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France Telecom delays return to profit growth

01 июня 2011

France Telecom struggled to convince sceptical investors that it can turn around its perennial underperformance, pushing back its return to profit growth until 2014.

Europe's fourth-largest telecom operator by market value laid out modest financial targets for the next three years on Tuesday amid high network investments and intensifying competition in its all-important home market.

Its strategy did little to reverse investors' perceptions that it is a low-growth utility play, with some analysts calling the long-term targets "ambitious" and the short-term ones "disappointing".

Shares opened about 1 percent lower and were trading 0.3 percent higher by 1231 GMT, broadly in line with the Stoxx 600 Europe Telecoms Index .SXKP. Key to Chief Executive Officer Stephane Richard's message of reassurance was a hint that the company would be profitable enough in coming years to keep paying a high dividend, despite the arrival of broadband specialist Iliad as a fourth mobile player in France next year.

"Beyond 2012, the improvement of operating performance offers the perspective of a stable dividend," said Richard, although he stopped short of making a formal dividend pledge for 2013 and onwards.

In part to compensate investors for its lagging share price, France Telecom will pay a dividend of 1.40 euro per share in 2011 and 2012, giving it among the highest yields in the dividend-rich telecom sector.

France Telecom's shares have underperformed rivals like Spain's Telefonica and Deutsche Telekom in the past year, climbing 1.1 percent, compared with a 12 percent rise in the Stoxx Europe Telecoms Index.


"We are not in denial of the competitive challenges that lie ahead in next two years especially in France," said Richard.

France Telecom faces a similar dilemma to other telecom giants in the mature markets of Europe: there is little growth while the cost of modernising networks rises to keep up with booming data traffic as consumers adopt smartphones and tablets.

To cope, the company is focusing on cost cutting and undertaking a portfolio review of its European businesses outside France.

On Tuesday it released financial targets in two distinct phases: from 2011-2013 the company predicted big network investments, slight revenue growth, and stable operating profit. Then it said for the first time that it would reach operating profit growth in 2014-2015 in a more benign period of lower network costs and softer regulatory impact.

Analysts said its predictions through 2013 were in line with consensus for earnings before interest, tax, depreciation and amortisation (EBITDA), slightly above on revenues, and called for higher spending on networks.

Several analysts said the targets in 2014 and onwards were a stretch.

"Given the tough start to 2011 and lingering uncertainty about a new mobile entrant in France in 2012, we are not sure that the medium-term guidance will be correctly appreciated by investors and the market," wrote Benoit Maynard, analyst at Natixis.

Jerry Dellis, analyst at Jeffries, said he expected investors to be sceptical: "The dividend comment is likely to reassure, but in our view France Telecom's long-term growth targets are credible only if you are bullish on sector fundamentals and relaxed about repricing and cannibalisation risks."


France Telecom's situation is even tougher than many rivals because its inflexible workforce means it can't cut costs as deeply and it also faces intense competition with the arrival of Iliad. The French state is its largest shareholder, limiting its ability to cut staff to boost profits.

Nevertheless, the company, which sells its products under the brand name Orange and is present in France, Spain, the U.K. and Poland, said EBITDA would stabilise in 2013 at a level higher than this year and would begin expanding after that.

Chief Financial Officer Gervais Pellissier told investors that the low point for the French market, where the group earns more than half of revenues and profits, would come in 2012 when Iliad launches.

To cut costs, France Telecom is putting into place a joint purchasing agreement with Deutsche Telekom aimed at saving 3 billion euros through 2015.

It is also reviewing assets in Europe outside its home market and said on Tuesday that it did not plan to keep minority stakes in countries where it did not have operational control.

Assets sales could come in Austria and Portugal, and market speculation has also focused on Belgium and Switzerland as places where France Telecom could change its footprint.

Richard said the company would return money to shareholders if it was able to divest assets worth more than 1 billion euros. Asked about the likelihood of such sales, Richard put the odds at above 50 percent.

Источник: Reuters

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