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December 16, 2005

Trimming Central European Media Enterprises

I was so busy last week at the UBS Media Conference that I failed to get up a post informing clients that I trimmed positions in Central European Media Enterprises (CETV). I've had a long-standing target of low $60s based on 2006 estimates so when the stock first broke through $59 last week, I cut back the position from what was usually the largest individual stock holding in any client portfolio to what I consider a normal-sized holding of 3%. This trimming is consistent with my standard practice of cutting back winning positions as they near long established target prices.

I still think CETV can trade into the $70s if 2006 breaks for the company as I expect it will. Thus, CETV was only trimmed rather than sold completely. Merely rolling forward the current multiple on 2005 estimates to 2006 would get the stock to the $70s.....

The shares now trade for just under 13 times 2006 attributable segment EBITDA adjusting for the losses at the start-up in Croatia. I am zeroing out Croatia for valuation purposes as despite the losses there is value in the license and growing revenue stream. I am looking for 20% EBTIDA growth in 2006 on an apples-to-apples comparison. My key assumptions are: (1) growth of 11% in the Czech Republic following a flat 2005, (2) growth of over 40% in Ukraine on margin expansion and another year of expanding margins, and (3) continued strong growth in the booming Romanian market,, although growth will be closer to 30% rather than the 80% growth in 2005. In general, I see Ukraine as a year or two behind Romania.

Risks to my outlook include the possibility that 2006 turns out to be another year of investment in the Czech Republic, a disruption in Ukraine due to upcoming elections, a larger acquisition that is priced at a premium and/or requires additional equity financing, and a stronger dollar relative to the Euro and other Central and Eastern European currencies.

One of the reasons I am bullish on the stock is the ongoing development of the still immature TV advertising markets in Central Europe. Not only do these markets have much lower per capita ad spend than in Western Europe and consumers that are trading up (from poor to middle class) but integration with European Union media regulation also offers benefits as state-owned TV stations lose share of advertising dollars.

One example of regulation working in favor of TV broadcasters in Europe was revealed yesterday when the EU announced proposed changes to its TV advertising laws that will allow product placement in TV shows and loosen restrictions concerning the timing of commercial breaks. Of CETV's markets, the Czech Republic, Slovenia, and Slovakia are already in the EU, while Romania is scheduled to join in 2007. Croatia has an application pending and Ukraine hopes to join and has received overtures but timing is likely toward the end of this decade.

Posted by Steve Birenberg at December 16, 2005 08:06 AM in CETV