CanWest's Improving Fundamentals a Positive Sign

CanWest Global Communications Corp. (CWG) re-affirmed its commitment to TEN Network Holdings during a luncheon on Monday, and given the Australian-based subsidiary's positive influence on CanWest's bottom line, who can blame them.

TEN’s management "went out of its way" Tuesday to state that they are currently in the sweet spot among over-the-air networks in Australia, says Carl Bayard, analyst at Genuity Capital, in a note to clients following the investor luncheon held in Toronto.

In a research note, Mr. Bayard reiterated his "buy" rating and $10 price target on Can West shares and said:

While the Alliance Atlantis transaction and its valuation complexity attracts the lion’s share of investors’ attention, it is important to remember that the bulk of CanWest’s value now resides in its Australian and newspaper operations – and the two are generating some impressive growth relative to their peers.

The analyst told clients he estimates that TEN accounts for 32% of the total value in CanWest and unlike its parent company, can comfortably state that its balance sheet is not a worry to investors. "At 2.3x net debt/EBITDA, TEN has room to take out more leverage and perhaps pay up a special dividend to CanWest," he wrote.

RBC Capital analyst Drew McReynolds, meanwhile, expressed increased confidence regarding TEN's growth outlook following the presentation and stressed patience to CanWest shareholders, maintaining his "sector perform" rating and C$9 price target on the stock.

Despite the many moving parts to the CanWest story, we believe fundamentals are improving and we see value in the stock at current levels. However, we expect the company's high exposure to advertising and levered balance sheet to weigh on the stock in the current credit environment and given the likelihood of a slowing economy in 2008 and 2009. We recommend investors remain patient for more timely entry points into this name.