Broker gives its verdict on the Telstra (ASX:TLS) share price following Digicel acquisition

Is the Telstra share price in the buy zone?

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The Telstra Corporation Ltd (ASX: TLS) share price was on form on Monday.

The telco giant’s shares rose 2% to $3.81 after announcing the acquisition of Digicel Pacific for US$1.6 billion in partnership with the Australian Government.

This means the Telstra share price is now up almost 27% in 2021.

Where next for the Telstra share price?

Positively for shareholders, the Telstra share price could still push higher from here.

According to a note out of Goldman Sachs this morning, the broker has retained its buy rating and $4.40 price target on the company’s shares.

Based on the current Telstra share price, this suggests that there’s still 15.5% upside ahead for investors. And with Goldman expecting another fully franked 16 cents per share dividend in FY 2022, this brings the total potential return to approximately 20%.

What did the broker say?

Goldman appears happy with Telstra’s acquisition of Digicel Pacific. And while it doesn’t expect the deal to have a material impact on the company’s earnings, it appears to see it as a low risk boost to its financial performance.

Goldman notes: “As part of this structure, TLS is entitled to receive a preferred return of US$45mn p.a. for 6 years (17% ROE) with significant risk mitigants in place (FX, political, operational risk etc.). Management notes that the transaction meets all of Telstra’s M&A criteria including: i) EPS/FCF accretion, ii) generates ROIC > WACC; and iii) is superior for shareholders vs. a buyback, while also being iv) incrementally positive to the companies’ FY22/25E targets.”

“Although the proposed transaction would have a relatively small contribution to Telstra (4% of FY21 PF underlying EBITDA), we note that: 1) the transaction has significant risk mitigants; 2) is within Telstra’s core competency; and 3) is FCF/EPS accretive according to management,” it concludes.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Corporation 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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