Nine stocks to buy after Carillion crash

As Kier Group has demonstrated Thursday, the shocking collapse of Carillion doesn't mean investors should turn their backs on the support services sector.

Analysts at Peel Hunt have sifted through the fall-out from Carillion's high-profile demise and think the industry remains on track for an "exciting year", with a number of strong investment opportunities across a range of strategies.

Construction services firm Kier highlights the broker's point, with the company's latest trading update providing evidence today that it is no Carillion. In fact, Kier is on track to deliver double-digit profit growth for this financial year and to achieve the targets it set out in its Vision 2020 strategy.

Shares bounced a whopping 17% to 1,124p on the back of the reassuring update, although Peel Hunt thinks there's potential for much more.

It has a price target of 1,600p and, in its note written prior to today's update, praised the company for improving the quality of its earnings.

They added: "The shares offer scope for a material re-rating given the attractive organic EPS growth, improving earnings quality and the strengthening returns and dividend profiles."

The other company that Peel Hunt believes has re-rating potential is Balfour Beatty, with the company well placed to benefit from its refocused operations, demise of Carillion and balance sheet strength.

They backed the management team, led by Leo Quinn, for its good job on de-risking the investment case. Medium-term expectations now look undemanding, while there's hidden value in the company's infrastructure investments division.

Nudging up their price target on Balfour by 10p to 350p, implying 20% upside, the broker said shares were well set for material outperformance.

Peel Hunt's four-strong list of 'conviction buys' in support services also includes commercial vehicle hire firm Northgate, which has a target price of 575p amid signs that its turnaround plan is gaining momentum.

They warned: "While some investors may be tempted to wait for more tangible financial delivery, they could miss the opportunity."

The other conviction buy is Menzies, which has transformed the scale of its aviation services business through the acquisition of plane refueller ASIG.

Upgrading its price target to 809p from 758p, Peel Hunt thinks there's potential for strong margin progress over the next few years as the company exceeds its ASIG synergy target, and as pre-existing aviation operations deliver further underlying operational improvements.

Among other 'buy' recommendations, Peel Hunt highlights Hogg Robinson, Renewi and SIG as interesting 'special situations'. For investors seeking a smaller company with significant potential, the broker picks out both Inspired Energy and RM.

Today's 198-page note from Peel Hunt also identifies its four 'least preferred' stocks in support services as Aggreko, HSS, MITIE, and Serco.

On Aggreko, the broker said the company's management was performing well, but that this was outweighed by competitive, structural and cyclical challenges.

They downgraded their target price on the stock to 750p from 800p, while also cutting MITIE from 205p to 179p. They added on MITIE: "The large, diverse group faces challenges in delivering both its medium-term margin and deleveraging targets."

The Serco target price was cut by 10p to 86p, with Peel Hunt warning that the group's recovery is beyond the investment horizon of many potential investors.

The vast majority of companies in the support services sector have progressive dividend policies which, combined with sensible levels of earnings cover and solid balance sheets, mean that dividends typically grow in line with earnings.

However, the broker's analysis points to increases in dividend per share well in excess of the increase in earnings per share for both document management firm Restore and Smart Metering Systems, once the investments in their markets are complete.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.