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September 22, 2006

Central European Media Enterprises: Analyst Meeting Goes Well and Affirms Near-Term and Long-Term Upside

I spent last Thursday at the annual analyst meeting for Central European Media Enterprises (CETV). The news was good as CETV slightly raised EBITDA guidance due to more rapid than expected improvement at TV Nova in the Czech Republic. Results at this station are the most critical aspect of the CETV story for the next several quarters, so the increased guidance is a strong positive. The company also reaffirmed guidance at its core four stations in Slovenia, Slovakia, Romania, and Ukraine. Romania and Ukraine remain the long-term growth engines so affirmation of guidance in these high growth markets is also good news for investors. Below is a detailed recap of the analyst meeting:

This year’s meeting was in NY. All the previous meetings had been in Europe, so this was my first time attending. CEO Michael Garin stated that with 82% of the shareholdings are in the US so it was time to hold the meeting here. There were about 100 people in attendance, an amount I found to be surprisingly high. CFO Wallace Macmillan told me that in the prior meetings in Europe attendance was generally around 40 people with a majority from European institutions.

The meeting agenda had Garin giving an overview followed by presentations from the operating managers in each individual country. Each presentation recapped general economic information on the country, its advertising market, and its political environment. Updated 2006 guidance was also provided for each country.

Overall, management maintained EBITDA guidance for the 2006. However, adjusting for a few items, EBITDA guidance actually went up by $5 million. All of the increase is due to TV Nova in the Czech Republic. This is by far the company’s largest business (about 40% of EBTIDA) and following the introduction of a new strategy that was one big step back (2006) followed by two huge steps forward (2007 and 2008), the guidance increase was very welcome. The key takeaway is that the new strategy appears to be working and previously provided detailed guidance for Nova for the next two years looks extremely realistic, if not low. Additionally, Nova’s ratings are off to a great for the fall TV season, while its primary competitor is not delivering its ratings guarantees. If those trends hold, the new guidance still has upside.

For the core four stations of Romania, Ukraine, Slovenia, and Slovakia, management maintained guidance for 2006 EBITDA of $130 million....

I was actually hoping these four stations would produce closer to $135 million. I still think that is possible, especially since revenue guidance at these four stations is now $14 million above my prior estimate. Essentially, the company appears to be reinvesting in locally produced programming in order to secure its market share leadership in these markets. A bear might say that these markets are becoming more competitive but given the underlying growth rate of advertising expenditures in each market, I think that sacrificing a little margin is a smart move. The company showed ratings data for the first few days of the fall season in each market which might suggest that the EBITDA guidance is conservative but it is too soon in the new season to extrapolate. If ratings hold, I expect the company might be willing to slightly raise guidance on the third quarter conference call.

CETV did state that losses in Croatia would be $1 million higher than expected. This has been a difficult market for CETV as it is attempting a startup vs. well established commercial and state competitors. Ratings are coming up following lots of investment but the general manager of the station told me that he didn’t expect losses to moderate in 2007 although revenues should gain. He appears to believe in the upside and is willing to bet that he can raise ratings further and possibly even take top market share. I wonder whether the Board is willing to endure the losses in Croatia but given past success in similar countries I think they will tough it out.

Another $4 million in losses will be incurred in Ukraine as the company launches a second network. These losses should drop sharply next year according to the head of the station. Ukraine is an enormous opportunity with 47 million people and per capita advertising expenditures of just $6. I am strongly in favor of additional investment in this market.

While CETV appears to be continuing its multiyear run of superior operating results, investors should stay focused on the long-term opportunity. The company presently serves six countries with a population of 91 million. As a group, the six countries produce GDP of about $430 billion with growth rates of 4-6% this year. Advertising spending is growing very rapidly in these markets (Ukraine and Romania +30%, Slovakia +10%, Croatia +10%) driven by rapid foreign direct investment and rising wages and incomes. Per capita advertising in CETV’s markets averages just $11 vs. $27 for all of Central Europe and $74 for Western Europe.

CETV is a direct, pure play on rapidly developing consumer economies in Central and Eastern Europe. Investors can access this growth by investing in CETV which is a US company with GAAP accounting and incredibly detailed quarterly financial disclosure. CETV is the only true organic growth stock in traditional media, more than compensating for the emerging markets risk. I think the shares will double again in the next two to three years.

Posted by Steve Birenberg at September 22, 2006 06:27 PM in CETV