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November 08, 2006

Looking For A Good Quarter and Optimistic Guidance from CETV

Tomorrow, I expect Central European Media Enterprises (CETV) to report another strong quarter in its seasonally weak 3Q. Romania and Ukraine will again be the growth engines but the big story will be the turnaround at TV Nova in the Czech Republic. In 1H06, CETV reset expectations and initiated a new strategy at Nova designed to insure long-term growth by raising advertising prices and modernizing the advertising market in the Czech Republic. Prices are largely unchanged since 1999 despite massive growth in the Czech economy. The reset caused 1H06 revenue and profit to fall by 25% and 40%, respectively, in CETV's largest market. At its September analyst meeting, CETV raised guidance at Nova and the implied 3Q guidance would call for flat revenue growth and rising EBITDA. Since that meeting, Nova has continued with excellent ratings performance so I expect a good result in this crucial market. In fact, I think it is possible that 2006 guidance for Nova will be raised further. The company is already on record with solid double digit growth guidance for Nova in 2007 and 2008. I would expect that guidance to be maintained although the absolute revenue and EBITDA projections look conservative. It is just too early to increase out year numbers....

With Romania and Ukraine likely to continue growth in the 20-30% range and Slovakia to accelerate with a tailwind from the Czech Republic, CETV looks poised to continue growing very rapidly. I expect corporate revenue growth of over 20% in 2007 with the big turn at Nova leading to EBITDA growth of over 40%. This type of growth in traditional media is not available in any other public company and CETV shares are deserving of a premium valuation similar to where < b>Univision (UVN) has historically traded. At a mid-teen's EBITDA multiple on my 2007 estimates, CETV shares are worth over $90.

There are a couple of other things to keep mind regarding 3Q. First, margins in the seasonally strong 2Q were a little lower than I expected. CETV seems to be investing in local content to sustain its ratings leadership. I see no problem with this but if margin pressure grew I might adjust my long-term EBTIDA growth downward. Second, at its September meeting, CETV announced a new small network launch in Ukraine that will produce about a $4 million loss this year. I also have no problem with this as Ukraine has huge upside potential (its population is 70% larger than Romania but 2006 EBITDA will be less than half of Romania). The general manager of the Ukraine operation seemed very confident that losses would recede sharply in 2007 but I think it is possible that further network launches in Ukraine are possible. Finally, CETV's one failure so far has been in Croatia where greater than expected losses have been incurred. I am not sure how much patience the company has for losses in Croatia although relative to the larger corporate entity the absolute dollar amounts are not large. I hope for an update on the 2007 plan in Croatia.

Overall, I expect a good quarter with a strong possibility that guidance goes up further for 2006. CETV shares are on a roll. They put in a nice bottom over the summer when Apax Partners agreed to buy half of Ronald Lauder's control stake at $60. Apax is a top tier private equity firm and they didn’t buy into CETV looking for 30%. In fact, the agreement with Lauder gives them the right to reject buyout bids at less than $120 for the next three years. I think that gives us an idea of what upside they expect in CETV. I agree.

Posted by Steve Birenberg at November 8, 2006 10:37 AM in CETV