Central European Media Enterprises (CETV) rose to a new all-time high on Friday. The shares have been unusually strong over the last few weeks even as the market has pulled back. I suspect that much of the strength is related to the fact that CETV is being added to the Russell indices on this year’s rebalancing. But something else may be at work.
I’ve also noticed strength each morning in Prague where the stock has a secondary listing. CETV’s largest TV station is in the Czech Republic and should generate about one-third of revenues and half of EBITDA for the entire company this year. Two factors could be fueling buying by Czech and Central European investors. First, TV Nova has sustained strong ratings this year. Second, and probably more importantly, a compromise has been reached on the awarding of digital TV licenses in the Czech Republic. Late last week a bill cleared a parliamentary committee that will grant three new licenses to CETV and its primary commercial competitor while also allowing six licenses previously awarded to new entrants to escape legal limbo. Additionally, the scheduled elimination of advertising on the state-owned TV has been adjusted but in a manner that should still cut state TV advertising revenue by at least 75%. The only downside for CETV is that the new digital license holders can launch services as soon as they want. I’d be surprised if the new stations were able to gain much market share as initial reach will be only 30% of the population and the analog signals won’t be turned until 2012 lessening urgency for households to upgrade to digital….

Given ratings strength in the Czech Republic, a calming political situation in Ukraine, and strong advertising growth throughout the Central and Eastern Europe region, 2007 is shaping up to be another strong year for CETV. I am currently expecting revenue and EBITDA growth of 28% and 41%, respectively. In 2008, I expect momentum to remain strong with revenue and EBITDA growing 19% and 29%, respectively. This growth has been par for the course since 2002 when CETV had $137 million in revenue and $31 million in revenue. In 2007, revenue should be about $775 million with EBITDA of $285 million. Acquisitions have aided growth but much of the gain has been internally generated. The four original markets of Ukraine, Romania, Slovenia, and Slovakia, which produced all of the revenue and profits in 2002, will earn $466 million in revenue and $179 million in EBITDA this year.
With the shares moving up to all-time highs, CETV’s valuation is now at 14 times 2007 estimated EBITDA excluding the losses in Croatia which I ignore now that the station has built enough ratings and revenue momentum that it clearly has positive value. After updating my spreadsheet, I am raising my target on CETV to $130 based on the company maintaining a 15 multiple on 2008 estimates and giving credit for free cash flow of about $200 million I project the company to produce in 2007 and 2008 combined. If you are uncomfortable buying on 2008 estimates, using a 15 multiple on 2007 estimates and free cash flow only, the new target is $105.
I remain a buyer of CETV and would be aggressive if the shares give back some of the gains that were possibly fueled by the Russell Index addition. A major sell-off in emerging market stocks could also knock a quick 20% off the shares but as long as revenue, EBTDA, and margin momentum remains, the shares will bounce back strongly.
I’ll bet those guys at Apax Partners who bought half of Ronald Lauder’s controlling stake in CETV last summer for $60 are pretty happy. I’ll also bet they agree with my analysis.