Central European Media Enterprises Rating: Buy

Transcription

1 SATELLITE, CABLE & BROADCASTING David B. Kestenbaum Julia A. Heckman Company Update / Estimates Change October 22, 2007 Key Metrics CETV - NASDAQ $ Pricing Date 10/19/2007 Price Target $ Week Range $ $66.93 Shares Outstanding (mm) 41.4 Market Capitalization ($mm) $4, Mo Average Daily Volume 163,505 Institutional Ownership 50% Debt/Total Capital 34.4% ROE 3.3% Book Value/Share $25.43 Price/Book 4.2x Dividend Yield NM LTM EBITDA Margin NM EPS($) FY: December Prior Curr. Prior Curr. 2006A 2007E 2007E 2008E 2008E 1Q-Mar (0.38) -- (0.01)A Q-Jun A Q-Sep E 0.11E Q-Dec E 1.75E FY E 2.91E 4.27E 4.31E P/E NM 36.4x 24.6x Revenue($mm) Prior Curr. Prior Curr. 2006A 2007E 2007E 2008E 2008E 1Q-Mar A Q-Jun A Q-Sep E 146.7E Q-Dec E 295.2E FY E 806.1E 913.6E 974.8E 1 Year Price History for CETV Q3 Q1 Q2 Q Created by BlueMatrix Company Description: Central European Media Enterprises ( is a TV broadcasting company with leading networks in six Central and Eastern European countries reaching an aggregate of approximately 82 million people. The company's television stations are located in Croatia (Nova TV), Czech Republic (TV Nova, Galaxie Sport), Romania (PRO TV, Acasa, PRO Cinema), Slovakia (Markíza), Slovenia (POP TV, Kanal A) and Ukraine (Studio 1+1). CME is traded on the NASDAQ and the Prague Stock Exchange under the ticker symbol "CETV." Central European Media Enterprises Rating: Buy Back from Bucharest; And the News is Good Investment Highlights: Back from Bucharest after an upbeat analyst day; we remain positive on CME's future. Overall, we left Bucharest very upbeat about the LT growth potential for CME, particularly given the company's continued ability to: 1) retain dominant market share across its portfolio; 2) increase its ownership stake in markets that are not yet 100% owned; and 3) grow total revenues and EBITDA at double-digit rates via operational execution. Reiterate Buy and $114PT. Ukraine guidance for 2007 well above our estimate; market represents the fastest-growing LT opportunity, in our view. For 2007, the company raised guidance for Ukraine to $25.0mm-$35.0mm, well above our previous estimate of $11.5mm. We believe the market represents the company's largest opportunity for growth, particularly as CME works to increase its ownership stake and, potentially, acquire additional stations there. Deal timing uncertain but we're still positive on the opportunity to improve margins alongside increased ownership. Management stated that closure could take anywhere between two months to two years. We remain positive on the deal given: 1) the company's ability to smooth operational efficiencies with more effective control; and 2) the planned partnership with influential businessman Igor Kolomoisky, which should help speed the deal timing and facilitate further deal making in the market.. Adrian Sarbu promoted to COO; can't argue with his track record of success. To date, Sarbu has led the Romanian stations to tremendous growth and overseen the turnaround of the company's Czech and Slovak Republic operations. Given his track record, we believe Sarbu will continue to serve the company well in his new position. However, while we believe he has lined up a credible management team to fill his place in Romania, we are slightly wary of his step back from the day-to-day operations there. We're hopeful for Turkey but the competition is fierce. Ultimately, winning the bid is probably a long-shot for CME. However, we are encouraged that the company has found a strong local partner that it could potentially work with. The bidding for the station has been pushed back until December from early November. Increasing estimates. We are increasing our 2007 revenue and EBITDA estimates for Ukraine to $118.0mm and $26.3mm from $95.4mm and $11.5mm previously. Finally, our total revenue and EBITDA estimates move to $806.1mm and $303.7mm from $780.6mm and $295.7mm. The Disclosure section may be found on pages 6-7 of this report. The Valuation section may be found on page 6 of this report.

