A Rising Russian Media Star

05/01/2008 12:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says a Russian media company should profit from advertising’s rapid growth in that booming economy.

When it comes to investing in Russia, most investors immediately think about natural resource stocks. But there’s also a lot of opportunity in sectors that are exposed to Russia’s growing consumer class.

Advertising is a perfect example. Overall, the Russian ad market is growing at a 25% to 30% clip. In 2007, total advertising spending in Russia was approximately $9 billion versus just $1.1 billion back in 2000.

There is clearly a lot of room for growth. Television companies will be a prime beneficiary of this trend. TV accounts for about half of all advertising spending in Russia, or about $4.4 billion. And television advertising has been growing at 40% annually, an even faster pace than that of ad spending overall.

One of the easiest ways for investors to tap into this growth is through CTC Media (Nasdaq: CTCM), one of the leading television broadcasting companies in Russia. The Moscow-based company is 100% privately owned and its primary listing is on Nasdaq.

The company’s flagship channel, CTC is Russia’s fourth-biggest broadcaster, reaching more than 100 million homes. CTC has a second channel that reaches more than 60 million viewers, and it is buying another channel, DTV, in a transaction expected to close in the second quarter.

CTC focuses almost exclusively on entertainment programming, including cartoons, dramas, and foreign movies. Earlier this month, CTC inked a multiyear deal with Disney (NYSE: DIS) to license its programming in Russia.

Revenue for 2007 was $472 million, a 27% increase over the previous year. For 2008, management guidance calls for a range of $600 million to $650 million, implying growth of at least the same as last year or better. Operating margins are expected to run [from] 45% to 48%, and the company generates roughly $150 million in free cash flow. CTC’s balance sheet is remarkably strong, with virtually no long-term debt and $300 million cash.

As always, corporate governance and transparency is a major concern when investing in Russia. CTC [has] very stable Western ownership. Sweden’s Modern Times Group owns a 40% stake in the company and Modern Times’ CEO, Hans-Holger Albrecht, serves as chairman of CTC’s board. Furthermore, CTC is subject to full disclosure under US securities laws and files its financial reports in accordance with GAAP.

That doesn’t eliminate the risk, but it gives us a measure of comfort that isn’t always there in other emerging markets. At a recent $26, CTC sells for about 16.5x 2009 estimated earnings. That’s not cheap in an absolute sense, but for a rapidly growing company with as much upside as CTC, it’s an attractive long-term opportunity.

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