Challenging market exacerbated by FX■ FY11F NPAT reduced 15% to...

Challenging market exacerbated by FX

■ FY11F NPAT reduced 15% to $338mn ($397mn) reflecting the adverse impact of AUD appreciation on USD revenues against an AUD cost base, and the risk of a rise in steel imports, (FX enabled) displacing domestic production. Domestic steel demand remains at depressed levels, falling short of our modest recovery trajectory. Ultimate demand recovery is inevitable but now appears unlikely to occur in time to support consensus earnings expectations. Iron ore price increases have materially lagged the currency appreciation. FY11F dividend reduced to 13cps on lower earnings expectation. DCF now $2.82 from $2.98/share but incorporates a punitive long-term iron ore assumption of U$58/t. Assuming current spot as a long-term assumption would increase our NPV to $3.68/share. We lower our target price to $3.25 (from $3.50).

■ Investment case: OST performs strongly in a tight steel market combined with a rising raw material cost environment. The current over-supplied global steel market and weak domestic demand is challenging the manufacturing and distribution businesses. FX is undermining the entire earnings base and eroding the otherwise strong iron ore export business. The stock price is in line with our US$58/t LT iron ore price driven NPV.

■ Catalysts: We expect management to provide a trading update at its AGM on 15 November. We see little prospect of substantive demand recovery, FX depreciation or material iron ore appreciation necessary to alter the current challenging outlook.

■ Valuation: OST now appears appropriately priced relative to our NPV. Near-term earnings support continues to be eroded by delayed market recovery and FX appreciation. Target price adjusted to reflect lower EPS and DCF.