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March 01, 2007

Central European Media Enterprises: Even Better Than Expected

I will likely have some follow-up comments on CETV after I check in with management and my key analyst contacts. Below is my commentary as written immediatley following completion of the conference call. The stock traded off because ivnestors are selling assets exposed to emerging markets risk. I think the quarter shows CETV is even stronger than I expected for the long-term so I'll weather whatever storm the market brings as I honeslty believe CETV shares could double ot triple over the next several years if the company hits my forecasts.

As I expected, Central European Media Enterprises (CETV) reported better than expected 4Q06 earnings. Revenue of $214 million exceeded my estimate of $202 million and EBITDA of $99 million beat my $88 million estimate. Romania and Slovakia had substantial upside surprises, while the Czech Republic, Slovenia, and Croatia also beat expectations. Ukraine was short of my estimates but still showed good growth.

Also as expected, CETV deferred comments on 2007 guidance to the 1Q07 conference call in May. CETV has always provided its annual guidance in May and has never provided quarterly guidance. There were some favorable hints and conclusions that can be drawn about 2007 suggesting that my prior expectations were too low. First, in the Czech Republic the prior 15% revenue guidance was indicated to be a minimum level. Even better it was noted that this is local currency growth. At recent exchange rates, currency is 5% favorable over the course of 2007. Second, management said that Croatia would produce a breakeven quarter in 2008 and for the full year of 2009. The tone of comments about Croatia which has been a lagging turnaround was much improved. Third, management feels that TV advertising in Ukraine would be in the 30-35% range in 2007, up from 28-30% in 2006. Management expects CETV to maintain its market share despite a competitive environment. Fourth, the upside surprise in Slovakia looks sustainable and management feels that there is a lot more good news to come from this market. CETV gained full management control of the station in 2006. Finally, management reiterated its long-term growth goal of doubling revenues in 4-5 years with slight margin expansion. This is organic growth solely form the current station group.....

There were a few other key news items from the call:

• CETV's local partner in Ukraine won his case over an ownership dispute. No further appeals are available. This means that CETV is much closer to increasing its economic ownership from 60% and gaining control of the license.
• Management indicated it is looking for acquisitions and specified Russia, Poland, Hungary, Bulgaria, Russia, and Turkey. I didn’t get the impression anything was imminent but this was a more explicit comment that in the past.
• Management would consider adding production assets, especially in Russia and Ukraine.
• €125 million in bonds are likely to be called in May. These bonds are floaters with a current interest rate of 8.5%.

Overall, this was a routine quarter for CETV offering outstanding growth, excellent execution, and superior disclosure. Relative to prior quarters I found things less volatile as far as individual country upside/downside.

I see nothing in the 4Q06 results or commentary that makes me less bullish on CETV. It is my single best idea for near-term and long-term growth. The multiple is quite reasonable, especially against a 15-20% 5 year forward revenue growth rate. If CETV hits those numbers, I think the stock will double or triple from current levels. In the short-term the shares will be impacted by investor sentiment toward emerging markets but I would be using current weakness and any further weakness to buy more shares. I added a tiny bit this morning and would have added more if my position were not full. CETV remains my largest position away from my ETF rotation strategy. I think the shares are headed to $90-100 this year assuming the market cooperates.

Posted by Steve Birenberg at March 1, 2007 04:38 PM in CETV