2 Back from Bucharest after an upbeat analyst day; we remain positive on CME's prospects. Overall, we left Bucharest very upbeat about the long-term growth potential for CME, particularly given the company's ongoing ability to: 1) retain dominant market share in each of its six markets; 2) increase ownership stakes in the markets that are not yet 100% owned; and 3) grow total revenues and EBITDA at double-digit rates via operational execution. While we were impressed with the state of each of the company's six markets, the increased guidance for Ukraine proves, in our view, that the market is turning around and is currently CETV's largest growth opportunity. Reiterate Buy and $114PT. Ukraine guidance for 2007 well above our estimate; we believe this market represents the largest and fastest-growing opportunity for CME over the long-term. At 46mm, Ukraine's population is the largest of all of CME's markets, and additionally, it has a substantial number of television households (18.5mm) and a TV advertising market that is expected to grow 30% over the long-term. As such, we believe the market represents the company's largest opportunity for growth over the next five to ten years, particularly as CME works to increase its ownership stake and potentially, acquire additional stations there. For 2007, the company raised guidance for Ukraine to $25.0mm-$35.0mm, well above our previous estimate of $11.5mm. We expect the company to provide further clarity on this range when it reports earnings in November. During 3Q07, Studio 1+1, the Ukrainian station, booked $17.0mm of political advertising, which is higher than our prior total estimate for the quarter. Timing of Ukrainian deal uncertain; we remain favorable on the terms and the company's ability to improve margins and profitability alongside increased ownership. On the ownership side, the company's deal to acquire an additional 22% ownership (which would increase its stake to 82% from 60% currently) remains pending and largely uncertain. Management stated that closure could take anywhere between two months to two years depending on the pace of the legal and negotiating process. Overall, however, we remain very favorable on the deal given: 1) the company's ability to smooth operational efficiencies with more effective control; and 2) the planned partnership with influential businessman Igor Kolomoisky, which should help speed the timing of the closure. Mr. Kolomoisky owns a stake in a smaller TV station, with roughly 4% market share, which we believe could eventually be folded into the CME portfolio. Adrian Sarbu promoted to COO; we can't argue with his track record of success. To date, Sarbu has been primarily responsible for running the highly successful Romanian operations and managing the turnaround of the company's Czech Republic and Slovak Republic operations. Given his track record, we believe Sarbu will continue to serve the company well in his new position. However, while we believe he has lined up a capable management team to fill his place in Romania, we are slightly wary of his step back from the day-to-day operations there. While we remain hopeful on the Turkish bid, the competition is fierce. Ultimately, winning the bid is probably a long-shot for CME. However, we are encouraged that the company has found a strong local partner in the market. While, in our view, Turkey is certainly an enticing market for CME given its 74mm population and younger demographic, the rules in Turkey mandate a 25% ownership cap, which we believe adds risk to the transaction since the company could not then have effective managerial control of the station. Slovenian operations waiting to see the impact, if any, of the Modern Times strategy. Modern Times, the owner of CME's largest Czech competitor (Prima), recently entered Slovenia as the third major player in the market. As such, CETV has been more aggressive with its programming strategy in the market. To date, however, the company has yet to see much competitive impact and is still waiting to see how much reaction 2 MORGAN JOSEPH & CO. INC.

3 will be in the market from the additional entrant. We think CME's New Media strategy is heading in the right direction. Management's long-term Internet strategy goal is to become the top three Internet destinations in each of its markets. To date, CME has become the number one news portal in Slovenia and Croatia, and additionally, is number four in Romania. Overall, while it is still a relatively nascent initiative, we expect Internet could become a critical component of operational growth going forward. While we have yet to include Internet contribution into our model, we note the potential for this strategy to become a substantial operational catalyst over the long-term. Increasing Ukraine estimates on better-than-expected EBITDA outlook. Given the substantial upside to our current estimates, we are increasing our 2007 revenue and EBITDA estimates for Ukraine to $118.0mm and $26.3mm from $95.4mm and $11.5mm previously. As such, our total revenue and EBITDA estimates move to $806.1mm and $303.7mm from $780.6mm and $295.7mm, respectively. 3 MORGAN JOSEPH & CO. INC.

