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April 03, 2007

Central European Media Enterprises Update

Central European Media Enterprises (CETV) shares had an outstanding first quarter, gaining 26.4%. Part of the gains recouped a $5 decline from mid-November through year end, a bullish period for the market when CETV would be expected to outperform.

Gains this year are tied to several factors. First, fourth quarter results were quite favorable and management was bullish about 2007 prospects on the conference call. Formal guidance won’t be issued until the company reports 1Q 07, likely on May 3rd, consistent with past practice. Second, even before management's comments several Central European based analysts raised estimates for CETV's largest TV station, TV Nova in the Czech Republic, well above previous guidance provided by management in mid-2006. Finally, investors and media industry observers are finally waking up the fact that Central and Eastern Europe offers the prospect for annual advertising gains of 20% plus for the foreseeable future. ZenithOptimedia reiterated its own optimistic in a recent report picked up by BroadbandTV News:

" ZenithOptimedia has identified Central and Eastern Europe as one of two regions containing the world’s fastest growing ad markets. It expects Moldova’s ad market to expand by 185.7% between 2005-9, while those in Romania, Russia and Slovakia will grow by 160.4%, 143.2% and 106.4% respectively. The value of the ad market in Central and Europe, including all media, is meanwhile expected to almost double from $19,160 million (€14,352 million) in 2005 to $33,428 million in 2009. Internet expenditure is the fastest growing in the world as a whole and is expected to account for 8.7% of the total in 2009. This will put it ahead of cinema (0.5%), outdoor (6.0%) and radio (7.9%) but still a long way behind TV (37.6%)."

As a reminder, CETV operates leading TV stations or networks in the Czech Republic, Romania, Ukraine, Slovenia, Slovakia, and Croatia....

CETV shares are presently trading at 13.4 times my estimate of 2007 Attributable EBITDA. Given my expectation for more than 40% growth this year and at least 15-20% in 2008, I don’t find this valuation challenging. Back in its growth heyday, Univision, with a slower EBITDA growth rate consistently commanded an EBITDA multiple of 15 or more. MY CETV target based on 2007 estimates remains $90-100 based on a 14-15 multiple. If management issues the anticipated strong guidance, I'll be willing to look ahead to 2008 where I expect at least 20% EBITDA growth driven partially by Croatia turning to profitability. Croatia receives no value in my current model. Based on my preliminary 2008 estimates, my target price goes up to $110-120.

Besides falling short in execution, which would be a first for CETV management, the primary risk relates to emerging markets exposure. I believe that the volatility of emerging market equities is a greater risk than the political instability. Central and Eastern Europe aren’t going back toward socialist and extremely corrupt governments. However, political stability can cause uneven results and delays in rolling out new stations or new countries.

For example, yesterday afternoon, new elections were called in Ukraine for May 27th as the pro-Western leader of Ukraine's Orange Revolution, has lost control of Parliament to his foe in the Presidential election and an ally of Vladimir Putin. The former communists may not comply with the call for elections leading to a nasty political standoff that might allow them to regain political control in Ukraine. But that won’t greatly impact the rate of advertising growth in the country where GDP is running ahead 7-8% per year and advertising is rising 25-30% annually.

Political turmoil could upset investors though so keep a close eye on CETV to see if any nervous shareholders give you an opportunity to get long. I'll be staying long regardless of the election outcome.

Posted by Steve Birenberg at April 3, 2007 01:35 PM in CETV