Over the lunch hour today, I listened to a presentation by CETV management to clients of Jefferies and Company brokerage firm. The CEO is based in NY but the London based CFO and COO were in the States to present the 2005 budget to the Board. Based on commentary on the call, it appears the story is intact and 2005 is setting up to be another excellent year…

CETV expects to double in size off its 2004 revenue base in the next four years as a leading beneficiary of rapidly rising disposable personal income in its Central and Eastern European markets. Management also expects operating cash flow margins to rise from the current 30% to 35% within the next three years. Doubling revenues in four years, implies a 19% top line growth rate, which with expanding margins means that cash flow should rise 23% per annum.
Rising disposable income in the region will lead to increasing advertising spending per capita. According to CETV, Eastern European countries have a $17.44 per capita advertising spend, while Western European countries have a per capita of $46.90. Prior to its acquisition of the dominant TV network in the Czech Republic, CETV’s markets (Slovenia, Slovakia, Romania, Ukraine, and Croatia) have a per capita spend of just $5.04. CETV’s figure is held down by very low per capita’s in Ukraine and Romania, which have populations of 48 million and 22 million, respectively.
Regarding current trends, management said there was a slight pause in Ukraine ahead of the second round of voting. It was not clear if the pause had lifted yet but management was “extremely positive” on Ukraine given the outcome of the Presidential contest. Management plans to build Ukraine on the model that it has used very succesfsully in Romania. In the seasonally weak third quarter revenues in Romania were 2.3 times those of 3Q01 and cash flow was $4.4 million vs. a loss of $2.1 million in 2001.
Management also commented that the 2005 outlook in Croatia is not as optimistic as the other markets due to higher than expected content costs as the State television network is spending wildly on programming. Fortunately, Croatia is a small market which will produce about $6 million in negative operating cash flow in 2004 against pro forma companywide attributable operating cash flow of $106 million.
In further comments, management noted that the Croatian government is violating its license by showing programming beyond its charter. If Croatia were in the EU, it would be in violation of EU rules on this matter. One benefit of the CETV story is that as Central and Eastern European countries move into or toward the EU, it improves business conditions for the industry leaders.
Overall, it was a good presentation. The fourth quarter “will reflect the overall good year” enjoyed by CETV. Further clarity on the financing, projected growth, and path to increased ownership of TV Nova is the Czech Republic will be released in about four weeks. I expect the news to be favorable. I also expect an optimistic 2005 outlook.
Given the 20% plus growth rate projected over the next several years, I see no reason that CETV can’t maintain its current 15 multiple on 2004 operating cash flow on 2005 estimates. If so, a price target in the mid-$40’s is realistic, providing 20% upside from current levels.