ubs report - buy - $3.95 price target

􀂄 OST reports $241m in Underlying NPAT, in line with expectations OST reported underlying NPAT $241m, in line with UBSe of $236m and consensus of $240m. EPS was 18.2c vs UBS 17.8c, while a final dividend of 6.0c was declared vs UBS 4.0c and consensus 5cps. Unsurprisingly, the result was
driven by iron ore ($333m EBIT and +40% on our estimate), with steel divisions reporting EBIT down 60-70% y/y and 40% below our estimates. Outlook commentary overshadowed the in-line result; OST indicated that conditions in the steel businesses had deteriorated in recent months and that this has continued into FY11e.

􀂄 Downgrading FY11e NPAT by 19% to $441m due to steel outlook
We have cut our earnings estimates in the steel divisions in FY11e, with these now expected to deliver flat EBIT h/h, reflecting the deterioration in conditions in recent months, with a recovery in earnings expected in 2H FY11e. We have also remodelled our realised pricing in the iron ore division, which has led to a marginal downgrade. As a result of these changes, our FY11e NPAT is downgraded 19% to $441m.

􀂄 Despite challenging near-term outlook for steel, valuation is attractive
Despite the difficult conditions encountered by the steel businesses, the iron ore division should account for further earnings growth in FY11e, due to higher iron ore prices. Based on our revised earnings estimates, OST is trading on a sub 10x FY11e P/E, which continues to look attractive to us with a cyclical recovery expected in the steel businesses to deliver further earnings growth in FY12e.

􀂄 Valuation: $4.37 (DCF, 10% d.r.)
Our $3.95 target is unchanged and based on the average of: 1.3x P/Book, 1x NPV, estimated replacement cost, 11x mid-cycle EPS and 6.5x mid-cycle EV/EBITDA.