Central European Media Enterprises (CETV) shares responded positively to its earnings announcement last Thursday as the company reported a solid quarter and maintained a confident and bullish stance on its conference call. As is often the case with CETV’s quarters, there was some variance on a country by country basis, but the overall thesis is firmly intact. I am looking to the seasonally strong 4Q to see broad-based strength across most of the countries the company operates in with a return to very strong growth in Ukraine likely to be a highlight.
In the latest quarter, Romania was the star with revenues up 42% and EBITDA up 102%. This masked slower growth in Slovenia, Slovakia, and Ukraine in the quarter although the results in those countries matched company guidance. CETV has different seasonality this year in terms of comparisons due to an unusually strong 1H04. This suggests growth rates will pick up in 2H05, especially in Ukraine…

…TV Nova in the Czech Republic was only owned for two months in the quarter but produced strong results. Nevertheless, management issued admittedly conservative guidance for Nova to compensate for (1) fears that it was being spruced for sale in 2004, and (2) a desire for CETV to increase investment in new programming and infrastructure to secure the long-term growth and franchise of the cash cow that will finance the company’s expansion in emerging markets like Croatia, Ukriane, and possible future Central and Eastern European markets. Management said that the legislation restricting advertising on state-owned TV channels has not yet been signed into law by the President but would a nice positive. A Czech broker wrote yesterday that they believe a veto is extremely unlikely.
Non-operating news on the call was quite favorable with management noting that it looks like it will be able to gain control of the license in Ukraine as the new government updates the media ownership laws. CETV also said it would like to own a new network in Ukraine if the government allows it. Overall, these comments attest to the upside in Ukraine and support the idea that the transition of the country to a more stable and Western looking entity continues.
I continue to tweak my CETV spreadsheet to adjust for the new ownership in the Czech Republic and the new business plan in Croatia. I am trying to look at 2005 on a pro forma basis as though both those events were in place as of the start to the year. This allows me to focus on growth rates in 2006, which are key to the next leg of the story. Presently, I believe EBITDA growth in 2006 will be 15% for the total company but in the upper teens for just the four core countries of Romania, Slovenia, Slovakia, and Ukraine. EPS should be comfortably above $2 (John Tinker of ThinkEquity is using $2.30). On these figures, I think CETV shares can trade into the $60s which equates to 13 times attributable segment EBITDA and an upper 20s P-E ratio. I think these multiples are achievable given CETV’s sustainable growth rate in the mid-teens and the company’s status as the only pure play on the emerging consumer economies of Central and Eastern Europe.