update on reliance, page-12

A couple of paragraphs from Patersons on todays DOW announcement.

Without doubt DOW looks excessively cheap, but the reality is that it will not benefit from a re-rating until the market is convinced that DOW doesn't need to raise capital. Capital won't be raised for Reliance Rail or the upcoming Fortescue Christmas Creek contract, but it may be required if DOW secures more contract mining business (the current pipeline of additional projects is $4bn and we believe DOW will need capital if it wins c$2bn of projects). Given the current situation DOW may choose not to pursue a portion of that pipeline because, at current prices, it would be difficult to justify any sort of capital raising.

If the second guarantor defaults, Reliance Rail may need to find another source of funding for the $357m. DOW may be involved; however I think it's unlikely that they would contribute a material amount and are certainly not obligated to do so. Therefore, they will not need to raise capital for this event.

We retain our Hold recommendation but acknowledge that DOW is looking attractive on fundamentals. FY11 PER of 5.6x with an unfranked 9% yield. We remain cautious due to the complex and opaque nature of the NSW rail contract and the fact that confidence in management has been completely destroyed, resulting in ongoing negative sentiment towards the company. The flip-side.......is DOW a potential target? YES.