Tobacco company Gallaher Group Plc posted a 4 percent rise in half year profits on Wednesday and forecast an improving second half that will help the group to reach its earnings growth target for the year.

The company, whose cigarette brands include Benson & Hedges, Silk Cut and Mayfair, said its problem areas in Europe such as Austria, Spain and Poland should improve in the second half as competitive pressure eases and stability returns.

Looking ahead those areas that showed profits down are now showing improvements and we expect to hit our expectations for the year, said Chief Executive Nigel Northridge in a conference call after results.

The world's fifth largest cigarette group posted underlying pretax profits of 275 million pounds for the first six months of 2006, in line with analyst forecasts of 271 million to 277 million pounds. Its adjusted earnings per share increased 3.3 percent to 30.1 pence.

Gallaher's long term EPS target is for an annual high single digit percentage rise, but this year analysts say its expectations have come down, with consensus EPS forecasts for 2006 pointing to a 3.2 percent rise to 65.1p a share.

Gallaher shares were unchanged at 905p by 8:50 a.m. after a rise from a low of 800p in June. They have underperformed the FTSE 100 index and Imperial Tobacco Group Plc by around 2 to 3 percent since the start of 2006.

The stock has had a good run up in the last three months and there is not a lot in these numbers to push it higher, and the shares may drift a bit today, said industry analyst Jonathan Fell at Deutsche Bank.

The group's first half cigarette sales volumes rose 4.1 percent despite challenging conditions in some European markets.

In Britain, which accounts for nearly half of group profits, earnings rose 1.4 percent, and Gallaher said the cigarette market Scotland dipped 3 to 4 percent after a smoking ban in public places in March. It expected a similar one-off effect when bans are introduced in the rest of the UK during 2007.

The group earns 70 percent of its profits from the shrinking cigarette markets of Britain, Ireland, Austria and Sweden, and to offset this has been expanding into the former Soviet Union, where earnings rose more than 50 percent in the first half.

But analyst Michael Smith at JP Morgan said this area only accounted for 11 percent of profits and Gallaher lacked the geographical diversity and international brands of its rivals.

Without cost savings, it is difficult for Gallaher to get good earnings growth, he said.

The half year dividend rose 5.7 percent to 11.2p.

Gallaher shares trade at 13.1 times 2007 consensus earnings compared to Imperial at 13.6 and BAT at 13.4, according to analysts in Reuters Estimates. Analysts say the latter two companies have greater growth prospects, while Altadis at 15.1 times earnings has been boosted by takeover speculation.

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