Shares: Radio is beaming over wave of ads: Commercial stations may also be facing some bid activity

INVESTORS might do well to tune in to the radio sector where, because of the operational gearing, some 60 to 75 per cent of added revenue can flow through as profits. Revenue is showing strong signs of growth, with a steady climb in local ad spots and the beginnings of what could be a spectacular surge in national advertising.

Share prices in the sector have already begun to move but I believe that this is only the start of a potentially huge bull market. It is certainly not too late to buy.

On top of these rapidly moving fundamentals, there is also the promise of some corporate activity. Something of the same consolidation that is happening so dramatically in the television arena is likely to take place in the radio industry.

Among the companies that have grown substantially during what has been roughly a four-year recession in the industry are Capital Radio, at 415p, which now owns the main Birmingham station and has near 20 per cent stakes in the North- East, Metro Radio, at 310p, and the explosively fast-growing GWR, at 945p. The latter now owns stations in the Midlands, around Bristol, and in the South. It also has a stake in the hugely successful national station, Classic FM, which will begin broadcasting to the Netherlands this summer.

In Scotland Radio Clyde, at 570p, added to its original Glasgow station with stations serving Edinburgh, Dundee and Scotland. It has just announced that it is changing its name to Scottish Radio Holdings to reflect this expanded presence. Newspaper groups such as Daily Mail & General and Emap have also made no secret of their desire to become more heavily involved in radio.

The newly discovered enthusiasm of the owners of big consumer brands for radio advertising is leading to a dramatic surge in spending. At its AGM last week, Scottish Radio Group revealed that in the four months to January local broadcast revenue had increased by 8 per cent year on year and national broadcast revenue had risen by 26 per cent, taking both to record levels. The expectation is that the surge in national advertising will change the local to national revenue ratio from 30:70 last year to nearer 40:60.

GWR's Classic FM, where revenue is running at pounds 1m a month or more, is winning business mainly from advertisers who are new to radio. New advertisers on Capital in recent months include Gold Blend, the Health Education Council with its anti-smoking campaign, Hewlett-Packard, Lancia, Alfa Romeo, Peugeot, Horlicks and Flora margarine. Among the reasons cited for this barrage of new advertisers, apart from the long-standing argument of cost-effectiveness, are the new awareness brought by the national stations, Classic FM, Virgin and Atlantic 252, and the spirit of co-operation between stations that is fostered by the Radio Advertising Bureau.

Capital is valued at nearly pounds 300m, more than all the other groups put together, supporting its claim to be the most profitable and successful local radio station in the world. Its two stations, Capital FM and Capital Gold, are so ubiquitous in London than you hardly need a radio to listen to them. They hold first and third position respectively, with the BBC's Radio 1 FM a struggling second. The new national stations and fresh local competition such as Jazz FM and Melody Radio seem only to have enlarged the market or taken share away from the BBC.

In addition to the two Capital stations and the main Birmingham station, the Capital group has a valuable portfolio, including stakes in GWR and Metro, plus a growing cash pile. It is also developing a range of services to the industry. These include a stake in Independent Radio News as well as providing programming and placing advertising for other stations, such as Trans World in Manchester.

Consolidation in the industry is restrained by complex formulae that look increasingly inappropriate in a world of trans-national media giants. Capital can still do a deal or two before hitting regulatory ceilings but would benefit from the more flexible regime that is almost certainly coming.

The most dramatic growth is being seen at Bristol-based GWR which has come almost from nowhere to be the second largest group in market capitalisation terms as investors look forward to an expected sales and profits explosion. GWR owns 17 per cent of the phenomenally successful Classic FM (launched in the autumn of 1992), which already has nearly 5 million listeners and will surely increase that number substantially when it begins broadcasting to the Netherlands. At the same time, GWR has done a deal with Capital to acquire three Midlands stations, alongside a separate deal to buy Beacon Radio. This has lifted its potential adult audience from 2.9 million to 7.1 million. The revenue per adult generated by the acquired stations is a fraction of that generated by GWR, suggesting great potential for revenue enhancement and even more for profits. As a result, observers are looking for a spectacular multiplying of profits in coming years.

The commercial sector has only been around since the early 1970s. So it is a measure of its strength that three of the companies (Capital, Metro and Radio Clyde) have made the FM services in their local areas more popular than the BBC. Similarly, Classic FM has already overtaken its most obvious rival, Radio 3, even though the boost to classical music listening has been so great that Radio 3 has also acquired listeners.

Readers should grit their teeth in the face of sky-high p/e ratings - 25 for Scottish, mid to high 30s for Metro and Capital and off the scale for GWR - and buy the sector. Prospects look outstanding as the big advertising agencies at last take radio seriously as a medium for national brand awareness marketing campaigns.

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