EARNINGS PREVIEW: France Telecom 1st Half Net Profit Seen -0.4%

PARIS -(Dow Jones)- France Telecom is expected to post slightly lower net profit when it publishes its first-half results Thursday, as the group stabilizes its domestic market while pursuing growth in emerging countries.

After better-than-expected first-quarter revenue and margin figures in April, the French telecommunications giant is likely to post a first-half net profit of EUR2.34 billion, down 0.4% from EUR2.35 billion the previous year, according to analysts.

The company's gross operating margin is expected to drop to EUR9.29 billion from EUR9.47 billion. Analysts consider the closely-watched operating margin to be equivalent to earnings beforeinterest, taxes,depreciation and amortization.

However, on a comparable basis, excluding elements such as the sale of its directory unit, PagesJaunesGroupe, the margin is seen up 0.3%. France Telecom sold its 54% stake in PagesJaunes to private-equity firm Kohlberg Kravis Roberts & Co. for EUR3.31 billion in the second half of 2006.

The average forecast of seven analysts surveyed by Dow Jones Newswires has France Telecom posting revenues down 0.3% to EUR25.8 billion from EUR25.9 billion. On a comparable basis, though, revenues are expected to rise 1.6%.

The gross operating margin rate as a percentage of sales is likely to decline to 36% from 36.5% a year earlier.

The deterioration in the margin rate is likely to stem from an increase in commercial costs, particularly in France, Spain, and the U.K.

The company is expected to reiterate its full-year guidance, which is "solid," according to Exane BNP Paribas analyst Antoine Pradayrol.

France Telecom has said it targets organic cash flow at EUR6.8 billion and the "near stabilization" of its gross operating margin rate.

By the end of 2008, the company aims to achieve a ratio of net debt to gross operating margin of less than two.

"There is a good chance of seeing the company hitting this target earlier than expected," Rob Goyens, an analyst at Dexia, said in a note.

Goyens has a buy rating on France Telecom stock.

Analysts will want more details on what the company is doing to turn business around in the U.K., where its Orange unit is struggling to attract new mobile and Internet customers, and Spanish markets where it has also struggled in recent quarters.

France Telecom's shares have followed an unsteady trajectory over recent months. A placement of 5% of the company's stock by the French government June 25 wiped out most of the gains made so far this year.

Dexia's Goyens said he considers "current trading levels to be appealing with the stock's valuation relative to peers again having widened towards a 20% discount."

After a number of selective purchases by the company, attention will also be paid to further comments on acquisition strategy.

In June, France Telecom paid EUR320 million to buy Spanish Internet provider Ya.com from Deutsche Telekom AG (DT) to bolster its presence in the Spanish broadband market.

Later that month, the company teamed up with the private-equity firm Mid-Europa Partners to purchase Austrian mobile operator One, for an enterprise value of about EUR1.4 billion.

France Telecom took a 35% stake along with Mid-Europa's 65% share of One's capital. France Telecom's chief executive, Didier Lombard, has said the company is willing to conclude similar deals with private-equity firms in the future.

The company also agreed to sell its Dutch unit to Deutsche Telekom, exiting a tough market where it had struggled to gain a strong foothold.

The deal, thought to be valued at about EUR1.3 billion, is awaiting works council approval.

-By Jethro Mullen, Dow Jones Newswires; 33 1 4017 1738; jethro.mullen@dowjones.com

(END) Dow Jones Newswires "

Posted to the site on 31st July 2007