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January 21, 2005

Buying Central European Media Enterprises Again

Central European Media Enterprises (CETV) was repurchased yesterday per my plan to wait for a pullback to the mid-$30s and a resolution in Ukraine, both of which occurred this week...

Key Points

* Price decline and a good outcome in Ukraine set up a buying opportunity.

* CETV is a direct play on emerging consumer economies in Central and Eastern Europe.

* Primary near-term risk is the financing of an acquisition in Czech Republic but this could also raise the profile of this underowned and underfollowed stock.

CETV Acquires TV Nova

CETV is the largest television broadcaster in Central and Eastern Europe with leading stations in Slovenia, Slovakia, Ukraine, Croatia, Romania and the Czech Republic. The company recently announced a major acquisition of TV Nova in the Czech Republic. The acquisition is atractively priced at about 10-11 times operating cash flow. Nova will represent almost half of 2004 estimated pro forma attributable EBITDA of $112 million. Nova and the Czech Republic are mature compared to CETV's other markets, so the acquisition trades a slightly lower overall corporate growth rate for more stability. Nova still offers growth of 8% to 15% in operating cash flow, but that is below the 20% growth rates likely in CETV's other markets.

CETV will need to raise about $300 million to finance the acquisition. The company can easily borrow the money without straining the balance sheet. However, I think some equity might used to preserve flexibility if other acquisitions become available in the region. New equity issuance can depress share performance temporarily but it also is an opportunity for a smaller company to raise its profile. CETV has minimal Wall Street coverage and none from major firms. Any equity offering would likely be through a big firm that would introduce the company to all the major mutual funds, hedge funds, and money managers.

CETV Benefits From Favorable Yushenko Victory in Ukraine

CETV was sold around Thanksgiving due to the election uncertainty in Ukraine. Ukraine represented over 20% of 2004 estimated attributable EBITDA prior to the Nova acquisition. Fortunately for CETV, the outcome in Ukraine is about as good as could have been expected. The opposition leader, Yushenko, won an election that was deemed clean by all observers and validated by the Ukrainian Supreme Court. Best of all, major countries and leaders throughout Western, Central and Eastern Europe all expressed support for Yushenko and pledged to assist the transition of Ukraine to a capitalist democracy.

Ukraine had the highest GDP growth in Europe in 2004 at 12%. I still expect a slight shortfall in Ukraine in the 4Q04 and restrained 1Q05 guidance. However, investors will rightly look past this period and see a nation of 48 million people just beginning its evolution as a consumer-based economy.

CETV To Prosper From Emergence of Central and Eastern Europe

CETV is an excellent play on the now widely acknowledged upturn throughout Central and Eastern Europe. Television advertising should be an early cycle way to play the region as local and multi-national companies look to establish early brand identity and loyalty with newly emerging consumers.

Valuation and Target Price

Like most media stocks, I value CETV on the basis of enterprise value to EBITDA. CETV shares are trading at 13.7 times 2004 pro forma estimates, an appropriate multiple for this high growth company (estimated 2005 pro forma EBITDA growth of 17%). Hispanic media assets in the U.S. with lesser growth rates trade at similar or higher multiples. Assuming CETV holds this multiple on 2005 pro forma estimates, my target price is $43, offering 20% upside.

Posted by Steve Birenberg at January 21, 2005 10:21 AM in CETV