J J J JSource: Mysteel, Macquarie Research, April 2012 Page 22
  • 23. …with iron ore prices reacting to the change in p g gfutures prices SHFE Rebar vs Spot iron ore 700 220 Rebar- SHFE 3M (LHS) 650 Spot Iron ore (RHS) 200 600 180 550 /tonne /tonne 500 160 US$/ US$/ 450 140 400 120 350 300 100 May-10 May-11 v-09 ar-10 v-10 ar-11 v-11 ar-12 n-10 ul-10 p-10 n-11 ul-11 p-11 n-12 Nov Nov Nov Jan Sep Jan Sep Jan Ma Ju Ma Ju MaSource: Mysteel, Macquarie Research, April 2012 Page 23
  • 24. Chinese domestic ore output is highly price sensitive  Q4 2011 showed how flexible Chinese Apparent domestic iron ore use domestic ore can be – fell by >100mtpa as prices dropped into cost curve. 400 200 Import iron ore price 180 350  Declining grades, rising costs and 160 300 140 250 environmental concerns have meant that $/t cfr price mt iron ore 120 200 100 production has been constrained. 363 345 336 316 07 80 98 m 3 293 3 30 $ 150 29 270 270 261 256  High-cost domestic supply only in the 231 231 60 216 196 100 market as much as it needs to be. 40 50 20 - 0  If steel production rises so Chinese rises, 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 domestic ore must respond.Source: NBS, Platts, Macquarie Research, April 2012 Page 24
  • 25. Cost curve remains crucial to the iron ore market – themarket underestimates cost inflation at top end Supply curve to Chinese market for iron ore fines 170 Vale Rio Tinto BHP Billiton FMG 165 160 Other Australia Other Brazil India Africa 155 150 145 China Other 140 135 130 125 120 115 110 hina ($/t) 105 100 95 90 CIF Cost Ch 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 - 0 50 00 50 00 50 00 50 400 450 500 550 00 50 00 50 00 50 00 50 00 50 00 50 00 50 00 50 400 450 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 Volume (mt) Source: Company data, Macquarie Research, April 2012 Page 25
  • 26. European steel consumption – 1998-2008 decade was p pnot the norm, particularly in austerity kg Decade above 500 EU steel consumption per capita the norm 30 year average 450 400 350 300 250 200 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: worldsteel, Ronly, Macquarie Research, April 2012 Page 26
  • 27. There was something wrong in steel in 2011 – who is g gsupposed to be fuelling demand? YoY changes in apparent steel consumption, 2011 vs 2010 g 15% 10.8% 10% 8.7% 8 7% 7.8% 5% 1.9% 0% -5% -5.2% -5.2% -7.9% -10% Japan India st/Africa Europe China US Brazil Middle M Eas Source: worldsteel, Customs statistics, Macquarie Research, April 2012 Page 27
  • 28. Latest data implies Q4 destocking, but is there appetite to p g, pprestock? 70% Steel Consum ption 60% 50% Industrial Production hange - World 40% 30% 20% 10% YoY ch 0% -10% -20% -30% -40% May-07 May-08 May-09 May-10 May-11 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 M M M M M Source: worldsteel, Customs statistics, Macquarie Research, April 2012 Page 28
  • 29. Chinese steel output – swings can be big even in a globalcontext CISA 10 day production data - CISA and non-CISA mills 800 Non-CISA Non CISA mills 750 CISA mills Crude steel production (mtpa) 700 650 600 s 550 500 450 1-10 11-20 21-31 1-10 11-20 21-28 1-10 11-20 21-31 1-10 11-20 21-30 1-10 11-20 21-31 1-10 11-20 21-30 1-10 11-20 21-31 1-10 11-20 21-31 1-10 11-20 21-30 1-10 11-20 21-31 1-10 11-20 21-30 1-10 11-20 21-31 1-10 11-20 21-31 1-10 11-20 21-29 1-10 11-20 21-31 Jan- Feb- Mar- Apr- M Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- 11 11 11 11 ay- 11 11 11 11 11 11 11 12 12 12 Source: CISA, Macquarie Research, April 2012 Page 29
  • 30. Still plenty of growth in China, with productivitycontributing more and property less over time YoY growth in Chinese steel consumption with sector contributions 18% Other 16% Machinery & Autos 14% Infrastructure I f t t Property & Real estate 12% 10% 8% 6% 4% 2% 0% 2011F 2012F 2013F 2014F 2015F 2016F 2005 2006 2007 2008 2009 2010 Source: NBS, CISA, Macquarie Research, April 2012 Page 30
