Is the Telstra (ASX:TLS) share price in the buy zone?

One leading broker believes the Telstra Corporation Ltd (ASX:TLS) share price is in the buy zone and could provide excellent returns…

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The Telstra Corporation Ltd (ASX: TLS) share price was a positive performer on Thursday.

The telco giant’s shares rose 2.5% to $3.25 following the release of its half year results.

Is it too late to buy Telstra shares?

According to analysts at Goldman Sachs, they still believe there’s a lot of value in the Telstra share price at the current level.

This morning the broker retained its buy rating and lifted its price target on the company’s shares to $4.00.

Based on the current Telstra share price, this price target implies potential upside of 23% over the next 12 months excluding dividends. This potential return stretches to approximately 28% if you include the 16 cents per share dividend the company plans to pay.

What did Goldman say?

The broker notes that management is suggesting that an earnings’ inflection is imminent in the second half of FY 2021.

This is expected to be driven by ongoing cost reductions and a robust mobile service revenue outlook. Goldman explained that the latter is due to its positive average revenue per user (ARPU) outlook and ongoing strength in sub growth, supported by the clear 5G lead that Telstra holds.

Its analysts believe this makes Telstra’s dividend secure.

It commented: “Telstra indicated that it would pay 16¢ in FY21, which we believe is sustainable in FY22, given we forecast FY22 FCF/share of 24cps, with lost NBN earnings / WC build (mobile hardware) mostly offset by underlying EBITDA growth and lower capex.”

The broker then believes that Telstra can sustain this dividend from earnings per share from FY 2023. Though, it suspects there could be upside risk due to its belief that its future free cash flows could provide for a larger payout.

Is a re-rate of the Telstra share price coming?

Goldman believes that the Telstra share price could re-rate to higher multiples as the market becomes more confident on its earnings.

It concluded: “We stay Buy on Telstra ahead of the earnings’ inflection, believing that it will re-rate as it becomes a ‘simpler’ telco post NBN completion, along with further upside from possible asset monetisations; Catalysts include: (1) Tower update in March; (2) FY21 results and corresponding mobile inflection in August; and (3) Nov-20 ID when post T22 plans are outlined.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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