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June 25, 2007
Central European Media Enterprises Joins Russell and Receives Good News In The Czech Republic
Central European Media Enterprises (CETV) rose to a new all-time high on Friday. The shares have been unusually strong over the last few weeks even as the market has pulled back. I suspect that much of the strength is related to the fact that CETV is being added to the Russell indices on this year's rebalancing. But something else may be at work.
I've also noticed strength each morning in Prague where the stock has a secondary listing. CETV's largest TV station is in the Czech Republic and should generate about one-third of revenues and half of EBITDA for the entire company this year. Two factors could be fueling buying by Czech and Central European investors. First, TV Nova has sustained strong ratings this year. Second, and probably more importantly, a compromise has been reached on the awarding of digital TV licenses in the Czech Republic. Late last week a bill cleared a parliamentary committee that will grant three new licenses to CETV and its primary commercial competitor while also allowing six licenses previously awarded to new entrants to escape legal limbo. Additionally, the scheduled elimination of advertising on the state-owned TV has been adjusted but in a manner that should still cut state TV advertising revenue by at least 75%. The only downside for CETV is that the new digital license holders can launch services as soon as they want. I'd be surprised if the new stations were able to gain much market share as initial reach will be only 30% of the population and the analog signals won’t be turned until 2012 lessening urgency for households to upgrade to digital....
Given ratings strength in the Czech Republic, a calming political situation in Ukraine, and strong advertising growth throughout the Central and Eastern Europe region, 2007 is shaping up to be another strong year for CETV. I am currently expecting revenue and EBITDA growth of 28% and 41%, respectively. In 2008, I expect momentum to remain strong with revenue and EBITDA growing 19% and 29%, respectively. This growth has been par for the course since 2002 when CETV had $137 million in revenue and $31 million in revenue. In 2007, revenue should be about $775 million with EBITDA of $285 million. Acquisitions have aided growth but much of the gain has been internally generated. The four original markets of Ukraine, Romania, Slovenia, and Slovakia, which produced all of the revenue and profits in 2002, will earn $466 million in revenue and $179 million in EBITDA this year.
With the shares moving up to all-time highs, CETV's valuation is now at 14 times 2007 estimated EBITDA excluding the losses in Croatia which I ignore now that the station has built enough ratings and revenue momentum that it clearly has positive value. After updating my spreadsheet, I am raising my target on CETV to $130 based on the company maintaining a 15 multiple on 2008 estimates and giving credit for free cash flow of about $200 million I project the company to produce in 2007 and 2008 combined. If you are uncomfortable buying on 2008 estimates, using a 15 multiple on 2007 estimates and free cash flow only, the new target is $105.
I remain a buyer of CETV and would be aggressive if the shares give back some of the gains that were possibly fueled by the Russell Index addition. A major sell-off in emerging market stocks could also knock a quick 20% off the shares but as long as revenue, EBTDA, and margin momentum remains, the shares will bounce back strongly.
I'll bet those guys at Apax Partners who bought half of Ronald Lauder's controlling stake in CETV last summer for $60 are pretty happy. I'll also bet they agree with my analysis.
Posted by Steve Birenberg at June 25, 2007 12:31 PM in CETV
1.Cetv is still going up as per your excellent call.
2.MICC was strongly recommended on videoblog on STREET.COM today[Altucher] as a momentum play.Do you concur?
3.Any thoughts on Netflix,Nintendo and/or MINI?
1. CETV seems to have found a new higher trading range. I would use any weakness to buy more if you don't own enough. I am buying for new accounts today.
2. I like MICC as long as emerging market stocks remain in favor. Over the long haul the value exists for the stock to go much higher so a bear market period for emerging markets should prove temporary but as you know the declines can be swift and painful.
3. Unfortunately I am not familiar with Netflix, Nintendo, or MINI. I have no opinion on each due to lack of knowledge, even rudimentary knowledge.
Posted by: Steve at June 28, 2007 09:41 AMCetv went down $3 today on no apparent reason.it still has tremendous volatility fo such an excellent stock and company.I take it ,you believe ,it is reasonable to purchase some more at this time.
Posted by: at June 28, 2007 04:25 PMI do believe it is a buying opportunity especially since my revised model calls for $104 on 2007 estimates and $129 on 2008. I would expect to be gradually moving toward the 2008 target as the second half of 2007 unfolds. I bought some today for a new account.
I'll be back in my office next week if you want to chat.
Posted by: Steve at June 28, 2007 04:39 PMDOES THE MERGER OF SBSTV AND PROSIEBEN HAVE ANY SIGNIFICANT REPERCUSSIONS FOR CETV?
Posted by: MP at June 29, 2007 06:35 AMI don't think it has much impact on day-to-day operations. SBS and CETV only compete head to head in Romania and CETV is dominant. I think there are positive implications based on the price SBS is selling out for. If CETV got the same plus a premium for its much faster growth and better geogrpahic reach in Central Europe, the buyout would be more like $150. I don't think yesterday's decline in CETV was more than profit taking. It was not related to the SBS buyout in my opinion.
Posted by: Steve at June 29, 2007 07:54 AM1.What do you think of the possible acquisition of VMED by the Carlyle Group/some articles are quoting present bids at $33 to $35 per share.
2.CETV and MICC are still forging ahead as companies.Soon,however,both stocks may run into problems with regard to PRESENT GROWTH when compared to their own previous spectacular numbers.Are there any acquisitions on the horizon for either company which would enable them to continue their present rate of growth? What do you think of the likelyhood of excellent conference calls over the next six months for these two growth companies?
1. I am surprised that prices as high as $33-35 are being discussed for VMED given that earlier rumored deals were at $32 and VMED's fundamental outlook is dramatically worse. Then again, private equity firms have unlimited funds and themath works at $33-35 assuming the financial performance stabilizes. I sold my stock at $26 assuming any deal would be no better than $30. If I were still long I would hold.
2. I don't think either CETV or MICC are expensive relative to their forward growth rates. In fact, assuming they hit numbers I think both stocks are cheap. Growth will slow just because the companies have grown large but current multiples do not reflect past growth so a slowdown is OK especially as the slower growth rate is still at a huge premium to almost any other company you can find. I expect good quarterly earnings from both companies in 2Q and think the conference call swill be fine. 2Q and 4Q are seasonally strongest for CETV due to TV viewing patterns so those would be the calls with the best news. Acquisitions are available for both companies but the question is at what price. Large deals would have numerous bidders driving up the price. That said, I would be happy for either company to expand their reach in a deal that offers more years of growth even if it is slightly dilutive for the first year or two.
Posted by: Steve at July 2, 2007 06:39 PMWHAT IS GOING ON WITH CETV AND MICC.DESPITE A VERY STRONG MARKET IN U.S.,BOTH CETV AND MICC ARE NEGATIVE TODAY.IN FACT,CETV WAS JUST DOWN MORE THAN $2.IS ANYTHING GOING ON IN EUROPE OR IN THE EMERGING MARKETS?
Posted by: mp at July 12, 2007 09:58 AMI have no information that would account for the weakness. I just bought a little CETV for a new client. I notice a few other recent big winnners laggin today such as Google and Apple. Probalby nothing besides short-term traders rotating to retail and other stuff that is due to catch up.
Posted by: Steve at July 12, 2007 10:18 AM