Investment Column: Rio Tinto has strength for the long-term

Laura Ashley; Westminster


Our view: Buy

Share price: 4406.5p (-23.5p)

Earlier this month Rio Tinto approved extra funds to boost its annual iron-ore production in Western Australia's Pilbara region. The announcement was part of a broader plan to expand capacity by more than 50 per cent over five years. Soon after, we heard Rio was eyeing Riversdale Mining, the Mozambique focused coal miner, in what could end up being a $3.5bn (£2.2bn) deal. Both moves spring from the same factor: the growing demand for industrial commodities from fast growing countries such as India and China.

Rio, which yesterday announced the sale of most of its stake in US coal miner Cloud Peak Energy as part of a divestment programme, is positioning itself for growth. To be sure, not everyone is entirely convinced about recent moves. Responding to yesterday's update on Cloud Peak, Evolution Securities said it was not sure if it was "strategically sensible" to be exiting in favour of "looking at more expensive coal in Mozambique".

We disagree. Not only does Mozambique have vast, untapped coal resources but it is located across the ocean from India, which, to bring up just one example, needs thermal coal to power many electricity plants. It is also well placed for deliveries to China.

We are, however, cautious about the potential for external shocks such as contagion from Europe's sovereign debt crisis or (more likely), a sudden shift to tighter monetary policy in China. But that should not detract from the the long-term strengths of Rio (also a major copper producer). Is it reason enough to hold back? No. The valuation is pretty thin: UBS puts it at just 7 times forecast earnings for next year. We're buyers.

Laura Ashley

Our view: Hold

Share price: 19.5p (+2.5p)

Laura Ashley, yesterday provided further evidence that the recent snow has not melted its recovery. The retailer, best-known for its floral-patterned dresses, posted underlying UK sales up by 2.7 per cent for the 19 weeks to 11 December. While this represented a slow down on first-half sales growth of 6.2 per cent, Laura Ashley, has regained momentum after a soft start to the second half. In the most recent period, furniture was the star, growing by 10 per cent, while online revenues surged by 29 per cent.

Laura Ashley said it was confident that full-year trading will be ahead of expectations, despite the uncertain outlook for consumers and bad weather. The closure of 12 underperforming stores also bodes well. The performance led Numis to upgrade its profits forecast for this financial year from £14.4m to £15.8m.

However, after finishing 2009 at 14p, the shares have soared and now trade on 12 times forecast earnings. Despite the momentum, we think that Laura Ashley may struggle to match the recent rise in its share price next year, given the uncertain outlook for consumer spending in the UK. But its worth holding.

Westminster

Our view: Speculative buy

Share price: 16.75p (-2.25p)

With the shadow of terrorism looming large, the environment seems right for a company like Westminster Group. The AIM listed firm makes technology systems for security and defence as well as fire protection and safety markets. Projects include a perimeter security system at the airport in southern Sudan as well as infrastructure to protect a dam in the River Nile.

Unfortunately, major customers are governments and given the economic turmoil, their purse strings have been drawn tight. In a trading update yesterday the group warned on full-year profits. It faces an operating loss of £2m. The shares duly tumbled. Yet, the company said its contracts were delayed not cancelled, and it is looking to boost business in less economically bruised regions like the Middle East. There could be an upside after yesterday's weakness. High risk, though.

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