Everyone considers Carillion to be a UK construction business – a sector far from being considered attractive in this economic climate. But the truth is that most of its profits now come from support services – a higher margin business that with it attracts a higher market rating. In fact much of future construction will really be a feeder for its facilities management operations.

With this in mind, the investment case for Carillion is compelling when you look at it’s valuation. Trading on a December 2009 price earnings multiple of just 7.7x, it is not only cheap in absolute terms but also against its support services peers – Serco is trading on a multiple of 18.4x and Capita a multiple of 18.8x.

We believe the market has got the valuation wrong for what is a growing and profitable business. The underlying EPS CAGR over the last 5 years is 14% putting the shares on a PEG ratio of 0.5. Put simply, that means the stock is undervalued and now is a great time to buy before the market wakes up to the Carillion story of a company transforming itself from a construction group into a support services company. And with one of the best yields in the FTSE 350 (4.5%, covered 1.8x) investors can lock in a decent yield as well.