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August 01, 2007

Central European Media Enterprises Earnings Preview

Central European Media Enterprises (CETV) reports second quarter earnings tomorrow morning. CETV is the largest TV broadcaster dedicated to serving Central and Eastern Europe and owns leading TV stations in the Czech Republic, Slovakia, Romania, Slovenia, Croatia, and Ukraine. CETV is a sizable US company controlled by Ronald Lauder and Apax Partners. The current market cap is $3.8 billion. The company is modestly leveraged with net debt of $325 million. I am expecting 2007 sales of over $750 million and EBITDA of more than $300 million. My model has CETV trading at 11 times 2008 EBITDA. Foreign exchange fluctuations make earnings a crapshoot but my attempt at smoothing calculates EPS north of $3.00 this year.

Revenue and EBITDA has grown rapidly over the past five years as advertising in these markets has grown at rates well in excess of upper single digit GDP growth. With CETV, you get immature and rapidly growing advertising markets, excellent management, GAAP accounting, and a media market where traditional TV stations still dominate and still have room to gain advertising share. I like to compare the Central and Eastern European TV markets to the US prior to the advent of cable TV. Back then, TV was growth industry. In Central and Eastern Europe it still is.

I expect good 2Q results for CETV with revenues rising greater than 20% and expanding margins driving a larger gain in EBITDA....

The Czech Republic, Slovakia, and Romania should be the strongest performers. The Czech Republic and Slovakia could enjoy EBITDA growth north of 40%, while Romania comes in around 30%. A restructured ad market in the Czech Republic and new management in Slovakia are behind the big increases. Romania is just staying on trend.

The weak point could be Ukraine where the combination of political turmoil and weaker ratings should cause a negative comparison and might even lead to a small EBITDA loss. Croatia should show that it has turned the corner on revenue growth ahead of profitability in 2008. Slovenia is CETV's most mature market but should still show gains in the mid-to-upper single digits.

I expect CETV to reiterate guidance laid out on its 1Q07 conference call. The composition may change with higher estimates for the Czech Republic, Slovakia, and Romania offsetting sharply reduced expectations for Ukraine. Country-by-country volatility around a steady 20% plus organic growth uptrend is the norm at CETV.

CETV shares are volatile to begin with and around earnings volatility usually rises. Barring a highly unexpected change in underlying trends, I expect CETV's results to confirm the numbers in my spreadsheet which calculates a 2008 target of $132.

Posted by Steve Birenberg at August 1, 2007 02:16 PM in CETV