Russia’s CTC gets trimmed




A year ago CTC Media, which specialises in broadcasting within Russia, was riding high with its share price at an impressive $31.75, benefiting from a booming Russian economy and strong advertising demand. That has now all changed.

CTC Media’s share price is now about $3.40 (but it has been even lower) although an investor note from Morgan Stanley gives some reasons for optimism. Nevertheless, the bank’s view is that the appetite for foreign investors to invest in Russian equities and companies has diminished.

CTC operates in a very competitive Russian market with 18 other TV channels. The two largest are effectively government-controlled which means that they may operate in a less cost conscious manner through a downturn. This could lead to a loss of market share for CTC, argues Morgan Stanley. CTC Media also reports its results (it is listed on the NASDAQ) in US Dollars.

That CTC Media has to make some cuts was inevitable. The Russian Rouble is down significantly against the Dollar (25%), and while only 20% of CTC’s operating expenses are in Dollars, there’s obviously a problem when 100% of income is generated in Roubles. The company has trimmed staff by 20%, and this, plus other belt-tightening, has helped bring the company back on an even keel.

But there are challenges ahead, says the bank’s note, with Russian advertising now suffering from the downturn, and likely to overall fall some 15% this year. However, the bank says: “Given its pricing advantages and national reach, we expect TV’s share of advertising will actually increase during this downturn from 55% to 60%, which we see as a long-term ceiling. In US dollar terms, we therefore look for a 61% and 3% contraction in the TV ad market in 2009 and 2010, respectively.”

Morgan Stanley is concerned by the acquisition of the DTV channel in Russia, and the C31 network in Kazakhstan, and in particular the amounts paid for the two stations, which with the benefit of hindsight were “extreme”.

“The $395m paid for DTV now represents 61% of CTC’s market capitalization. Through cost cutting we expect C31 to breakeven in EBITDA terms in 2009 and 2010 with modest profits by 2011. Assuming a 20% drop in content costs, we factor in a drop in EBITDA at DTV from $26m in 2008 to $20m in 2009 and $22m in 2010. This represents a margin of 39%,” says the bank’s note. Morgan Stanley also suggests that a write down of some $400m may be needed because of the high price paid for the recent acquisitions.