The Investment Column: Hold on to Liberty as it expands city centre shops

Launch of video downloading looks set to revive ARC International; Omega Underwriting buoyed by promise of long-term growth
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The Independent Online

Liberty International could be blamed by some as one of the main reasons why we have "clone town Britain". That is, the same chains of shops at pretty much every shopping destination in the country, be it on the high street, city centre shopping centres or out-of-town centres.

The group, our third largest property company, owns both city centre and out-of-town shopping. It owns nine of the top 25 shopping centres in the country, including Manchester's Arndale, Braehead in Glasgow and the Metrocentre in Gateshead, with some 1,800 tenants in all.

But David Fischel, Liberty's chief executive, says the whole "clone town" debate is a fallacy. He says people would not recognise the majority of shops in one of the company's centres.

Clone-creator or not, Liberty certainly seems to be prospering. This is despite being entirely dependent on the retail sector, which has been in the doldrums.

The woes of the actual retailers only affect Liberty, as a landlord, if they stop paying their rents or go bust, and there is no sign of that. Occupancy rates stand at 98.5 per cent. Last year, there was an 8.5 per cent rise in total rents, on a like-for-like basis. That was driven by a 28 per cent rise at Braehead after a rent review.

Given the planning difficulties surrounding out-of-town shopping, Liberty has gone for a strategy of expanding its politically more acceptable city centre shopping. Almost the whole of the company's £1.2bn development programme is focused here, with the Arndale scheme destined to make it the largest city centre shopping area in Europe. But it does show that driving growth is a capital-intensive business in this sector.

Liberty's net asset value was up an impressive 16 per cent last year. But, with the uncertainly about the introduction by the Government of a new tax-efficient vehicle for the property sector, its shares, at 1,082.5p, are a hold.

Launch of video downloading looks set to revive ARC International

Underneath the rocket science, ARC International's business model is simple. The company designs architecture behind microchips that are used in a range of applications such as digital cameras and MP3 players, taking a royalty for every chip shipped using its technology. It does not manufacture anything itself, leaving that part of the process to its customers.

The company is run in an almost identical manner to its rival ARM, the crucial difference being ARC's chips are configurable. In layman's terms that means customers can tailor-make the chip to their specifications, trimming away any unnecessary functionality.

ARC stock traded at a little more than 450p in September 2000, but has not seen the dizzy heights of 100p since 2001. Its chief executive Carl Schlachte took over the company about two years ago, and most observers think he has done a good job in turning the company around, selling subsidiaries and trimming 7 per cent of its staff.

Still, there is much to do, and yesterday's results show the company is some way from making a profit. Mr Schlachte has put his neck on the line - if things do not improve in 2006 he will be the next to go.

There are signs that 2006 could mark a turning point in the group's fortunes. ARC's video subsystem technology will be launched on Monday, allowing digital video downloading to a range of equipment, regardless of how that information is formatted. The company is excited about the possibilities, particularly in light of the increasing demand for visual content among telecoms operators.

With 23p of net cash per share and a declining burn rate, at 26p the market values the ongoing operations of this business at little more than £4m. It is worth more than that, and if a big name manufacturer signs up for ARC's video subsystems the impact could be dramatic. Not for the faint hearted, but worth a punt. Buy.

Omega Underwriting buoyed by promise of long-term growth

In April Omega Underwriting became the first Lloyd's of London insurance company to list on the Alternative Investment Market, raising more than £18m in the process.

At the time, its main source of income was the fees and commissions it received for its role as managing agent of Lloyd's Syndicate 958 - famous for being the only syndicate to have turned a profit in every year since 1980. As well as its role as managing agent, Omega subscribed to a small amount of the underwriting risk - taking on 0.5 per cent of the syndicate's capacity in 2005. So small was its exposure that even the costly Hurricane Katrina failed to make any significant impact on its balance sheet.

But the past year has seen the beginnings of a transformation. Just a few weeks after flotation, the company was in merger talks with Hardy Underwriting, and after these came to nothing, it announced it was to launch a Bermuda-based business, raising £90m through a rights issue to fund the expansion.

Yesterday, the group said the Bermuda division was up and running, and, while the prospects for its business depend on a good credit rating, this is beginning to look like a formality.

Back in London, Omegahas upped its participation in Syndicate 958 - taking more than 15 per cent in 2006, compared with just 0.5 per cent a year ago. Once the overhaul is finished, Omega will look to generate its revenues from a wider range of sources.

Although it trades on an expensive multiple of almost eight times next year's predicted earnings, there is a solid long-term growth story behind Omega, which makes its shares worth buying.