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December 08, 2008

CETV Presents at UBS Media Conference

Central European Media Enterprises (CETV) presented on Monday morning at the 36th Annual UBS Media and Telecom Conference in New York City. The presentation appears to be contributing to a rebound in the shares which are up 13% today to their highest price since mid-November. Also contributing to the rally has been modest strength in the Euro and other Central European currencies and the strong rebound in the market.

CEO Michael Garin led the presentation which I listened to via a webcast. It sounded like a small crowd, not too surprising since CETV presented opposite Comcast. Garin did a quick overview of the presentation the company has recently been using. His remarks were a bit more off the cuff than other recent presentations I have listened to.

The most important takeaways were: (1) 65% of advertisers have committed their 2009 budgets in the Czech Republic, Romania, and Slovakia giving him confidence to state that in these three markets, which generated 120% of 2008 operating profit, the company would enjoy a "significant double digit" gain in local currency advertising revenues in 2009, (2) Ukraine has no visibility and they are making no forecasts but don't assume that means they are going to lose money in Ukraine in 2009, (3) the company has three budgets – moderate growth, recession, and depression – under which it would show EBITDA growth in local currency. The depression budget has local currency growth despite an $80 million, or 8%, hit to revenue, a scenario that the company believes is extremely unlikely....

....Garin also reiterated that the company's advertisers are in the brand building business for consumer staples creating a more stable ad market than most investors assume. He also restated plans to dramatically cut capital spending, limit investment in developing markets (Ukraine, Bulgaria, Croatia), and reduce corporate overhead (20% of London HQ staff has already been laid off). He again outlined the ability of the company to reduce costs due to their huge library of locally produced programming. Expenses also will benefit from the weakness in foreign currencies which is hurting revenues as 80-85% of expenses are in local currencies. Finally, Garin outlined that the company has $318 million in cash and undrawn bank lines which will not go below $200 million until 2012 under virtually any scenario.

I have created a worst case scenario model, with more conservative assumptions than Garin's remarks would suggest, which leaves the stock at 6.6 times projected 2009 EBITDA at current exchange rates. I find this to be an absurdly low valuation when Ukraine, Bulgaria, and Croatia will collectively generate no profits in 2009 implying that they have no value. Put another way, the Czech Republic, Romania, and Slovakia, which will have double digit growth in local currency next year, a year that many investors see as a horrible year, are being valued at mid-single digit multiple providing no premium whatsoever for superior growth and profitability.

Assuming that sometime in 2010-2011 the company gets back to a $400 million plus EBITDA run rate vs. $370 million in 2008 and $260-$330 million in currency penalized 2009, I believe at a minimum the shares would fetch 8 times EBITDA. This works out to $52 per share, more than three times the current price.

I have no idea how other investors will discount this prospect but it is realistic and not based on aggressive assumptions for growth or profitability. My numbers are solid and Garin's defense of the company is eloquent and honest but the stock remains hostage to macro concerns about economic growth in emerging markets and weak currencies.

The biggest risk remains a collapse in economic growth in Central Europe, especially Romania, the company's second largest markets. Currencies likely will tell the tale. As a result the stock remains triple levered to sentiment towards emerging markets, local currency level operating results, and currency translation.

On the way down this was a killer. It will work in favor of the longs on the way back up. The question is just when and from what level.

Posted by Steve Birenberg at December 8, 2008 01:40 PM in CETV