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May 04, 2007
Good Quarter and Great Guidance From Central European Media Enterprises
1Q07 results and 2007 guidance from Central European Media Enterprises (CETV) are very positive. My bullish interpretation was further reinforced following the conference call and a quick read of the 10-Q. I think the guidance was the primary reason the shares moved up $5 yesterday. I am not done with my spreadsheet yet but I expect my revised target to be $120 assuming 2007 guidance is met and 2008 is a 15-20% up year. The story is very much intact and substantial upside beyond $120 is very plausible in 2008 and 2009.
CETV reported revenue of $148 million and EBITDA of $40 million, representing growth of 22% in both cases. Results were really good in the Czech Republic, Slovakia, and Romania. Slovenia and the start-ups in Croatia and Ukraine were as expected. Ukraine has a significant but well explained shortfall.
Guidance was very strong across the board. The company is no longer providing country-by-country guidance for competitive reasons. The established markets of the Czech Republic, Romania, Ukraine, Slovenia, and Slovakia are being grouped together while Croatia and the Ukraine start-ups are being itemized. Aligning my spreadsheet similarly shows that the established markets are way ahead of street estimates and exceed my most aggressive estimates for revenue and EBITDA. Revenues in Croatia and the Ukraine start-ups are ahead of my estimates as is the EBITDA loss. Foreign currency assumptions are that 1Q07 ending levels are maintained for the rest of the year. The other major assumption is that despite 1Q weakness in Ukraine the country's primary station will grow in line with forecasted 2007 TV ad market growth of 28-31%....
Ukraine represents the primary risk to guidance but CETV has historically been conservative with guidance so there is probably some cushion in non-Ukraine markets to take up any slack. Ukraine faced an unusually tough comparison that saw 1Q06 revenue growth of 77% and EBITDA grow from $2 million to $11 million. $8 million in political advertising related to the March 2006 elections and the debut of Ugly Betty in Ukraine was the source of the tough comparison. Additionally, during 1Q ongoing political turmoil in the country led advertisers to hold back on their commitments and all TV stations responded by cutting pricing. Management believes that advertisers have not cut their full year budgets and that any shortfalls will be made up in the fall season. Major advertisers are already returning with March, April, and especially May results looking much better. Barring more serious political turmoil management's forecast seems plausible but not without risk.
Backing into likely budgets in the other countries, it seems obvious that the new strategy is performing well ahead of initial guidance, boosted further by excellent ratings. A big part of the move in the stock in 1Q was related to analysts raising numbers for Czech Republic beyond guidance. Those moves turned out to be accurate. In Romania, growth remains robust as modest rating deterioration is not impacting monetization as the lost viewers can’t be monetized by stations with tiny reach that age gaining viewers. CETV also continues to add to its stable of networks in Romania. Slovakia is booming as gaining management control, great ratings, and benefits of the synergy with the Czech Republic are providing much faster and larger than expected returns. Croatia's revenue growth has accelerated sharply the last two quarters suggesting long-term returns will be there. As a result, I won’t quibble with increased investment. Slovenia is a more mature market but should be able to sustain moderate growth due to above average GDP growth. Cost control across the entire portfolio is very good, especially on SG&A. Programming expenses are also under control, especially in the Czech Republic.
CETV also announced a Euro 150 bond offering with proceeds for general corporate purposes. Increased ownership in Romania and Ukraine was mentioned and would be greeted very positively, especially in Ukraine where it would come with control of the license. I am pleased to see the company add leverage and not dilute shareholders. The balance sheet is underleveraged at just 2 times EBITDA and free cash flow is becoming significant and growing.
The bottom line is that CETV remains the best growth story in media. The 2007 guidance supports substantial increases in estimates as well as a premium valuation. Barring a collapse in emerging market equities, CETV shares are headed much higher.
Posted by Steve Birenberg at May 4, 2007 10:12 AM in CETV
