Investment Column: Shortages make Rio Tinto a buy

PHS continues to look an unattractive option; Brammer has driven high enough for now

Unless the global economic recovery suddenly and unexpectedly stalls, and if Chinese industrial production continues to grow at anything approaching the current speed, there simply is not enough copper, iron ore or other minerals coming out of the ground to meet the demand. And that means the current strength of commodities prices is not a speculative bubble - even though speculators have spotted the opportunity - but will be a fact of life for the medium-term future.

And that means Rio Tinto shares are a buy.

The company's mining interests span the globe and range from the basest of the base metals to the most precious. And yesterday the management treated shareholders to an upbeat survey of the group and its prospects at their annual meeting. "China's ongoing demand for raw materials has created a significant opportunity for the mining industry and provides Rio Tinto with a strong growth prospect," said Paul Skinner, the new chairman. Leigh Clifford, the chief executive, said: "We have been able to take on some exciting expansion projects, and we will be able to make the most of good options for development that we see opening up in the longer term.

"The industry is responding to improved demand by reversing the under-investment of earlier years, but mining projects take a long time to get off the ground and we are still on the upswing of a long cycle."

Rio Tinto shares have underperformed their peers since we recommended buying in October, in part because companies which are newer to the London market, such as Xstrata, have been attracting investor money. From here, though, that should reverse. Rio Tinto is relatively cheaper than it has ever been; it has recovered from setbacks due to cyclones at its Australian iron ore project and to a fatal accident at its Indonesian copper mine, and the company has begun to talk up expansion plans. In addition, the currency moves of the past year, which depressed earnings, are unlikely to be repeated on the same scale.

PHS continues to look an unattractive option

When businesses are finding life tough, they can always prune the tropical plants in the foyer. So it is that PHS's Greenleaf division, which hires out and waters office plants, has been one of the group's worst performers in recent years.

Similarly, the sluggish economy has meant that fewer companies are trading up to new offices and needing PHS's crate-hire business.

Happily, none of this has affected the main business supplying and maintaining office washroom towels, hand dryers and air fresheners. This has continued to grow organically, perhaps by 8 per cent in the past year, analysts estimated after a trading update yesterday.

Washroom services account for three-quarters of the group. PHS is effectively a mini-Rentokil, but whose strategy of acquisition-led growth sets it apart and is the reason the stock market has traditionally ascribed a higher value to the share relative to its rival. Is this really justified?

Now Rentokil's decision to bulk up its salesforce could, over time, increase the pressure on PHS's margins. Readers who followed our advice to sell a year ago would have missed out on a 35 per cent recovery by the shares, but the shares continue to look unattractive to us.

Brammer has driven high enough for now

Brammer is in the unfashionable business of supplying parts to car manufacturers. However, while its customers continue to have a tough time, Brammer, through its core BIS business, is the leading player in Europe in its particular niche - components for power transmission systems, gearboxes, motors and the like - so it believes that it is well placed.

Furthermore, the company, which reported full-year results yesterday, has managed to exit the other arm of the business. Brammer has sold its troublesome Livingston unit, which provides calibration equipment to industrial customers and relied on the hard-hit technology industry in particular. A large £33.3m exceptional charge was booked with the results. But sales at BIS increased 10 per cent in a tough trading environment, so the slightly improved conditions that we are now seeing in continental Europe ought to see growth maintained. The company reckons that, if conditions remain as now, it will see 4 per cent organical growth for the next couple of years, or up to 7 per cent with a "modest" improvement in its markets.

The shares, at 126.5p, trade on 13 times earnings, which seems high enough. Hold.