Russia’s CTC ‘shifting up’ a gear

Chris Forrester

CTC Media is the company behind some important Russian and Kazakhstan TV stations. Russia has been an economic nightmare this past two years, and commercial advertising has been badly affected. Couple that with the collapse of the Rouble and channels paying for their foreign programming in Dollars and you have a recipe for disaster. However, the mid-year report on CTC is that its predicament is improving.

A report from investment bankers Morgan Stanley says they have upgraded their expectations, influenced by a more optimistic view of macro conditions in Russia, as well as better than expected cost cutting at CTC.

“At its core, we now forecast underlying advertising revenues to grow close to 4% in 2010, with a material shift up in programming costs. The single largest change is FX, where we now assume US$/R31 in 2009 and 2010. This alters revenues by 15% with around a 20% impact on EBITDA in 2009. We note that these forecasts are now broadly in line with consensus for 2009 (revenues $471m, EBITDA $182m, EPS $0.72),” says the bank.

“Given its pricing advantages and national reach, we expect TV’s share of advertising will actually increase during this downturn from 55% to 62%, which we see as a long-term ceiling. This leaves TV advertising down 15% in 2008 (-20% in 1H) but up 3% in 2010 and 8% by 2012. In US dollar terms, we therefore look for a 35% contraction in the TV ad market in 2009. Indeed in 2Q the TV market is estimated to have decreased 20% relative to a 30% decline in overall advertising.”

The bank says: “We now expect CTC’s stations to have growth in audience shares in 2009 (was flat). After a disappointing 1Q (-6% yoy), recent data is better (+4% in 2Q), although CTC network has slipped a touch so far in 3Q (although it is the less important period). DTV has been encouraging at 2.4% in 2Q up from 2.2% in 1Q. Looking forward, we expect all stations will seek cost efficiencies in buying content which should not leave CTC at a disadvantage.”

“In today’s market, the valuation of CTC’s acquisition of DTV and C31 in Kazakhstan now appears extreme. Through cost cutting we expect C31 to break even 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 $25m in 2009 and $28m in 2010. This represents a margin of 43%.”