Weekly commentary

Weekly commentary

Economy: The continuing rise in the US$ and world oil prices is now placing significant pressure on the world economy and if maintained are likely to lead to significant slowdown in world economic growth in 2001. Oil prices paid in Euro’s for example have risen by 62% since September last year. World bond markets are forecast to rally strongly once oil prices peak, which we expect by year end. The continuing depreciation of the A$ even though improving our export competitive position is placing upward pressure on import prices and inflation. We expect the RBA to raise interest rates by 25 basis points in October to head off further rise in inflation.

Equities: Australian market experienced a correction over the past week in line with faltering offshore markets on earnings concerns. A significant number of US companies have flagged over the past couple of weeks that 2nd half earnings forecasts will not be met because of slowing sales and rising costs. Major sectors to be effected were Telecommunication, Media & Miscellaneous Industrials. Fund managers continued their selling of Telstra as the value of the deal with PCCW looks very expensive, as the PCCW share price has halved since the deal was negotiated. Another factor pressuring the share price is the potential overhang of instalment receipts of those investors not paying the final instalment. However, our forecast rally in world bond markets by year-end, should support gains in equities into 2001.

Capital Flows

The small end of the Australian market continued to drift lower over the week ending Thursday 21 September,. The Small Industrials Index closed at 2109.7 down 3% on the previous week inline with the All Ordinaries which lost just over 2.7%. Volumes have also contracted over the week reflecting uncertainty and Olympic distractions.

Retail investors, taking their lead from the Nasdaq, have been quiet over the past few weeks, whilst some profit taking is evident amongst domestic institutions. As a result domestic institutions are continuing to build cash positions especially given the increase in Superannuation contributions. Once sentiment turns we expect institutions will have considerable cash levels looking to be invested.

The weakening of the $A will also begin to attract renewed international interest to many of BNPPE’s preferred growth companies. Given the dollar and our declining market we expect strong offshore interest will re-emerge and on a twelve-month time horizon we continue to expect further out performance from our key themes of service providers, technology stocks (with robust business models and immediate earnings) and companies with dominant franchises and market positions.

Alinta Gas Limited

Float of Western Australia gas distribution & sales co.

A well placed utility linked to economic growth in WA

Main Points:

* Alinta Gas is the major natural gas distribution and retailing company in Western Australia. Its distribution business delivers natural gas to approximately 58% of households in WA via its network of 10,500km of pipelines. The retailing business markets and sells gas to over 400,000 industrial, commercial and residential customers.

* The Retail Offer is priced at $2.25 per stapled security with the final offer price being the lower of this and the institutional price. The institutional offer price has an indicative range of $2.10 to $2.40 per stapled security. The stapled security is composed of 20c in loan notes and the balance as equity. This is a similar structure to that used by United Energy and Australian Pipeline Trust, allowing distributions in early years to be in excess of profit generated, but covered by cashflow generated. The loan note component is non-interest bearing and its role in distributions is simply that of capital repayment.

* Alinta gas will commence life with a forecast distribution yield of 8.00% (18.0c) in FY01, year ending June, based on a $2.25 issue price. The distribution is a combination of after tax income and capital return, paid half yearly, commencing in March 2001. The FY01 distribution is just covered by cashflow of 18.0c per stapled security in FY01, with dividends of 14c (franked to 5c) and loan note repayment of 4c per stapled security. The dividend component of distributors in future years is forecast to be fully franked. Supplies of natural gas are secured under contract with various gas producers, including the NorthWest Shelf project, Harriett project and the Tubridgi project. Gas reserves available to Alinta Gas are abundant with over 140 years of reserves life at current demand levels.

* A unique feature of Alinta Gas is its exposure to LPG prices via an arrangement with Wesfarmers, which strips LPG from the natural gas at its plant in Kwinana near Perth. Alinta Gas sells LPG rich gas to Wesfarmers and also shares in revenues received by Wesfarmers upon sale of the pure LPG. At current world LPG prices, we estimate Alinta Gas forecast Prospectus FY01 earnings will prove modest and a significant earnings upgrade is expected upon listing. A 20% change to the forecast LPG prices moves EBITDA by $9.3m (9.5%). LPG prices in A$ terms are currently 50% above the forecast figure assumed in the prospectus of A$374/t. This translates into a theoretical lift in FY01 after tax earnings of 58% to $41.4m if this price was sustained over a full year period.

* The retail offer closes on 6 October with the final price being determined on 16 October following the close of the Institutional Offer. Trading of securities is expected to commence on 17 October on a deferred settlement basis. 88m (55%) stapled securities are available to investors in this float with a cornerstone investor having already purchased the remaining 72m stapled securities (45%) at $4.38each. The retail offer price is $2.25 per staple security, however if institutional bidding is below this price, refunds on the difference will be sent to successful subscribers. 66m (75%) of available stock is reserved for retail investors, while 75% of stock, including institutional investors, is reserved for Western Australian based applicants. The stock is priced on a similar Per to AGL and UEL, excluding its holding in UEC.

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