CITY TALK : Verity must turn down volume

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The Independent Online
The spotlight has once again swung back on to Verity Group, the loudspeakers firm pioneering a revolutionary new flat panel technology.

Its shares have continued their ascent of recent months, and rose another five per cent in the last fortnight, to 52.5p. For most of last year, they had trundled along at under 15p.

The latest news to affect the price came last Tuesday when the firm announced a cross-licensing deal with Noise Cancellation Technologies, a company quoted on Nasdaq in the US.

The deal means the two companies will share their technology, and Verity will pay NCT an up-front royalty fee of $3m (pounds 2m).

Verity has already signed up with NEC, the giant Japanese consumer electronics and personal computing firm, for its technology to be used in its lap- top computers. It all sounds pretty encouraging on paper, and the company is almost certainly doing the right thing when it licenses the technology, rather than try to go it alone.

However, the shares have attracted all sorts of hyperbole, and some of the recent buying has left a suspicious whiff of a stockmarket ramp in action.

The annual worldwide market for loudspeakers is worth a little over pounds 1.7bn. Verity could say justifiably that its technology will be used in items such as laptop computers and mobile phones, which fall outside the conventional speaker market.

Most commercial royalties pay a 3 per cent fee on sales of another company's technology. If that were the case, a back-of-the-envelope calculation suggests that worldwide sales for the new technology will need to top pounds 400m if Verity is to generate pounds 12m in royalty income, and thereby merit its stockmarket tag of pounds 147m - a tall order.

The original speakers and percussion business is worth about pounds 15m to pounds 20m, leaving pounds 120m plus in hopes.

With royalty income of pounds 12m, after central administration costs and tax, say there is pounds 6m left over, putting the shares on a ratio of 20 times 1998 earnings - which is just about right.

Can Verity do it? It seems unlikely - fee income of, at best, pounds 8m by 1998 looks more reasonable. The shares look over-priced, and it is time the market took a more sensible view on this company's financial prospects.

Later this month will see maiden results from LucasVarity, following the merger of the two concerns, under chief executive Victor Rice. Observers are convinced it will announce details of a long mooted share buyback, which will probably be accompanied by a cut of the 7p dividend. There is an argument that some of the surplus cash from this move and cost-cutting will be best returned to shareholders through a share buyback, and LucasVarity has said its leading shareholders approve the move. Share buybacks are a US favourite - which, given LucasVarity's quasi-US status, lends the story credibility.

Tomorrow the market will hear how Manchester United has performed off the field, when it reports its interim results for the six months to the end of January. The range of forecasts is for pre-tax profits of pounds 15.3m to pounds 16m before transfer fees, against pounds 11m last time. Transfer fees are expected to notch up pounds 3.8m, down from the first half figure last year of pounds 4.2m. One boost will come from higher gate receipts; the six months is the first full period since capacity at Old Trafford was increased to 54,000.

The results have been brought forward a day because the club plays the first leg of its European Champions League semi-final against Borussia Dortmund on Tuesday.

The bio-tech merry-go-round continues unabated, with Drew Scientific the latest boy wonder to grab the market's attention. The company had to announce it was working on a new marker for heart disease, after the shares went into orbit over the last few days. They soared another 32.5p on Friday, to 195p.

Given the recent ups and downs in the sector, it is clear that the best approach for wannabe biotech investors is to select a judicious portfolio of shares, and spread some of the risk around.

Pity shareholders in Alpha Omikron, the company with assets ranging from a Hungarian syringe factory to a Russian publishing concern. It was booted off the AIM on Thursday, after its nominated adviser, Henderson Crosthwaite, resigned. The company has had problems proving its assets exceed liabilities, and the future looks bleak. It is a warning, if one were needed, that while the AIM, set up to serve fledgling companies, can offer rich rewards to well-informed investors, equally purchasers must be prepared for the worst.