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August 02, 2007

Ukraine Shortfalr Pressures CETV Despite Otherwise Great Results

Central European Media Enterprises (CETV) reported second quarter revenues and EBITDA above estimates. However, the composition of the results caused concern among investors leading to a sharp 5.4% decline in the stock on above average volume. I think investors overreacted and remain very bullish on CETV shares. I was adding to positions in some client and personal accounts yesterday.

CETV report a 38% increase in revenues and EBITDA, both comfortably ahead of my estimates. Second quarter results represented an acceleration form the first quarter when revenues and EBITDA grew 21%. The Czech Republic, Slovakia, Romania, Slovenia, and Ukraine all matched or exceeded estimates. However, Ukraine had a very poor quarter due to political turmoil and weak ratings. First quarter results in Ukraine were also poor.

As a result of the weak first half in Ukraine, continued low visibility with elections coming up on September 30, and uncertainty on ratings in the fall TV season, management dropped the bottom end of its guidance range for revenue and EBITDA. I believe this is the reason for the negative reaction of the shares. Getting less notice was the fact that management did not adjust the upper end of guidance. In other words, management feels that it is possible to make up the shortfall in Ukraine in the other five countries. Given the momentum in those countries revealed in their exceptional second quarter results, I am extremely confident that full year results for all of CETV will be in the upper half of guidance. The bottom line is that despite assuming Ukraine moves from 12% of 2006 EBITDA to a small loss in 2007, CETV will still make at least what I expected prior to the second quarter report.

I still expect CETV to report 30% growth in revenues and EBITDA in 2007 excluding a $10 million investment in developing the company's internet properties. Excluding Ukraine, I expect revenue growth of 35% and EBITDA growth of 55%. High growth should continue in 2008 where I am looking for 18% and 25% growth in revenue and EBITDA excluding Ukraine. Should the September elections lead to a stable government, CETV's results in Ukraine in 2008 are likely to bounce back with revenue growing more than 30% and a return to EBITDA profits even assuming no rebound in ratings. History would suggest that ratings improvement would occur....

CETV is trading at 11 times my estimate of 2008 EBITDA assuming breakeven results in Ukraine and Croatia. Those two markets will have 2008 revenue north of $150 million combined. Ukraine had $21 million in EBITDA in 2005 and $30 million in 2006 while 2008 will represent breakeven for Croatia after several years of significant investment. The 11 EBITDA multiple implies that there is no value to Ukraine or Croatia which is absurd. I am certain that if CETV held an auction for its stations in those two countries, bids would more than $500 million which equals $12 per CETV shares.

Yesterday's stock price decline and the uncertain outlook in Ukraine creates more risk in achieving my $130 target for CETV shares in 2008. However, my experience with this company and its management team since 2001 leaves me confident that the stock will achieve my expectations.

Posted by Steve Birenberg at August 2, 2007 04:32 PM in CETV