FY10 underlying NPAT of $241m was in line with our expectations,...

FY10 underlying NPAT of $241m was in line with our expectations, driven primarily by higher EBIT from iron ore, which was up 195% yoy. With management targeting increased iron ore sales of up to 6.5mtpa in FY11, we expect this will more than offset near-term steel business weakness. Buy.

Solid result boosted by expanding iron ore earnings
Underlying NPAT of $241m was driven almost solely by a surge in iron ore earnings. EBIT from iron ore increased nearly three-fold over FY09 to $333m, accounting for c80% of the total group result. Strength of the iron ore division offset weaker earnings across the remainder of the businesses, particularly in 2H10 which saw the manufacturing division produce an EBIT loss of $1m. Despite this, strong operational cash flows of $602m led gearing to drop to 18% (ND/ND+E). A final dividend of 6cps was also announced.

Iron ore earnings gaining momentum
The iron ore business profited from both a lift in total export volumes to 6.03mt (from 5.07mt in FY09) and higher average prices, with spot iron ore prices finishing the year c84% higher than the end of FY09. Conversely the manufacturing, and the Australian and New Zealand distribution businesses saw EBIT fall 72%, 68%, and 65% yoy, respectively, due to lower steel prices and demand levels, resulting in significant margin contraction, particularly in 2H10.

Management now targeting 6.0-6.5mt of iron ore sales in FY11
With spot iron ore prices currently sitting near US$148/t (cfr China), management has increased its FY11 iron ore sales volume target to 6.0-6.5mt. The volume expansion should come from an increased mix of medium-grade ore (Fe 56-60%). We believe this could increase FY11 sales volumes upwards to c6.3% on a dmtu basis. We raise our FY11 iron ore sales target to 6.25mt, in part leading to a 3.5% increase to our FY11 NPAT.

Buy maintained An iron ore business with steel leverage upside potential
In the near-term, low-margin environment for steelmakers, we believe OST is one of the best defensive plays in the steel sector, benefiting growing iron ore exposure. Longer term, we see value on a P/NPV basis with leverage to a likely steel sector earnings recovery in FY11-12F. We retain our Buy recommendation with a DCF-based price target of A$3.95ps.