Buy This Turnaround Media Stock Now

Jun.13.12 | About: Central European (CETV)

Yesterday, Central Entertainment and Media Company's (NASDAQ:CETV) shares were up 11.26%. This price appreciation was the highest in the last two months. The reason for this price hike was the announcement by the company to have agreed to repurchase its 2014 bonds for $71.1 million as part of a plan to reduce the company's leverage.

Investment Thesis:

The reduction in the debt should be a turning point for the company's profitability and cash flows going forward, as it will reduce the interest expense significantly. There are expectations that the company will break even in 2Q2012 and this will be a major trigger for the stock price.

This is a chance for a large short squeeze in CETV's shares. 5 million shares of CETV are short vs. average daily volume of nearly half a million. This translates into a short ratio of near 10x.

The P/S and P/B ratio of 0.4x and 0.3x, respectively indicate that the company is trading cheap valuations.

We think CETV is a cheap way for the U.S investors to play resolution of European crisis. However, any negative development in Europe's debt crisis is a major risk for the company's operations. Potential equity dilution is a cause of concern too.

The Trading Plan:

We recommend investors to buy CETV now and use Monday's lows of $5.04 as a stop loss level. For investors with more risk appetite we recommend a stop price of $4.9, in case the stock breaks $5 level.

Company Introduction

Central European Media Enterprises Limited is a Media and Entertainment Company operating in broadcast, content, and new media businesses in Central and Eastern Europe. The company has three business segments: Broadcast, Media Pro Entertainment, and New Media. It is listed on the NASDAQ in the U.S and the Prague stock Exchange in the Czech Republic.

The company generates most of its revenue and profitability through its broadcast business, which relies on advertisement revenue. Ever since the financial meltdown of 2008, the company has been facing severe operational difficulty due to curtailed advertising expenditure in the region.

Financial Performance

For 1Q2012, CETV announced a loss of S of $ -0.49 per share compared to 1Q2011's loss of $ -.033 / share. Analysts were expecting a loss of 13c per share.

Following is the revenue and OIBDA breakdown:

Revenues

OIBDA

1Q2012

1Q2011

1Q2012

1Q2011

Broadcast

Czech Republic

51.7

57.7

20.2

22.6

Romania

31.2

34.4

1.9

3.4

Slovak Republic

18.6

19.1

-0.5

-2.5

Bulgaria

18.9

19.3

-1.1

0.2

Slovenia

14.5

14.5

2.8

3.2

Croatia

11.9

12.5

1

-0.3

Divisional costs

-

-1.4

-0.5

Broadcast sub-total

146.8

157.5

22.9

26.1

Media Pro Entertainment

43.4

40.2

1.7

0.7

New Media

3.7

2.6

-1.4

-1.6

Central costs

-

-

-8.2

-9.8

Inter-segment revenues / eliminations

-26.5

-27.5

-0.8

-1.2

Total All Operations

167.4

172.8

14.2

14.2

Click to enlarge

Source: Investor Presentation

The decrease in net revenues and OIBDA for Broadcast was primarily due to the continuing difficult conditions in the targeted countries.
The increase in revenues and OIBDA for Media pro entertainment primarily reflects the acquisition of Bonton film in the 2Q2011.

New Media segment reported an increase in net revenues and OIBDA primarily due to the launch of Voyo in all the territories of CEVT.

Analysis of net cash flow and free cash flows

USD millions

1Q2012

1Q2011

Net cash(used in) / generated from operating activities

-33.1

30.2

Net cash used in investing activities

-7.2

-6.4

Net cash used in financing activities

-1.2

-57.2

Impact of exchange rate fluctuations

5.1

6.1

Net decrease in cash and cash equivalents

-36.4

-27.3

Click to enlarge

Source: Investor Presentation

USD million

1Q2012

1Q2011

Net cash (used in) / generated from operating activities

-33

30,

Capital expenditures, net

-7

-5

Free cash flow

-40

25

Click to enlarge

Source: 10Q

The cash flow from operations, net cash flow and the free cash flow have decreased significantly on a YoY basis. The cash flow of the company deteriorated ever since the financial meltdown started in 2008, but the company is taking measures to improve it such as a reduction in the outstanding debt.

Debt buyback its implications

In its earnings announcement for the 1Q2012, the company declared that Time Warner will provide up to a $300mn credit facility which can only be used to buy back its issued bonds for 2013, 2014 and 2016. CETV will have to repay the $300mn loan within six months after the finalization of the offer.

As reported by the company, Time Warner (NYSE:TWX) and Ronald Lauder (RSL) have agreed to purchase approximately 11.5 million of CVET's Class A shares at a price per share of $7.51 (20-day volume weighted price). TW has agreed to purchase 9.5 million shares in order to increase its ownership in CETV to 40% on a diluted basis. RSL will purchase 2 million Class A shares and all Class B shares will be converted to Class A shares in connection with these subscriptions. CETV can repay the TW Loans with proceeds from these issues as well as other public or private issuance of equity within six months.

This is good news for the company, as the debt buyback will reduce its leverage significantly.

However, the potential dilution is a matter of concern.

Debt buyback up till now

On May 29, 2012 CETV announced that it had repurchased agreed to repurchase its 2014 bondsnbsp;109mn of 2013 notes. As mentioned above, yesterday, the company has Click to enlarge for $71.1 million.

Outlook:

CETV's revenues are highly dependent on how Central and Eastern European economies perform.

For many US investors, CETV is just a cheap option to bet on European growth.

Stock performance

CETV's stock is down 19% and 65% YTD and over the last 52 weeks, respectively. This is primarily due to the worsening business conditions, earnings and cash flows of the company. The stock has seen some excitement, price appreciation of 5% and 11% respectively after the company announced its debt repurchase program on May 29, and June 12, 2012.

Reaching a breakeven level will be the key catalyst in future.

Credit rating Outlook

The rating of the company's long-term credit was cut by Standard & Poor's to CC from B on May 18, 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.