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August 03, 2006

Central European Media Enterprises Earnings Preview

Due technology issues the following post is being added now even though it was written over 24 hours ago

2Q06 will be a tricky quarter to analyze for Central European Media Enterprises primarily due to the repositioning of its largest station, TV Nova in the Czech Republic. Self-induced changes will push Nova’s year-over-year comparisons deeply negative and as the largest station in the company drag total company comparisons negative. Nova will mask excellent growth in other countries which should be the focus of investors given detailed guidance for Nova’s recovery was provided on the last conference call.

CETV initiated a new strategic direction for Nova this this year after acquiring the station in spring 2005. Nova aggressively raised rates and moved to a modern inventory management system. This was the first attempt at a price increase since the 1990s. Advertisers initially resisted and moved to CETV’s lower rated competitor. CETV has since settled with advertisers and according to local news articles from Prague, it appears that the Czech TV advertising market is responding to CETV’s attempts to modernize it. The Czech Republic is far along in its transition toward becoming an industrialized economy and advertisers appear to agree with CETV’s attempts to bring Western European standards to the advertising sales process....

Unfortunately, the transition means that CETV’s results in the Czech Republic will be under severe pressure this year. This is not news and was well explained by management on the last conference call. On that call management provided full year guidance for the company and for Nova but no quarterly guidance was provided. Analyst coverage is limited so my expectation for Nova to produce revenues of $43 million and EBITDA of $17 million, declines of 41% and 58%, respectively, may not be consistent with whatever estimates exist. TO reiterate, this should be expected by analysts and portfolio managers involved with CETV.

The sharp, self-induced decline at Nova will pull overall revenue and EBITDA growth into negative territory as well. I expect CETV to report overall revenue of $140 million and EBITDA of $52 million. Honestly, I am not sure what street analysts are expecting. Besides the changes at Nova, further investment in Croatia also will contribute to the poor comparison. However, excluding these factors, growth at the four core stations in Romania, Ukraine, Slovenia, and Slovakia should be healthy. I expect revenue growth of 17% and EBITDA growth of 21% in these countries driven by continued growth of 25-30% or more in Ukraine and Romania.

With well established and previously successful local strategies in place in the Czech Republic and Croatia, investors should focus on the growth of the core four stations in assessing the attractiveness of CETV as an investment. The Czech Republic will return to growth in 2007, possibly even in 4Q06, while Croatia losses should peak this year. Consequently, CETV’s growth outlook for 2007 and 2008 is exceptional. I expect revenue growth of 15-20% in each year and faster EBITDA growth as margins expand.

This profile makes CETV a growth stock in any industry and possibly the only growth stock in traditional media now that Univision (UVN) is being taken private. Following its pullback in sympathy with the shellacking in the emerging markets, CETV is trading at 10 times my 2007 estimate, just a modest premium to mature companies likes Disney (DIS) and News Corporation (NWS) with healthy fundamentals. Were CETV to move to 12 times 2007 EBITDA, the stock would trade back to its old highs in the lows $70s, up 20% from current prices. Valued at the same multiple as the UVN buyout, CETV would trade to $100. CETV shares are unusually volatile due to light trading volume and the emerging markets exposure but if you can handle the volatility, the shares are poised to continue to their multi-year run.

Posted by Steve Birenberg at August 3, 2006 12:02 PM in CETV