Broker tips: Rio Tinto, Xstrata, Drax, Game

15th Dec 2009 12:41

Strong demand from China and restocking in 2010 could lead to the most resource intense recovery since the 1970s, according to one broker.UBS says companies have cannibalised 15% of a year's supply of base metals out of the supply chain in 2009, and will have to return to buying that material again.It also believes monetary and fiscal injections will cause resources demand from China to surprise on the upside.Xstrata and Rio Tinto are rated a 'buy' on the back of continued resources reflation and rank among the broker's five top picks.Power station operator Drax stays as 'underweight' at JP Morgan based on continuing oversupply in the UK gas market, which keeps electricity prices weak.The broker, which has a 450p price target on the shares, sees Drax as 'the stock to avoid in 2010' as UK gas weakness and a healthier global coal market will continue to erode margins and volume.It also worries about the planned investment into biomass will erode the stock's yield attraction and that the firm as the highest carbon risk in the sector.Morgan Stanley has reiterated its 'overweight' stance on engineer Tomkins."We believe the market knows the leading indicators for Tomkins' end-markets have bottomed, but that the pace of top-line recovery is underestimated - earnings upgrades coupled with strong free cash flow generation should drive the shares towards our price target of 230p," it said.The broker thinks there's scope for margin recovery driven by aggressive restructuring and portfolio pruning, which can drive margins to 8% for 2010 and support long-term margins of 10%.UBS repeats its 'neutral' stance on distribution and outsourcing firm Bunzl, but the target rises to 660p from 632p due to increased confidence in its recovery potential.The same broker has the same rating on video game retailer Game, although the target falls to 120p from 150p as it's unable to identify any imminent catalysts to justify a significant re-rating.