Lock in to the lucrative security market

Recent events have been a reminder of the very real threat to the UK from terrorism. Attention is turning to how to prevent such attacks, creating an ever-expanding security sector. So which firms look the most promising?

Coming just over a year after the London tube bombings, the footage of queues of air travellers waiting for delayed and cancelled flights has been a stark reminder that there is still a very real threat to the UK from terrorism. Unsurprisingly then, attention is turning to how to prevent such attacks by increasing security measures. We won't be able to rely on the armed forces. Massive cuts in the defence budget, due to the cost of operations in Iraq and Afghanistan, mean that the resources of the military are dwindling. The police and intelligence services are taking up some of the slack, but a large number of private-sector firms are also entering the defence and security market.

Security measures: new technology

Since aircraft have proved to be a favourite target, there is a big push to improve security measures at airports. The British Aviation Authority (BAA) is thought to spend about £165m a year on security at its seven UK airports alone, so it's a lucrative market. The strict security measures already taken illustrate the difficulty that the authorities have in spotting the presence of hidden explosives. X-ray machines and metal detectors are no longer up to the job. New technology, such as the sniffer' or puffer' machines used in some US airports, show if people or baggage have come into contact with explosives but these are not infallible.

So there is a race on for commercially viable technologies that can identify potential threats, some of which seem to be having a degree of success. The airport archway' metal detector could soon become a thing of the past, and the full-body portal' scanner which can identify hidden items brought in at around a ten-fold increase in cost.

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Security measures: intelligence gathering

A US firm, American Science and Engineering, has patented its Z Backscatter' X-ray detection system, which it claims has a higher probability of detecting liquid and other types of explosives than other X-ray systems on the market. Another key area is surveillance, with digital video products for airports, train stations and bus stations among

the most commonly sought forms of security since September 11th.

A vital part of the picture is intelligence gathering, which was behind the prevention of the latest plot. Advanced wiretapping, using software that can intercept and analyse various types of communications, is an increasingly important field.

The UK and US, as well as 30 other nations, believe that biometric passports containing a data chip can help in the fight against terrorism. Adopted last year by the International Civil Aviation Organisation (ICAO), Germany became the first EU country to introduce them last year, with the UK to follow in the coming months. The chip contains all the information that is now printed on the passport's data page, including a digital photograph of its owner. This text, as well as the photograph, can be read by a scanner at any border and compared to the information printed in the passport. The technology is expected to be improved further over time by using iris and fingerprint-scanning equipment.

With a number of firms competing in the desperate race for security, we look at how investors can profit from all this below.

Security measures: three promising stocks

Romag (ROM: Aim, 110p) is a specialist glassmaker whose markets include high-margin bomb- and ballistic-proof glass products, as well as photovoltaic glass for renewable energy generation. It's on a demanding forward p/e of 34, but the strong growth potential of both its key sectors makes this an interesting long-term play.

Verint Systems' (VRNT: NSDQ, $29) surveillance products are used in airports and stations, with customers including Washington Dulles International Airport. The firm specialises in the software that analyses video, voice and internet transmissions. The US government supplies 70% of Verint's business, but its products are also used by more than 1,000 organisations in over 50 countries worldwide. Even after a recent share-price rise, the firm is still on a forward p/e of around 22 times brokers' estimates.

Surveillance firm Croma Group (CMG: Aim, 3.75p) recently reported that technical issues' at its CCTV division had led to a backlog of orders during the third quarter. Although this is likely to dent its full-year profits, the company also reported that turnover had already exceeded total turnover for the year to June 2005, with its order book and contracts worth in excess of £2m. The firm has an aggressive strategy of growth through acquisitions and looks like a high-risk investment that could deliver high returns in a booming security market.