4 Central European Media Enterprises - Quarterly and Annual Income Statements E ($ in millions) Q05 2Q05 3Q05 4Q Q06 2Q06 3Q06 4Q Q07 2Q07 3Q07E 4Q07E 2007E 2008E Total Revenues $182,339 $48,304 $113,109 $87,067 $152,498 $400,978 $119,754 $156,589 $112,482 $214,290 $603,115 $147,912 $216,284 $146,684 $295,206 $806,087 $974,772 Yr/Yr Change in $ Revenue 53.8% 34.7% 152.0% 138.3% 134.4% 119.9% 147.9% 38.4% 29.2% 40.5% 50.4% 23.5% 38.1% 30.4% 37.8% 33.7% 20.9% Qtr/Qtr Change in $ Revenue NA -25.8% 134.2% -23.0% 75.2% NA -21.5% 30.8% -28.2% 90.5% NA -31.0% 46.2% -32.2% 101.3% NA NA Station Expenses Other Operating costs and Expenses $33,615 $11,285 $18,117 $15,331 $20,405 $65,138 $22,972 $26,042 $22,073 $18,973 $90,060 $25,657 $30,944 $33,871 $47,970 $138,442 $160,000 Amortization of Programming Rights 71,793 22,322 32,081 40,470 53, ,837 48,418 52,850 47,920 78, ,509 66,353 82,773 57,960 85, , ,862 Percentage of Revenues 39.4% 46.2% 28.4% 46.5% 35.4% 37.1% 40.4% 33.8% 42.6% 36.5% 37.7% 44.9% 38.3% 39.5% 29.0% 36.3% 35.1% Depr. of station fixed assets and other intang 6,663 2,213 4,623 8,908 6,300 16,367 5,702 6,059 6,080 7,954 25,795 6,899 7,680 6,500 6,500 27,579 34,000 Total Station Op. Costs and Exp. $112,071 $35,820 $54,821 $64,709 $80,669 $230,342 $77,092 $84,951 $76,073 $105,248 $343,364 $98,909 $121,397 $98,331 $140,063 $458,700 $535,862 % of Total Revenue 61.5% 74.2% 48.5% 74.3% 52.9% 57.4% 64.4% 54.3% 67.6% 49.1% 56.9% 66.9% 56.1% 67.0% 47.4% 56.9% 55.0% SG&A Exp. 22,112 6,928 12,562 12,766 14,126 46,382 14,166 14,541 16,481 20,224 65,412 15,781 15,699 19,000 20,785 71,265 85,000 % of Total Revenue 12.1% 14.3% 11.1% 14.7% 9.3% 11.6% 11.8% 11.0% 14.7% 9.4% 10.8% 10.7% 7.3% 13.0% 9.0% 11.0% 8.7% Corporate Expenses: Corporate Operating costs and expenses 19,085 4,631 4,851 4,200 8,692 22,374 7,281 6,996 7,342 8,885 30,504 7,604 6,144 10,000 12,500 36,248 37,000 Net Arbitration related proceeds/(costs) Stock based compensation 10,100 3,100 (1,400) , ,000 1,200 3,600 1,200 1, ,700 3,000 Amortization of license costs/goodwill ,344 11,180 4,332 4,620 5,015 4,846 18,813 5,162 5,165 5,000 5,000 20,327 22,000 Operating Income $18,740 ($2,252) $42,193 $4,792 $42,967 $87,700 $16,183 $44,781 $6,571 $73,887 $141,422 $19,256 $66,579 $13,753 $116,258 $215,847 $291,910 % of Revenues 10.3% NM 37.3% 5.5% 28.2% 21.9% 13.5% 28.6% 5.8% 34.5% 23.4% 13.0% 30.8% 9.4% 39.4% 26.8% 29.9% Interest (Expense) Income 3, (5,865) (9,858) (10,312) (25,263) (9,065) (9,596) (9,512) (9,690) (37,863) (9,982) (17,706) (9,972) (9,972) (47,633) (40,000) Equity in income/loss of affiliate 10, ,049 (63) 3,418 8,238 (730) (730) Other Income (expense) (1,272) (4,730) (4,860) 16 7,506 (2,068) (11,410) (23,082) 4,725 (25,390) (55,157) (4,825) 4, Pretax Income $31,202 ($5,376) $35,517 ($5,113) $43,579 $68,607 ($5,022) $12,103 $1,784 $38,807 $47,672 $4,449 $53,739 $3,781 $106,286 $168,214 $251,910 Pretax Income Margin 17.1% -11.1% 31.4% NM 28.6% 17.1% -4.2% 7.7% NM 18.1% 7.9% 3.0% 24.8% NM 36.0% 20.9% 25.8% Income Tax (11,089) (2,341) (3,565) (2,206) (8,579) (16,691) (3,994) (3,582) (1,235) (6,151) (14,962) (5,059) (13,419) 1,548 (24,078) (30,145) (52,977) Net Income Before Minority Interest $20,113 ($7,717) $31,952 ($7,319) $35,000 $51,916 ($9,016) $8,521 $549 $32,656 $32,710 ($610) $40,320 $5,329 $82,208 $138,069 $198,932 Minority Interest in (Loss)/Gain (4,106.0) (577.0) (4,104.0) 1,037.0 (5,264.0) (8,908.0) (5,441.0) (1,276.0) 5,718.0 (6,424.0) (7,423.0) (5,730.0) (786.7) (8,125.9) (16,797.4) (15,376.3) Net income(loss) $16,007 ($8,294) $27,848 ($6,282) $29,736 $43,008 ($14,457) $7,245 $6,267 $26,232 $25,287 ($250) $34,590 $4,542 $74,082 $121,271 $183,556 EPS (weighted average) ($) $0.57 ($0.29) $0.81 ($0.17) $0.78 $1.24 ($0.38) $0.18 $0.15 $0.64 $0.60 ($0.01) $0.84 $0.11 $1.77 $2.94 $4.39 EPS (fully diluted) ($) $0.55 ($0.29) $0.79 ($0.17) $0.77 $1.21 ($0.38) $0.18 $0.15 $0.64 $0.59 ($0.01) $0.84 $0.11 $1.75 $2.91 $4.31 EPS Growth NA % 295.0% NA 97.4% 120.7% 31.0% -77.2% NA -16.9% -51.4% NM 366.7% -26.7% 173.4% 393.8% 47.8% Shares (weighted average) 27,871 28,385 34,274 37,883 37,972 34,664 38,100 40,597 40,651 40,725 40,018 40,793 40,941 41,441 41,941 41,279 41,779 Shares (fully diluted) 29,100 28,385 35,145 37,883 38,554 35,430 38,100 41,186 41,188 41,276 40,438 40,793 41,407 41,907 42,407 41,629 42,629 Source: Company reports and Morgan Joseph & Co. Inc. estimates 4 MORGAN JOSEPH & CO. INC.

