Value may be hidden in support services stocks

LONDON (Reuters) - Investors seeking value in a stock market up some 40 percent from its March low may find the best bargains in the support services sector, a group of stocks linked by little more than they don't fit anywhere else.

The fact that support sector denizens such as Bunzl (BNZL.L), Capita (CPI.L), Experian (EXPN.L), G4S (GFS.L), Intertek (ITRK.L), Serco (SRP.L) and Wolseley (WOS.L) -- all in the FTSE 100 -- are in different business areas presents challenges to investors and analysts.

But this may result in hidden value.

"The support services sector is a diverse hodge-podge of businesses," said Andy Lynch, fund manager at Schroders. "Some of them are no more like each other than Banco Santander (SAN.MC) and British Airways (BAY.L) are.

"As a result of that you will probably find some interesting opportunities, because people often won't be bothered to really get in there and do the detailed analysis."

It is the sector's diversity which can mean its members aren't on investor radar screens.

"The vast majority of investors say 'I want exposure to housebuilders' or 'I want exposure to retailers'. You very seldom have anyone tell you that they want exposure to a credit checking company," said Paul Jones, analyst at brokerage Panmure Gordon.

Relative valuations, added Jones, were especially difficult for such companies. "You have nothing to compare them to."

As a group they also lack a common driver in terms of the economic backdrop. "There's no homogenous model -- no key statistics, like production figures in the oil sector," said Robert Morton at Investec.

The performance of support services stocks in recent times has done nothing to establish common characteristics.

MARKET LAGGARDS

Since the market's low of early March, building products supplier Wolseley for instance has soared more than 80 percent, while Capita and Bunzl have lagged the market, up just 5 and 3 percent respectively.

Price-to-earnings ratios in the sector also vary, from Bunzl, whose shares trade at around 11 times forecast earnings according to Reuters Estimates, to Intertek which trades on around 15 times.

By contrast the FTSE 350 support services index .FTNMX2790 carries an one-year forward P/E of some 13.7, while the blue chip FTSE 100 .FTSE has a multiple of just over 13.

Over the longer term the sector as a whole should mirror the market's performance, said Robin Speakman, analyst at brokerage Shore Capital.

These companies "service the rest of the market in effect," he said. "They are a microcosm of the market."

Data appears to back this up to some extent with the FTSE 350 Support Services index having gained about 40 percent since the March low, as has the FTSE 350 .FTLC.

Analysts' workloads also play a part in determining company coverage. "If you take on (start to cover) an extra recruiter, if you're covering recruitment already, it's maybe an extra 5 percent work, but another company (in a different area) it might be an extra 20-30 percent," said Jones.

To be sure, it would be an exaggeration to suggest the companies defy any grouping or comparison. And some analysts play down the difficulties of covering the sector.

Graham Brown, analyst at brokerage Evolution, acknowledges the problem of comparing companies but said: "If you look at just the UK, you have a small sample size. But if you have a pan-European perspective, you can paint a more sensible picture."

Brown also pointed to sub-groupings within the sector, more common at the midcap level. One example is in recruitment, which has three FTSE 250 companies: Hays (HAYS.L), Michael Page MPI.L. and SThree (STHR.L), but none in the FTSE 100.

Support services as a whole also doesn't readily fit investment models which aim to switch into areas which benefit from economic recovery or vice versa, though this too merely requires a more intelligent stance.

The sector, said analysts, is made up of a mixture of cyclicals and defensives, and some that are halfway between, making it difficult to establish a thematic approach.

"For a support services analyst, a sector stance is nonsense," says Jones. "It's very much a stockpickers' sector."

(Editing by David Holmes)