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May 08, 2006

Follow-Up Comments On Central European Media Enterprises Quarterly Earnings

The company's 2006 guidance is actually quite a bit below my prior expectations due to a complete restructuring at TV Nova in the Czech Republic and higher than expected losses at the start-up in Croatia. These two negative factors are partially mitigated by continued outstanding growth in Romania and Ukraine where results in 1Q and probably for the year will be comfortably ahead of my already above consensus expectations.

At Nova, CETV has put the head of its hugely successful Romanian operations in charge with a plan to duplicate the strategy and reignite growth in the Czech Republic which is the company's largest market. To accomplish this task first requires Nova as the market leader to raise advertising pricing in the market. This is a realistic goal as pricing in unchanged since 1999 despite superior GDP growth. Due to low pricing, TV advertising has just a 47-48% share of total advertising in the Czech Republic, below the 55% level in similar markets. Nova's 2006 results will suffer greatly as the company has instituted aggressive price increases which were intitially rejected by advertisers. The station has now completed negotiations and locked in double digit pricing gains. Revenue at Nova will fall 19% this year according to guidance, although aggressive cost cutting will limit the EBITDA decline to just 10%.

Management provided 2007 and 2008 guidance for Nova which I took as an indication of their extreme confidence in their strategy. For 2007, revenue will rise 40% and EBITDA will rise 50% against depressed 2006 levels. For 2008, management forecast an additional gain of 17% in revenue and 25% in EBITDA. Achieving these targets requires margins to move to industry high levels in excess of 60%. Given that margins were 48% in 2005 before any cost cutting or price increases, this doesn’t seem that much of a reach. Nova will also benefit in 2007 and 2008 when $40 million of advertising on state-owned TV will be phased out. As the industry leader, Nova should pick up an incremental $10 million or so in each year at an unusually high margin. Finally, expect launches of additional channels for cable as was done successfully in Romania. These channels can be launched cheaply and enable selling a demographics based package of ads to marketers. This is routine stuff in most European TV markets and is another indication of the relative backwardness of the Czech TV market despite the seemingly advance state of country compared to other Central and Eastern European countries.....

Essentially, CETV is shifting revenue and EBITDA out of 2006 and into 2007 and 2008 in the Czech Republic. The bottom line is that if guidance is met, Nova will have produced a 15% CAGR in EBITDA off its first year of ownership in 2005. This is actually much higher than analysts had previously expected although it requires a step back before two leaps forward.

Assuming Croatia begins a significant turn toward profits in 2006, Slovakia follows the turn at Nova, and Slovenia, Romania, and Ukraine continue on their growth paths, CETV will produce a 20% 3 year EBITDA CAGR off the excellent 2005 results. This is truly outstanding growth and worth significantly more than 11 EBITDA multiple the shares are currently trading at adjusting for the losses in Croatia.

Univision (UVN), the best growth asset in traditional media in the US, currently trades at 16 times 2006 EBITDA and is hoping to get 18 times in a buyout. Even if UVN weren't for sale, it would probably be trading today at 14 times 2006 estimated EBITDA. CETV has a faster growth rate than UVN but is a smaller company, though not small by any means with a $3 billion enterprise value, and operates in riskier markets. I think CETV can easily trade at 14 times 2007 estimates which would move the stock to the mid $80s. Underlying asset value using the 18 multiple asking price for UVN is over $110. CETV is not for sale but looking out to 2008 this is not an unrealistic target if guidance and growth targets are met.

Click the CETV link below to see all prior posts on CETV in reverse chronological order.

Posted by Steve Birenberg at May 8, 2006 09:42 AM in CETV