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February 01, 2009

CETV Update

CETV shares are approaching their November low including a 2-day drop of over 20% last Thursday and Friday. I received a bunch of emails asking for an update.

CETV has been closely tracking currency. As the euro and CEE currencies weaken the stock goes down. The December rally (more than a double) coincided with those currencies strengthening. Besides the huge impact on CETV's US$ reported results I think the currencies reflect the opinion of fundamentals in CEE markets for GDP and advertising. Right now, you have the currencies weakening rapidly indicating that the ad markets are going too be worse than management or some current estimates suggest.

There are other issues. First, several analysts have slashed estimates in local currency, assuming negative year over year growth even in markets where management says they will be positive (most notably the Czech Republic which is supposedly 70% sold for 2009 at positive local currency growth). The new lower estimates lead to a 30-40% decline or in US$ EBITDA due to currency translation. Second, if the low estimates for US$ results are accurate, the company will be very close to or in violation of debt to EBITDA covenants. There is no danger of CETV not meeting their obligations but technical covenant violations are not good news for any stock at any time. Third, the one year early exit of CEO Michael Garin leaves the company thin and without an American in the senior ranks. I think new COO and de facto CEO Adrian Sarbu and his operating team are superb but communication with and confidence of the street is lacking. Fourth, the company's 2008 expansion into Bulgaria and increase in ownership in Ukraine was poorly timed and now looks very expensive. Bulgaria looks like a waste of $170 million ($4.50 per share) given the need to build from the ground up against established competitors owned by Western companies. Ukraine still should be a huge market five to ten years down the road but right now it is considered a defaulted country and has no or negative value in investor eyes. The gas dispute, IMF bailout, and never ending political turmoil reinforce the negative perceptions and eliminate a positive view of the future....

....On the low end estimates, the stock trades at 6 times EBITDA fully loaded for corporate overhead. Market cap is just $400 million. What I find so frustrating is that the stock trades as though the business will never grow again. In a normal economic environment, local currency growth should be 10-15% at least for several more years. In a normal environment, the currencies strengthen. Just as the US$ numbers have collapsed they can double or more in a short period of time.

Also, despite the aforementioned issues in Ukraine, the assets have value of at least several hundred million, and a lot more in a stable environment. In 2009 Ukraine might lose $25 million. At 6 times EBITDA that is negative value of $150 million or $3.75 per share for an asset that could be worth $10-20 per share. Similar math can be done on Croatia which is operating around breakeven and has value of at least $100 million, maybe double that. Even Bulgaria has value as it produces EBITDA losses.

I think the stock is way too cheap. I am not sure what turns it around on a trading basis besides a weaker dollar. Maybe the company needs to cave on guidance so that the bar is lowered so far that value players can enter. Maybe an asset needs to be sold to strengthen the balance sheet and realize value for a non-EBITDA producing asset (unlikely). Mostly it is a macro play. Right now that makes it an easy sell and an easy short. Until that setup is more balanced it is a tough buy but I remain confident that when the macro situation straightens out the stock will be 3-5 times the current price quickly. The move from $9 to $24 in December is a reminder of what the upside can be.

Posted by Steve Birenberg at February 1, 2009 10:47 AM in CETV