5 Central European Media Enterprises - Quarterly and Annual Revenue Support E ($ in millions) Q06 2Q06 3Q06 4Q Q07 2Q07 3Q07E 4Q07E 2007E 2008E Television Operations Net Revenue: Romania $103,914 $29,871 $37,769 $29,298 $51,679 $148,617 $39,342 $52,224 $38,673 $69,767 $200,006 $260,008 Slovak Republic (Markiza TV) 64,267 11,206 20,046 13,895 28,273 73,420 18,677 29,652 18,897 40, , ,126 Slovenia (POP TV and Kanal A) 48,769 10,227 15,555 9,101 19,651 54,534 12,669 20,095 10,466 22,599 65,829 71,095 Czech Republic 154,013 40,549 56,312 40,141 71, ,386 51,519 80,544 50,979 90, , ,966 Croatia 22,029 3,810 5,647 4,288 8,565 22,310 7,232 10,414 6,432 12,848 36,926 46,157 Ukraine (Kino, CITI) ,750 3,552 7,104 Ukraine (Studio 1+1 Group) 72,846 25,852 21,260 15,759 34,297 97,168 18,075 22,701 20,487 56, , ,316 Total Net Revenue $465,838 $121,515 $156,589 $112,482 $214,290 $604,876 $147,912 $216,284 $146,684 $295,206 $806,087 $974,772 Other Consolidated Entities: Ukraine (Studio 1+1 Group) Slovak Republic (Markiza TV) (64,267) (1,761) (1,761) Media Pro - Romania (593) Station Depreciation Reportable Revenue $400,978 $119,754 $156,589 $112,482 $214,290 $603,115 $147,912 $216,284 $146,684 $295,206 $806,087 $974,772 Net Revenue Growth Romania 35.9% 52.0% 42.0% 38.6% 41.5% 43.0% 31.7% 38.3% 32.0% 35.0% 34.6% 30.0% Slovak Republic (Markiza TV) 4.4% -11.4% 2.1% 18.6% 39.4% 14.2% 66.7% 47.9% 36.0% 45.0% 47.4% 11.0% Slovenia (POP TV and Kanal A) 7.4% 3.0% 11.7% 18.9% 13.8% 11.8% 23.9% 29.2% 15.0% 15.0% 20.7% 8.0% Czech Republic 100.0% NA 17.9% -1.8% 9.2% 35.3% 27.1% 43.0% 27.0% 27.0% 31.3% 18.0% Croatia 125.8% -23.1% -26.2% 2.5% 63.5% 1.3% 89.8% 84.4% 50.0% 50.0% 65.5% 25.0% Ukraine (Kino, CITI) NM 100.0% 100.0% 100.0% 100.0% 296.8% 705.4% 100.0% Ukraine (Studio 1+1 Group) 36.5% 80.0% 23.8% 19.3% 22.1% 33.4% -30.1% 6.8% 30.0% 65.0% 21.3% 25.0% Total Net Revenue 89.0% 97.5% 18.0% 13.9% 24.0% 29.8% 21.7% 38.1% 30.4% 37.8% 33.7% 20.9% Segment EBITDA: Romania 43,540 11,613 16,424 11,719 26,106 65,862 15,136 22,530 15,469 35,581 88, ,004 Slovak Republic (Markiza TV) 17,240 (977) 7,827 2,408 11,547 20,805 5,756 11,712 3,401 17,628 38,498 48,051 Slovenia (POP TV and Kanal A) 19,337 3,033 6,430 1,225 9,155 19,843 3,001 8,388 1,518 9,378 22,285 24,883 Czech Republic 71,545 12,826 29,509 17,234 40, ,485 25,667 47,595 22,941 56, , ,779 Croatia (15,864) (4,442) (2,639) (4,558) (2,774) (14,413) (4,652) (2,167) (6,000) (3,100) (15,919) (30,002) Ukraine (Kino, CITI) 0 (1,977) (1,977) (2,370) (1,755) (2,500) (2,000) (8,625) (10,000) Ukraine (Studio 1+1 Group) 21,801 10,862 5,605 (2,020) 13,799 28,246 (2,417) 565 1,024 27,163 26,336 44,195 Total EBITDA $157,599 $32,915 $63,156 $26,008 $96,772 $218,851 $40,121 $86,868 $35,853 $140,859 $303,701 $387,910 Yr/Yr Growth NA 240.1% 8.3% 34.2% 37.8% 38.9% 21.9% 37.5% 37.9% 45.6% 38.8% 27.7% % EBITDA Margins Romania 41.9% 38.9% 43.5% 40.0% 50.5% 44.3% 38.5% 43.1% 40.0% 51.0% 44.4% 45.0% Slovak Republic (Markiza TV) 26.8% -8.7% 39.0% 17.3% 40.8% 28.3% 30.8% 39.5% 18.0% 43.0% 35.6% 40.0% Slovenia (POP TV and Kanal A) 39.7% 29.7% 41.3% 13.5% 46.6% 36.4% 23.7% 41.7% 14.5% 41.5% 33.9% 35.0% Czech Republic 46.5% 31.6% 52.4% 42.9% 57.3% 48.2% 49.8% 59.1% 45.0% 62.0% 55.7% 60.0% Croatia NA NA NA NA NA -64.6% NA NA -93.3% -75.0% -43.1% -65.0% Ukraine (Kino, CITI) NA NM NM NM NM NM NM NM Ukraine (Studio 1+1 Group) 29.9% 42.0% 26.4% -12.8% 40.2% 29.1% -13.4% 2.5% 5.0% 48.0% 22.3% 30.0% Total EBITDA Margins 33.8% 27.1% 40.3% 23.1% 45.2% 36.2% 27.1% 40.2% 24.4% 47.7% 37.7% 39.8% Source: Company reports and Morgan Joseph & Co. Inc. estimates 5 MORGAN JOSEPH & CO. INC.

