I note the concerns about a liner but consider this; I did a pair some years ago for my Moto Rumi. Now the original 42mm bores for this little beast were chrome on aluminium. When I got it there were various bits of cylinder skirt broken off, clearly welding was going to further ruin the chrome and the prospect of getting it re-chromed after welding and retrieving a working surface was pretty well nil.
As a result and with nothing to loose I made a pair of liners from S.G. iron but due to the design of the original casting I could only manage a 2,5mm wall thickness.
Concerning the fear of distortion due to local heating as a result of this engine being a side valve job; I think it doubtful if it proved to be the case. Compare it with the Rumi, a piston timed 2-stroke with the customary exhaust port with a bar occupying 1/3rd of the cylinder circumference plus inlet and two transfer ports. Then there is also the matter of the unequal expansion of the iron liner and the aluminium casting to be considered, a recipe for unequal expansion if there ever was one! Despite all those possible pitfalls there has been no indication over many miles that there have been any distortion gremlins at work. Indeed the machine was used in this form with homemade pistons and homemade rings for many months doing a 40 mile each way commute in all weathers with no problems – must have got something right! That is save for the Rozzers for ever pulling me over to get a closer look at this odd little machine — “Ello! Ello! Wot we got ‘ere then?” — when all I want to do is to get home for some grub!
Regarding the possibility of a reduction in heat rejection due to the sleeve/cylinder interface; if the job is done well this will be so small that it can be ignored particularly if close attention is paid to the finish in the bored out cylinder and the liner, the finer the finish the better. I’d be inclined to have the liner shrunk in rather than pressed, an easy enough job if a source of liquid nitrogen can be found and careful attention is paid to the dimensions for the interference fit. At least you don’t have just the one chance and a few seconds to align the ports in the liner with those in the cylinder as I did with the Rumi!
For liquid nitrogen if an industrial source fails try your local University. You are looking mainly for one with an Engineering, Chemistry or Physics Department especially if they have an electron microscope as many use liquid nitrogen for cooling EDAX equipment and the like. The Chief Technician is probably the person to chat up.
You could do no harm by having the whole thing soaked at about 250ºC for two or three hours followed by a slow cooling just to release any stresses caused by fitting the liner. It is assumed that you will have left enough meat in the bore so that the last job is finishing the bore to the desired size. I am assuming here that the existing piston will be re-ground and reused.
Concerning the piston I suspect that the recess is there more to reduce friction than to retain oil although of course it will do that. It would be well to maintain the depth of the recess if the piston is reground. Depending on the amount of metal that has to be removed to render the piston circular it would also be wise to have the ring grooves deepened by an equal amount. As new rings will have to be made in any event it would be wise to widen the ring groove by enough to remove any witness of previous wear. This will ensure a good fit and thus effective working of the rings; it is a build up of compression pressure behind the ring that does the bulk of the sealing, the outward pressure caused by the springiness of the ring itself making a minimal contribution.