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CTC MEDIA INC  (CTCM)

Last Updated: Nov 13, 2008


Business Summary

CTC Media owns and operates two television networks in Russia and surrounding countries. The largest and oldest network, CTC, is carried by 350 affiliate stations as well as 20 company owned stations, reaching nearly 100 million viewers. The network is the 4th most watched in the country with about a 10.4% overall audience share, and 13% in the target 6-54 year old demographic. In 2005, CTC Media launched the Domashny network, targeted at 25-60 year old female viewers, a coveted demographic for advertisers. Domashny is carried by 230 affiliates reaching 63 million people. CTC Media derives nearly all of it's revenue from free over-the-air television advertising.

Growth Strategy

CTC Media enjoys several strong tailwinds. Spending on TV advertising in Russia has increased at an annual 40% for the past 6 years, and still the country lags behind former Soviet-bloc countries like Poland and Hungary in per-capital advertising spending. This leaves plenty of room for continued organic growth in the Russian advertising market. CTC has also been expanding it's network into neighboring Russian-speaking countries like Kazakhstan. CTC has a strong brand with youths and teenagers, usually commanding a #1 or #2 share in the time slots allocated for that demographic. Finally, the Domashny network is the only Russian-speaking network that targets the 25-60 female demographic, creating an attractive advertising opportunity for certain marketers. The past 5 years have seen compound annual revenue growth of 32% and operating earnings growth of 43%.

Competitive Position

CTC is the 4th largest television network in Russia, behind Channel One, Rossiya, and NTV, each of which is 50% or more owned by the state (Rossiya is 100% state-owned). CTC focuses only on entertainment and has no "hard" news or commentary shows. While this helps avoid scrutiny from the Kremlin, it is also a competitive disadvantage to the state-owned stations who do provide this programming. As these competing networks are larger, they are also able to bid up rights on popular programming and secure lucrative sports broadcast rights, as well as reaching a larger viewer base. However, these competitors also have larger cost structures as they own and operate most of their channels outright instead of following an affiliate model. Cable networks are mostly undeveloped in Russia, removing a major competitor to free TV that exists in most Western markets. CTC's ownership of broadcasting frequencies and programs give it a decent economic moat.

Risks

Where to begin? Investing in Russia is quite risky in any sector. The country is overwhelmingly dependent on oil and natural gas exports, both of which have come down dramatically in price over the past few months. Oil alone counts for 30% of the country's GDP. These drops could send the economy into a recession, which has historically has had a pronounced effect on the volume of advertising. CTC sells ads through a single middleman, Video International, which accounts for 95% of all revenues. The only other ad clearinghouse, NTV Media, is a subsidiary of competitor network NTV and would likely be a poor alternative. What's more, Video International has consistently failed to meet sales expectations, but holds such bargaining power that CTC has had difficulty maintaining commission reductions due to poor performance. Political and economic risk is high in Russia, a state with little history of private ownership and enterprise. The government there has a history of seizing private entities, and the currency has been defaulted on once and continues to suffer from high inflation (over 15% this year). Longer term, the media revolution taking place in the West will find it's way into Russia and create similar problems for broadcast TV entities. The stock is extraordinarily volatile, with daily swings of 15% or more commonplace. With so many risks, an investment in CTC Media must build in an extremely wide risk margin.

Management

Anton Kudryashov is the CEO, replacing Alexander Rodnyansky a few months ago. Rodnyansky owns stakes in several production companies throughout Central Europe. Compensation has been drastically tilted towards stock options. There are some concerns with the board and ownership. Modern Times Group (MTG) controls about 39% of the stock, and Alfa Group owns 26% (Rodnyansky owns about 5%). MTG is a broadcast TV operator in Scandinavia and the Baltics. Alfa Group, however, is a massive Russian conglomerate with interests ranging from banking to telecom. These two outside shareholders effectively control the company, putting stockholders along for the ride.

Financial Health

CTC's financial health is fine. There is $54 million in cash on the balance sheet and $124 million in debt. Over half of the debt is due within the next year, but liquidity looks OK with a current ratio of 1.33. Interest coverage ratios are fine - operating earnings cover interest payments 12 times over. Historically, the company has used minimal debt to fund it's growth. The affiliate business model allows CTC to generate excellent returns on capital and free cash flow - there is little capital outlay needed for broadcasting equipment. Trailing 12 month MFI return on capital is an outstanding 112%, and free cash flow margin is 20%. Financially there are no issues with this company.

MagicDiligence Opinion

MagicDiligence delivered an entire stock report on this company because it looks like a potentially lucrative investment for those with very high risk tolerance. At the time of this writing, the stock price was about $4, which represents extreme value. At this price, earnings yield is 38% and free cash flow yield is nearly 20% (for traditionalists, that's about a 4.5 P/E ratio), as well as price-to-sales being about 1.0 on a company with a 40% operating margin. That's cheap, especially for a company growing revenues at 50% last quarter. CTC has outstanding growth prospects. Russia's advertising and media markets are in the nascent stage, and the potential is there for 20% annual organic growth for many years to come, not to mention numerous acquisition opportunities. To have a fair value at today's prices, we would have to assume that cash flow generally declines over the next 5 years. This is rather unlikely, even in a difficult market. But CTC cannot be a MagicDiligence Top Buy... there is just too much uncertainty and risk attached. For those who are willing to take that risk, CTC Media could be a 5-bagger over the next few years.

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