Huntleys' Stock of the Week

Recommendations: Accumulate

PBL's current stock prices

Investment Rating

PBL will split its Media and Gaming assets in late 2007, subject to an EGM. Media will have steady but reduced cash flows from 25% of Channel Nine with NBN and magazines plus new media assets like Foxtel. Gaming will have more upside with the Australian casinos plus the 41% JV with Melco to build Asian casinos. Its Australian Gaming assets have around $5bn book value. PBL has also invested around $550m in North American Gaming assets. The higher risk profile means more conservative investors may prefer Media or alternative investments. Others may still prefer investing alongside major 37% shareholder Consolidated Press. Competitive advantages are gaming management expertise and Consolidated Press support. This encourages PBL to take a longer term view before investments generate a suitable return. Longer term, Macau gaming can be thought of as a similar China bet to resources.

Event

* The de-merger vote will be on November 23, ahead of another minor event! You can receive one Crown share and one Consolidated Media Holdings (CMH) share plus $3/share per one PBL. You can choose to accept more Crown shares or more cash, subject to overall caps.

* PBL trades cum-entitlement to the $3/share until November 30. Deferred settlement of Crown and CMH starts on December 3 with normal trading from December 17.

Impact

* The de-merger is messy. The mechanics and taxation aspect are complex.

* Crown will become a promising internationally focused but Australian based gaming stock. CMH will be a shell holding company for residual PBL Media assets and relatively small new media investments.

* We mildly increase our valuation to $16.40/share for Crown, $5.80 for CMH giving $22 for PBL excluding the taxable $3/share.

* You will finally get scrip-for-scrip capital gains tax rollover relief for the Crown and CMH scrip you accept. The $3/share component will be taxable. The 570 page de-merger documents do not give sufficient comprehensive tax information.

* Key short term drivers will obviously be the EGM outcome, Crown's further acquisitions (Tabcorp or Las Vegas?), the FY08 results, Melco PBL's updates and CMH's corporate activity. Mr Packer clearly prefers Crown.

Recommendation Impact (Last Updated: 26/10/2007)

Given the uncertainty, it's probably better for longer-term shareholders to continue. Crown offers longer-term upside but is more fully priced. CMH has flatter growth so will trade on lower multiples. Accumulate/Accept

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