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March 01, 2006

Central European Media Enterprises Earnings Preview

Central European Media Enterprises (CETV) reports before the open on Thursday. I remain optimistic about the shares with the caveat that quarterly are quite volatile particularly on a country-by-country basis. If my forecast for 13% revenue growth and over 18% EBITDA growth in 2006 receives support from management, I think my target in the low $70s is very realistic. If there is significant variance to the downside from my forecast, the shares could take a tough hit but that would not likely change my long-term view that CETV offers superior long-term growth.

CETV has minimal analyst coverage so I construct my own consensus using five analysts. Analysts and investors in CETV analyze the company at the segment level focusing on country-by-country revenue and EBITDA. For 2005, the company has provided full year guidance by country but nothing specific for the fourth quarter. However, with three quarters in the books, it is possible to work backwards to see what the assumptions for 4Q05 must be. This is not possible for the Czech Republic where there is no comparable 4Q04 number available. The company completed its acquisition in the country in May has not provided pro forma quarterly historical results. With those caveats, here is my preview:

Excluding the Czech Republic and comparing just the full year guidance to the YTD results, 4Q05 revenue growth is projected at 14%. This figure covers Romania, Slovakia, Slovenia, Ukraine, and the money-losing start-up in Croatia. For 4Q, Ukraine should show the highest revenue growth at around 40%. The much smaller operation in Croatia should see revenue growth in the mid-30% range. Romania should show growth of 18% and Slovenia should come in around 7%. As forecast by the company, Slovakia will be down double digits on the revenue line due to some programming issues.

In the Czech Republic, the company will probably show pro forma revenue growth in the low single digits. The overall market grew in the low double digits in local currency but the company faces a modest currency drag due to strength in the dollar and ratings have shown some weakness, which is now apparently resolved.

If I were to make an informed guess, I'd say that results in Romania are likely to surprise to the upside. YTD revenue growth has been 37% and every quarter for the last three years has shown growth of at least 30%. Some slowdown is inevitable as the market matures but I don’t see 4Q05 growth dropping all the way to 18% unless a specific previously undisclosed timing issue exists. I don’t see as much room for surprise in the other five countries although if I had to guess I'd say the Czech Republic could go either way as measuring local market strength vs. ratings vs. currency leaves a lot of wiggle room.

EBITDA growth, excluding the Czech Republic, should be around 14%. Further excluding the losses in the Croatia, EBITDA growth should come in around 18%. All of the growth will be driven by margin expansion in Romania and Ukraine, both of which could see EBITDA gains north of 40% in 4Q05. The revenue decline in Slovakia will lead to a sharp EBITDA decline due to operating leverage inherent in the TV broadcasting business. Similarly, the slow revenue growth in Slovenia should lead to a year-over-year decline in EBITDA.

In the Czech Republic, management has acknowledged that 2005 was a year of investment while facing tough comps, so modestly negative EBITDA growth on a pro forma basis in 4Q05 would not be surprising. Nevertheless, I suspect that EBITDA growth will eke out a gain in the quarter.

While quarterly results for CETV have proven quite volatile on a country-by-country basis in the past, annual growth has been strong and predictable. I expect management to provide full year 2006 guidance on the call. My own spreadsheet calls for revenue growth of 13% across all six countries pro forma for a full year of ownership in the Czech Republic in 2005. My expectation for growth by country is as follows: Romania, 22%: Slovakia, 10%: Slovenia, 8%, Ukraine, 28%, Croatia, 10%, and the Czech Republic, 6%. Excluding the newly acquired operations in Croatia and the Czech Republic, I project revenue growth at 18% in 2006.

On an EBITDA basis, I project 2006 growth across all six countries at 18%. I think margins can expand in every country except the Czech Republic, and losses in Croatia should lessen. Rebounding margins in Slovenia and Slovakia seem likely due to unusual depressants in 2005. Ukraine could see significant margin expansion due to the very high revenue growth rate and the beginning of maturity in the business operation.

I think there is upside in Ukraine and Slovakia in 2006. Ukraine is at a point in its life cycle where Romania accelerated. Barring disruption on the political front, which is possible with a national election coming in March, I think EBITDA growth of well over 30% is possible. Slovakia could benefit from synergies with the much larger operations in the Czech Republic.

I am uncertain about the outlook for 2006 in the Czech Republic. In my opinion, this is the big wildcard for the stock. Presently, I am assuming 6% revenue growth and flat margins. Honestly, as far as I can tell, the 2005 results in the Czech Republic were disappointing. I think the company would agree but would argue that it was a year of investment spending and the comp was tough due to the prior owner maxing out results ahead of the sale. 2006 also faces a tough currency comp during part of the year. I'd like to see the company harvest in 2006 and allow EBITDA margins to expand. If that is the forecast, it will be good news for the shares as the Czech Republic will account for 40% of revenue this year.

Posted by Steve Birenberg at March 1, 2006 10:28 AM in CETV