Recently purchased positions in Central European Media Enterprises (CETV) were sold on Friday at a small loss due to uncertainty over the political situation in Ukraine. The concern is solely short-term as CETV’s long-term opportunity as the leading TV broadcaster in rapidly growing Central and Eastern Europe is an extremely worthwhile investment thesis….

In the last 12 months, CETV earned about 22% of its revenue and operating cash flow in Ukraine. Ukraine has been CETV’s fastest growing market in 2004 with revenue growing approximately 60% and operating even faster off a small base.
Very recent contact with CETV management confirms that thus far there has been minimal impact from the elongated election process in Ukraine. Since campaigning began in October, CETV’s Studio 1+1 has run its regular programming with normal advertsing levels. Even during the turmoil of the past week, operations have remained on track. CETV management feels any outcome short of violence will be a big positive in the long-term for its Ukrainian station as the country is moving steadily toward a stronger economic base.
Northlake’s concern is with the 2005 outlook in Ukraine. As of now, it looks like uncertainty on the government of Ukraine could extend for another month. If multinational advertisers decide to play it cautiously in making early 2005 commitments, CETV’s first quarter could face uncertainty in one of its larger markets.
Northlake views this situation as temporary and would quickly repurchase CETV, even at higher prices, if the situation in Ukraine is resolved without violence. A weak first quarter in Ukraine is not particularly troublesome as it is a seasonally slow quarter. More importantly, Ukraine remains on a path toward economic liberalism and is a huge opportunity with a population of 48 million. Further, all of CETV’s markets (Slovenia, Slovakia, Romania, Croatia, and Ukraine) are early in their economic development and offer GDP growth rates 2 to 3 times that of the U.S. and Western European economies. Advertising growth rates should be at a significant premium to GP growth. CETV is a unique long-term investment opportunity. It is the short-term that might prove worrisome, so moving to the sidelines temporarily seems prudent.