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January 18, 2007

Central European Media Enterprises: I Have Company For My $100 Target

Central European Media Enterprises (CETV) broker out to new highs this week following an upgrade from Czech-based analyst Tibor Bokor of Wood Company. Tibor sharply raised his estimates for 2007 and 2008 and increased his price target to $100. Tibor's new optimism is based on his analysis of the likely 2007 and 2008 resutls for CETV's largest TV station, TV Nova in the Czech Republic. Tibor has established EBITDA estimates for Nova in 2007 and 2008 of $160 million and $212 million, respectively, versus his prior estimates of $109 million and $135 million and management guidance of $135 million and $170 million. In other words, Tibor has gone from a bear to a raging bull on CETV's largest asset which will account for around 50% of estimated 2007 EBITDA....

As a reminder, CETV acquired Nova is 2005 for about $900 million. In early 2006, a change in Nova's advertising sales strategy was implemented that caused 2006 EBITDA to decline as estimated 20% from 2005. Management promised renewed growth beginning in 2007 with another big year in 2008. The major reason for the strategy change was that TV advertising rates in the Czech Republic were unchanged from 1999 despite significant growth in GDP. Unfortunately, the timing of Nova's shift was poor as the network had a highly unusual hiccup in its dominant ratings performance. Nova's #1 competitor gained share and then undercut Nova's attempt to raise prices.

Advertisers were always willing to accept some price increases in the Czech Republic as they were well aware TV advertising was significantly underpriced. In the second half of 2006, Nova's ratings dominance returned and the station's position with advertisers was re-established. The timing is now working in Nova's favor as state-owned TV stations are required by law to begin to eliminate commercials in 2007. Additionally, the launch of digital channels has been delayed at least one year, keeping another competitor out of the market.

Tibor was initially concerned that Nova's strategy change would backfire on a long-term basis. That was something I was never worried about given my experience with the CETV management which ahs always delivered as promised. Tibor now sees that the strategy decision is going to work so he lifted his market share for Nova by 10% in a TV ad market that is expected to grow by 7-8% in 2007. US investors further benefit form the fact that the Czech Koruna is presently aobut 7% stronger vs. the U.S. dollar than a year ago.

Put all this together, and Tibor's assumption that Nova's EBITDA will grow by more than 60% in 2007 and 32% in 2008 is very plausible. Further confirmation of the above guidance forecast could come in early March when I expect CETV to announce that Nova has beaten the upwardly revised guidance of $95 million in EBITDA for 2006.

Strong performance by Nova in 2007 and continued growth north of 20% for CETV's stations in Ukraine, Romania, Slovenia, and Slovakia easily justify the recent move in the shares. I stand by my long-time target of $100 for CETV in 2007. And if the company tracks toward the 2008 estimates in my spreadsheet, there is plenty of upside beyond $100. For now though, it is nice to have some company at $100.

Posted by Steve Birenberg at January 18, 2007 09:18 AM in CETV