We are upgrading our long-term recommendation on France Telecom S.A. (FTE) from Underperform to Neutral thanks to the Conquests 2015 plan, which aims to reinvigorate growth and restore profitability in the business.
France Telecom is progressing well with its Conquests 2015 plan. The company, in the midst of the first or adoption phase (2011-2013) of its five-year plan, is working on various initiatives to enhance growth in the domestic and international markets.
To drive growth in the domestic segment, France Telecom is making efforts to improve its networks and services like IPVPN access, managed services, network resources and Wi-Fi roaming. The company is also shedding underperforming European assets dueto the weak economic conditions in that region and unfavorable regulatory measures that continues to hamper its top line.
France Telecom is strengthening its footprint in the emerging markets including Eastern Europe, Africa and Middle East to boost profitability over the next few years. The company is focusing on network enhancements, cloud computing business, strategic partnerships and network-related IT services to accelerate growth in these markets.
Further, revenue is poised to recover this year owing to recovery in Côte d'Ivoire and Egypt. Better economic conditions in some international markets led to the stable revenue growth in the first quarter. The company is slowly improving from the last year’s challenges as it is benefiting from the diversified portfolio and the national roaming contract signed with Iliad SA, the fourth largest mobile operator in France.
Despite the economic uncertainty and competitive pressures, France Telecom will continue to strengthen its balance sheet. The company will maintainthe net debt-to-EBITDA ratio target of 2 times over the medium term and an operating cash flow of €8 billion for this year. In addition, it will provide healthy dividends to its shareholders as it would distribute 40–45% of operating cash flow in the form of dividends in fiscal 2012 and 2013.
Nevertheless, higher VAT rates, persistently weak domestic economic conditions, labor concerns, lower mobile termination rates, unfavorable regulatory measures across its key European markets and intensifying competition from Bouygues, Telecom Italia spA (TI) and Vodafone Group Plc (VOD) might restrict the upside potential of the stock. Further, increased investments related to expansion and network improvements might accelerate the company’s cost of operation, resulting in lower profits going forward.
Considering all the pros and cons, we prefer to have a neutral outlook rather than negative. France Telecom also holds a Zacks #3 (Hold) Rank for the short term (1–3 months).
FRANCE TELE-ADR (FTE): Free Stock Analysis Report
TELECOM ITA-ADR (TI): Free Stock Analysis Report
VODAFONE GP PLC (VOD): Free Stock Analysis Report
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