The Investment Column: Derwent puts on a good show with West End portfolio

ARC International; Sportech
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The Independent Online

Our view: Buy

Current price: 1,735p

Backing a stock so tied in to the property market may seem contrarian in the current climate, but Derwent London could provide a buying opportunity for those willing to hold on.

Derwent London, which leases office space in central London, was formed earlier this year when Derwent Valley Holdings merged with London Merchant Securities. Despite some misgivings in the market over the deal, the integration seems to have gone to plan, and produced a solid set of debut interims yesterday. Highlights included a rise in net asset value of 12.5 per cent to 1,931p per share, along with a 26.8 per cent rise in profits.

The value of its London portfolio, which accounts for 90 per cent of its property, was up by a tenth. Eye-catching deals included putting Rio Tinto up in Paddington and leasing space in Victoria to Burberry. Rents in the West End have continued to rise over the past three years, but Derwent, which is predominantly focused on the area, asks only £24 per square foot.

The group announced a higher-than-expected dividend of 7.5p per share yesterday, which combined the two companies' policies and passed on some of the tax savings from its conversion to a real estate investment trust in July. The group has solid management that has set out to overhaul Derwent London's portfolio and focus its operations, and the integration of the two businesses looks to be on track. It set an 18-month timeframe to sell £300m-worth of property, and completed it in six, and expects to sell £100m more by the end of the year.

Derwent should be able to protect itself during the downturn. It has little residential or retail exposure, the weakening property market should provide opportunities for the company, and its focus on corporate clients as tenants is far less cyclical.

With the shares looking cheap, at 14 per cent discount to the June net asset value, strong performance so far this year and good prospects, this looks like one to buy and stick in the back pocket for a while.

ARC International

Our view: Buy

Current price: 47p

After spending years in the wilderness, ARC's recovery under Carl Schlachte, president and chief executive of the semiconductor technology developer, has been slow and steady, but is starting to bear fruit. Turning around a company in the chip sector takes time due to the lengthy design and development cycle, but after signing a slew of new licensing deals over the past year, ARC looks in good shape to turn a profit next year.

The agreement revealed yesterday with the technology giant Intel has been called a "breakthrough deal" by analysts as it could bolster ARC's royalty by £3m a year by 2010. Intel, which dominates the mobile laptop market with its Centrino chips, is one of the largest suppliers of wifi and wimax chipsets in the world, shifting 200 million wifi chips last year. It will use ARC's technology to reduce power consumption and increase performance.

Shipments of wifi and wimax chipsets are expected to reach 480 million by 2010, and with ARC's royalty revenue rising 47 per cent on a sequential basis in the first half, the company is starting to motor. On top of that, the Intel deal could include an upfront payment that will underpin full-year forecasts. Perhaps more important is the endorsement of ARC's technology on the back of the deal.

Due to the volatility of the market and ARC's slow progress turning around the business, it is perhaps unsurprising that its valuation trails that of its main rivals. While ARC trades on 2.3 times 2007 sales forecasts – and 1.8 times 2008 estimates – its closest peer, ARM, is valued at 6.3 times 2007 revenue projections. But with the Intel deal in the bag, ARC's recent recovery does not appear to be another false dawn. Buy.

Sportech

Our view: Buy

Current price: 13.25p

Sportech was off a bit yesterday, and perhaps that is no surprise. The interest charges on the floating debt the company carries are starting to bite, and the Competition Commission probe into its acquisition of Vernons Pools from Ladbrokes has meant certain product upgrades have been delayed, so this year's results may not be quite as rosy as had been expected.

In the longer term, however, there remains a lot to like about this stock. The decision by the commission to (provisionally) allow the acquisition will create a single pools brand under a single owner that is committed to the product. Taking it online and adding new games can only help to drive revenues.

When we looked at Sportech in July it sat at 16p, but yesterday the shares finished at 13.25p, down 0.5p. Still, the company was at 6.5p at the end of the year, and has the right chief executive in Ian Penrose to turn it around.

At the current level, the shares trade at 8.6 times 2008 earnings, by which time the board's plans should be starting to show fruit. The rating looks undemanding and the fall in the price should be taken as another buying opportunity.

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