Wednesday tips round-up: Rio Tinto, Northgate

4th Dec 2013 07:40

More difficult times lie ahead for the iron ore industry. Plans announced by Rio Tinto on Tuesday to cut back its iron ore production are a testament to this. The firm will now seek to cut its outlays on capital expenditures to 8bn dollars by 2016, from 15.5bn dollars this year. The aim is to return rates of return for its owners - its shareholders - by thus allowing for a progressive dividend policy. The company is not alone. Brazilian arch-rival Vale recently announced a similar move. The lower investment means that both firms are turning into purer iron-ore plays. Hence, when attempting to put a price tag on the firm's stock investors ought to compare Rio more with Vale, rather than with BHP - which has a more diversified business. Vale is now trading at seven times' earnings versus eleven times for Rio. As further proof of what lies ahead, perhaps, Rio will is looking to damp the traditional volatility in the spot market for its main product by selling 15% of its production next year, a higher proportion than usual, in spot trading. "Prices may be fairly stable for the next few years, but the outlook for demand is not great. Another reason to cut back," according to the Financial Times´ Lex column. Northgate´s business model is based on renting vans via bank loans, rented out for a profit and then hived off after two years into a stable or rising second had market. The financial crisis almost killed off the small-cap van hire group, which was forced into a highly dilutive equity raise and punitive terms from the lenders. Since then, however, it has restructured and if the recovery in the UK holds, there could be more share gains to come even after this year´s strong run. Simply put, when small businesses are experiencing increasing demand, but can't afford to buy vans, then the rental business is good and profits rise. Nevertheless, said business model is quite exposed to the business cycle. In any case, five years on, and Northgate is finally showing signs of recovery. Underlying pre-tax profits in the first half were up 14%, to £32m, and the average utilisation of the fleet was 90% during the first six months of the year. The Daily Telegraph´s Questor team believes the shares are a good choice when trying to play the Santa rally, with December being one of the best performing months of the year for the stock market. "Not for the faint-hearted this one, and definitely one to watch closely, but it could just squeeze higher into the end of the year. Buy," Questor said. Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.AB