Shares: Multimedia set to soar: Electronic super-highways are the route to dramatic price rises

'MULTIMEDIA' promises to be one of the hottest areas of the stock market for the rest of the decade.

Short term, on the UK stock market, this means that substantial sums of money are going to be chasing a handful of stocks - which could have a dramatic impact on prices. Investors who like excitement should start building exposure to the fledgling sector now.

One objective, which may be only two or three years away, is to turn your TV into a 'virtual video recorder'. TVs will be connected via electronic superhighways (digital cable and satellite links) to 'videoservers'. These will enable subscribers to call up the film of their choice at any time and watch it with the same pause, playback and fast forward facilities they have with videos.

Mighty US companies such as Microsoft are spending hundreds of millions of dollars to develop the phenomenal computing power and software necessary to achieve these objectives at a mass market price. One US company, Oracle Systems, at dollars 31.50, is valued at over dollars 8bn. This is partly in the hope that its combination of data storage software and supercomputers based on massively parallel processors (like thousands of PCs all working together) will turn the videoserver into a commercial reality by 1996.

Oracle apparently hit on the multimedia potential for its database systems after being asked by British Telecom to devise such a videoserver - which raises intriguing ideas about BT's plans for this potential boom market. At the very least BT, at 469.5p on a probable 1994 yield of 4.6 per cent, should not be sold. It looks well placed to benefit from future developments and could attract massive overseas interest.

Cable & Wireless, at 462p, is also beginning its transformation into a multimedia stock with plans to deliver video on demand down the telephone line. Telecommunication stocks worldwide are moving from utility to growth and even supergrowth share ratings.

Among UK-quoted shares Flextech, at 269p, is already capitalised above pounds 87m even though it is still making losses. The shares have rocketed in recent weeks because of proposed plans by the US multimedia giant TeleCommunications Inc to inject its European interests into Flextech. In return it will receive a controlling stake in what will be a much larger company. The enlarged group will own chunks of a string of cable and satellite channels including Bravo, the Children's Channel, UK Gold, and UK Living, and will manage other channels.

The excitement in the shares, which will probably value the group in excess of pounds 200m once the deal has gone through, is the profits potential as revenue passes break-even.

There are strong similarities with BSkyB, which is valued in billions as it starts to generate a growing stream of operating profits for stakeholders including News Corporation at 451p, Granada at 473p and Pearson at 569p.

In the US, where cable and satellite television are much further developed, a company called International Family Entertainment makes profits of some dollars 32m on turnover of dollars 132m and is valued at dollars 800m.

Based on projections of strong growth in subscribers to cable and satellite channels, Flextech should see steady and substantial increases in subscription revenue supplemented by advertising revenue as the numbers build. The profits impact could be spectacular, justifying a market capitalisation much higher than pounds 200m.

The proliferation of media has exciting implications for companies such as Thorn EMI at 947p with its vast library of music rights. But the real showstopper for priceless film rights must be Walt Disney at dollars 39.25, with its growing portfolio of blockbuster cartoons worth billions of dollars apiece.

A small company well placed to ride the music and video rights boom is Castle Communications at 220p, best known for its collections of pop artists from the 1960s and 1970s. Pre-tax profits collapsed in 1990 but have trebled since then.

Today, Terry Shand, its chairman, is very excited about the potential for compact discs as vehicles for the multimedia revolution.

Films on disc show a sharp improvement in quality over video tapes, even on current TV receivers. The group has also recently gone into book publishing and sees scope for disc- based products bringing the different media together and accessing them interactively.

The year has begun well for the group, and its substantial worldwide export business should make pounds 2m plus this year against last year's pounds 1.51m.

Last but not least are Rhino, the video games retailer, VTR, the post-production specialist. The latter recently reported doubled full-year figures, aided by a flying second-half performance, and it is moving into programme making. Dealings begin tomorrow in Rhino, which is coming back from suspension at an ex-rights price of 53p. But with the shares likely to soar on prospects of three or four years of dramatic profits growth, the PE ratio should drop into single figures by 1996.

The VTR chief, John Banks, says his group is benefiting from increased use of its edit suites - which have been open since spring - despite some patchy moments. Prospects are for a further improvement, from pounds 884,000 to pounds 1.25m- plus in the current year, to leave the shares looking cheap at 99p to yield 4.7 per cent.

(Photograph omitted)