Pick a virtual certainty High-technology companies look poised for prof its as consumer demand grows : Shares

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The Independent Online
THE MAIN impact of the technological revolution has been on the business world, where computers and mobile communications are already ubiquitous.

In the next stage these, and other more consumer-oriented developments such as multimedia, are going to be launched on the world's mass consumer markets. The UK has a number of contenders developing innovative products for these emerging markets. Over the next 12 to 18 months some of these companies expect to go from losses to substantial profits - 1995 promises to be a watershed year in the UK's high-technology sector.

A hint of the fireworks that could lie ahead has come with action in some shares I have already written about: Magnum Power Selection (protection for PCs against power failure), Tadpole Technology (portable workstations), Virtuality (headsets and software for virtual reality), Division Group (virtual reality for business applications) and Filtronic Comtek (components for cellular-phone base stations).

Magnum, which was floated at 35p, was featured at 67p in October and has since been up as high as 144p against 130p at present. I mentioned forecasts by analyst Richard Lucas, at stockbroker Henry Cooke Lumsden, which anticipated 1999 profits in a range between £12m and £80m. The latter figure exceeds Magnum's current market capitalisation of £39m - which is why the buyers keep coming.

Tadpole, at 395p, is confidently expected to make the long-awaited breakthrough into serious profits this year and next, with some analysts looking for profits in the order of £10m and then £20m. That compares with a market capitalisation of £100m, so isnot fully discounted by the current share price.

Virtuality, where shares have rallied recently from 120p to 252p, has reawakened interest by a joint venture with US giant Atari to launch a high-powered computer with a headset and software based on Virtuality's technology in time for the 1995 Christmasmarket. It could do wonders for the group's profits.

Division, at 130p, has a joint venture with another US giant, Hewlett-Packard, to develop a workstation selling at the top of the range for CAD /CAM applications equipped with virtual-reality functionality. Hewlett-Packard is successful in the mid-range workstation market, but the higher end, selling for above $43,000, is dominated by another US company, Silicon Graphics. Division hopes its new machine, planned for launch in late 1995 or early 1996, will take back some of this share by offering greater performance for a comparable price. If successful, the impact on the tiny Division, with a market value of £44m, could be considerable.

Filtronic, 120p when I wrote about the cellular boom, raced to a peak 176p on US buying but has come back to 150p. The share surge also reflected the announcement, foreshadowed in the prospectus, that it had acquired sites for new factories in the US andUK that would treble capacity when they came on stream next year. The group is already profitable, with hopes of a sequence running from last year's £1m to £3m plus for 1994-1995, followed by £3m to £6m and then £9m to £10m.

Demand is not a problem, with mobile-phone subscriber numbers growing in leaps and bounds. The test for the company will be to manage growth at such a dramatic rate. A market valuation of around £60m looks justified against the potential, despite the demanding historic and likely current year p/e ratio.

The stream of flotations is a measure of the capital and brain-power being applied in the search for profitable technology breakthroughs. A recent arrival is Calluna, a Scottish company, founded by former members of the Rodime engineering team. Before its present difficulties Rodime had a great success with 3.5in disk drives.

Calluna, at 88p currently against a peak more than 100p and an October flotation price of 63p, is one of four companies in the world to have developed a 1.8 removable PC card disk drive, intended for notebook-sized computers, which it sells under the Callunacard trademark. These tiny, high-capacity drives, which give computers their permanent memory storage capacity, are expected to be a phenomenal growth market. A recent report estimated that demand for 1.8in hard-disk drives would grow from 678,000 in1994 to more than 20.6 million, generating revenues of $3.85bn, by 1998.

A new entrant, described by Richard Lucas as even more exciting than Magnum, is Memory Corporation. The shares are to be placed on the matched bargains 4.2 market with dealings expected to begin on 21 December. The price should be announced on 12 December.

The shares look assured of a dynamic start to stock market life. Interested parties could buy some stock at the opening and a few more when the price settles down in case they open at an unsustainable level. The excitement reflects hopes that the group'sproducts will sell in significant numbers into the vast world market.

Computers have two kinds of memory: the permanent storage addressed by Calluna's products and the machine memory needed to operate software, which works only when the computer is turned on. Memory addresses this market. Computer memory capacity is based on Simms (Single In-line Memory Modules), which themselves are made from Drams (Dynamic Random Access Memory).

Drams are made in $1bn factories to such high specifications that 60 per cent of the output is not perfect enough to be used in computers and winds up in less demanding applications such as telephone answering machines.

Memory has developed a technology for turning these fractionally imperfect, so-called Partial Drams, into effectively perfect Drams at low cost. Partial Drams sell at a fraction of the price of perfect Drams, but will be worth the same with Memory's unique technology. This will create scope for the group to enjoy high profit margins.

The market is already worth $11bn and growing so explosively that Drams are in permanent short supply. Memory does not want to upset that balance and just wants a few hundred millions of dollars of sales.

The company was founded in 1993 based on the inventive skills of Alex Deas and on the entrepreneurial acumen of Cameron McColl. It looks a classic boom-or-bust Silicon Valley start-up type of investment.

Last but not least is VideoLogic, a spin-off from quoted Avesco, which has a proprietary technology that enables PCs to cope with the demands of multimedia. One component of the multimedia package is video. These make huge demands on computer memory and operational ability.

VideoLogic makes chips and boards (microprocessors and the boards they are embedded in before going into computer expansion slots) which, for example, enable computers to run videos on the whole screen and not just in a tiny postage stamp sized corner box.

Demerged at 45p in the summer, the shares slumped below 20p against net cash of 12p as investors shunned "concept" stocks. The current revival to 391/2p was triggered by the announcement that Compaq was going to use VideoLogic chips in some of 1995 computers, probably the high end models.

On a value to VideoLogic of $23 to $30 a chip, and given Compaq's 13 per cent share of the world PC market, this could mean big numbers for the group. The company is anxious for observers not to become too excited but the speculative potential is clearlysubstantial.

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