  • 31. Macquarie steel production forecasts Crude steel consumptionCrude Steel Production (m tonnes) Average 1,900 , 2010 2011 2012f 2013f 2014f 2015f 2016f 2000-200 1,800Japan 110 108 105 110 110 110 112 1.8% 1,700China 640 694 732 783 820 855 883 21.4% 1,600 1,500 591India 70 72 77 80 86 93 100 11.3% 567 1,400 545Other Asia 92 107 110 113 116 118 121 3.8% 521 1,300 1 300 500North America 111 119 121 124 125 127 128 -0.3% 477 1,200 454 million tonnesWestern Europe 178 187 179 182 184 186 189 1.8% 1,100 456Brazil 33 35 36 38 40 42 43 2.8% 1,000 388Other L.America 11 13 14 14 15 15 15 3.6% 900CIS 109 113 117 121 126 132 133 3.4% 800 787 822 850 749 m 700 666 705Other 74 74 74 77 80 84 86 3.7% 453 612 600Total World 1429 1522 1564 1642 1703 1761 1810 6.9% 572 500World Ex-China 789 828 832 859 882 906 927 2.6% 400 300 200 418 356 376 368 370 373 375 378 100 274 - 2011f 2012f 2013f 2014f 2015f 2016f 2008 2009 2010 Developed China Emerging Markets Source: worldsteel, Macquarie Research, April 2012 Page 31
  • 32. Important disclosures: Recommendation definitions Volatility index definition* Financial definitions This is calculated from the volatility of historic price Macquarie - Australia/New Zealand All "Adjusted" data items have had the following movements. adjustments made: Outperform – return > 3% in excess of benchmark return Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return > 3% below benchmark return Very high–highest risk – Stock should be expected to move catastrophe reserves, IFRS derivatives & hedging, IFRS up or down 60-100% in a year – investors should be aware Benchmark return is determined by long term nominal GDP growth plus 12 impairments & IFRS interest expense this stock is highly speculative. month forward market dividend yield Excluded: non recurring items, asset revals, property High – stock should be expected to move up or down at revals, appraisal value uplift, preference dividends & Macquarie – Asia/Europe least 40-60% in a year – investors should be aware this minority interests Outperform – expected return >+10% stock could be speculative. Neutral – expected return from -10% to +10% EPS = adjusted net profit /efpowa* Medium – stock should be expected to move up or down at Underperform – expected <-10% ROA = adjusted ebit / average total assets least 30-40% in a year. ROA Banks/Insurance = adjusted net profit /average total Macquarie First South - South Africa Low–medium – stock should be expected to move up or assets Outperform – return > 10% in excess of benchmark return down at least 25-30% in a year. ROE = adjusted net profit / average shareholders funds Neutral – return within 10% of benchmark return Gross cashflow = adjusted net profit + depreciation Low – stock should be expected to move up or down at Underperform – return > 10% below benchmark return *equivalent fully paid ordinary weighted average number of least 15-25% in a year. shares Macquarie - Canada Outperform – return > 5% in excess of benchmark return All Reported numbers for Australian/NZ listed stocks are * Applicable to Australian/NZ stocks only Neutral – return within 5% of benchmark return modelled under IFRS (International Financial Reporting Underperform – return > 5% below benchmark return Standards). Macquarie - USA Recommendation – 12 months Outperform – return > 5% in excess of benchmark return Note: Quant recommendations may differ from Fundamental Neutral – return within 5% of benchmark return Analyst recommendations Underperform – return > 5% below benchmark return Recommendation proportions – For quarter ending 31 December 2011 AU/NZ Asia RSA USA CA EUR Outperform 56.59% 65.60% 54.55% 44.53% 75.28% 49.46% (for US coverage by MCUSA, 10.53% of stocks covered are investment banking clients) Neutral 33.45% 20.55% 38.96% 50.20% 22.47% 32.36% (for US coverage by MCUSA, 10.96% of stocks covered are investment banking clients) Underperform 9.96% 13.85% 6.49% 5.27% 2.25% 18.18% (for US coverage by MCUSA, 0.44% of stocks covered are investment banking clients) 32 Page 32
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