6 Required Disclosures Rating and Price Target History for: Central European Media Enterprises (CETV) as of /07/05 Buy:$63 03/03/06 Buy:$74 05/05/06 Buy:$78 03/02/07 Buy:$90 05/04/07 Buy:$110 07/16/07 Buy:$ Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Price Target Our price target is $ Created by BlueMatrix Valuation Methodology Our price target remains $ per share. Our target represents a 13.5x multiple of our 2008E attributable segment TEV/EBITDA vs. the current 12.5x 2008E TEV/EBITDA multiple. We also note that the stock appears attractive on a P/E multiple basis. We are estimating EPS of $4.31 in 2008, which we believe currently reflects a reasonable 24.6x multiple on 2008E earnings. We note that our analysis does not account for the value that could be derived from additional acquisitions, new channel additions, or increases in ownership percentages of current properties. Risk Factors There exists an emerging-market volatility and currency risk. CETV operates in the emerging markets of Slovenia, Croatia, the Czech Republic, the Slovak Republic, Romania, and Ukraine. These newly independent countries could revert back towards their old economic and legal systems, complicating CETV's ability to operate effectively. On a credit basis, Slovenia, Croatia, the Czech Republic, and the Slovak Republic are highly rated, while Romania and Ukraine are generally more risky. An investment in CETV is subject to currency volatility. A strengthening of the dollar could negatively impact results. However, while CETV is paid in local currency in its most risky markets, Ukraine and Romania, these payments are pegged to the US dollar, which mitigates some of the risk. There is always the potential for a bad acquisition. One of the company's key strategies is to pursue acquisitions of broadcasters in Eastern Europe. An ill-advised acquisition would burn capital and could waste management resources. The acquisition of NOVA TV in Croatia has been disappointing, since it is now expected that it will take longer than previously anticipated to reach EBITDA breakeven. Two shareholders effectively control the company. Chairman Ronald Lauder and APAX own roughly 20% of the equity, but have 71% of the vote because of Mr. Lauder's ownership of super-voting Class B shares. Therefore, the two have effective control of the company. I, David Kestenbaum, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. I, Julia Heckman, the author of this research report, certify that the views expressed in this report accurately reflect my personal views 6 MORGAN JOSEPH & CO. INC.

7 about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] HOLD [H] SELL [S] Meaning of Ratings A) Buy means reasonable outperformance relative to the market over months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2007 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY Tel Fax Sales and Trading New York Tel Fax Pittsford Tel Fax MORGAN JOSEPH & CO. INC.