The support services sector has a reputation for being highly cyclical and certain parts of the market, such as the recruiters and equipment hire companies, are certainly living up to the billing. However, the outsourcing firms, which also sit in the sector, have proved a strong defensive prop for investors' portfolios in 2008 and look well positioned to continue that role as the new year gets under way.
Not only are a wide range of public and private sector organisations continuing to exploit the cost benefits of outsourcing to companies such as Capita and Serco, but tougher trading conditions are also forcing those that had not previously considered going down the outsourcing route to look into the possibility. Green outsourcing company Eaga, which provides insulation and energy saving advice, looks set to benefit directly from government's fiscal stimulus package. Social housing maintenance group Connaught could benefit from the package, too.
The news is not so good though for engineering and design consultants, such as WS Atkins, who spent much of 2008 drawing investors' attention to their involvement with defensive infrastructure and public sector contracts. The end of last year saw a rash of profit warnings from consultants that were mainly related to commercial work. However, the growth of these companies in Middle Eastern markets could also come under threat as the credit crunch spreads. What's more, privately-financed public sector projects, such as regeneration work, and low profile low priority jobs also look vulnerable. This year should help sort the wheat from the chaff in this sub-sector.
Increased commitments by government to big infrastructure projects could provide some support for the consultants, though, and should also help the battered equipment hire sector. While demand from the commercial and housebuilding sectors has gone to the wall, a number of the large construction contractors' order books have held up well to date on the back of infrastructure projects. These firms are key clients for the likes of Speedy Hire, Ashtead and VP. In addition, the sector should benefit from strong cash generation in 2009, as companies cut back on fleet expansion and replacement. This, in turn, should help the sub-sector to start remedying one of the market's core concerns - high debt. The hire companies could even turn out to be one of 2009's dark horses.
Going into 2009 there appears to be little respite for recruiters. Many large listed companies, such as Hays and Michael Page, diversified into international markets in an attempt to limit their cyclicality. However, now that the credit crunch has become a global phenomenon, this seems to count for little. In addition, few professions seem to be escaping the economic plight. Still, when the recruitment sector recovers, it should do so with gusto, but there are few signs that this will be any time soon. The widely followed Report on Jobs for December revealed a record decline in demand for staff and downward pressure on salaries, plus signs that the deterioration in conditions is accelerating.
Cyclical parts of the support services market continue to be best avoided, although debt reduction in the hire sector could see investors reassess their take on these companies during the year. However, the defensive growth prospects offered by outsourcing firms look particularly attractive given the current climate of uncertainty.
