Might the Telstra Corporation Ltd (ASX: TLS) share price be a leading blue chip opportunity in 2022?
Telstra shareholders have been suffering for a long time. Since the start of this century, the Telstra share price has fallen more than 50%. Over the last five years it has dropped 17%.
The company has seen its profit decline substantially over the last few years.
In FY17, it made net profit from continuing operations of $3.9 billion, with earnings per share (EPS) of 32.5 cents. In that year, it paid a total dividend of 31 cents per share.
Compare that to FY21. Net profit was $1.9 billion. EPS was 15.6 cents. The dividend was $0.16 per share. Those figures have roughly halved.
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Telstra plans a return to growth
The telco is expecting a return to full year growth in FY22 after a sustained period of challenges due to the shift of broadband to the NBN, which is taking a substantial amount of the margin now, rather than Telstra.
But that transition has essentially finished.
In FY22, Telstra is now expecting total income to come in between $21.6 billion to $23.6 billion. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be between $7 billion to $7.3 billion. Free cashflow after lease payments is expected to come between $3.5 billion to $3.9 billion.
The company is just finishing its T22 strategy, which looked to monetise some of its assets (like its towers), reduce costs and become more efficient. Telstra was able to launch a $1.35 billion share buyback after selling a stake in its InfraCo Towers business.
But it has already launched its T25 strategy, which could have an impact on the Telstra share price.
T25 targets
With this new strategy, Telstra is looking to extend its 5G coverage to 95% of the population, with expanded regional coverage of new 4G and 5G coverage.
The telco is looking to grow its Telstra Plus members to 6 million by FY25.
Income-seekers may be pleased to know that Telstra is looking to maximise its fully franked dividends for shareholders and look to grow the dividend over time.
Despite already finding $2.7 billion of costs to cut in the T22 strategy, it's looking to deliver another $500 million of costs reductions to FY25.
Those cost reductions will help Telstra aim for a compound annual growth rate (CAGR) of mid-single digit for underlying EBITDA and high-teens of underlying EPS to FY25.
Diversification
Telstra has made a couple of acquisitions in recent months that looks to diversify and grow its earnings.
One was the US$1.6 billion acquisition of Digicel in partnership with the Australian Government. Digicel is described as a leading provider of communication services across PNG, Fiji, Nauru, Samoa, Tonga and Vanuatu. This business generated EBITDA of US$233 million for the year to 31 March 2021, with a "strong" margin.
Digicel will become part of a fourth subsidiary of Telstra – Telstra International.
Telstra also has a vision for 'Telstra Health' to be a leading partner for the health and aged care sectors. It recently announced it was buying leading GP clinical and practice management software company MedicalDirector for an enterprise value of $350 million. Its software as a solution (SaaS) offering supports approximately 23,000 medical practitioners and is used to deliver more than 80 million consultations a year.
Is the Telstra share price good value?
Morgans thinks so. It rates Telstra as a buy, with a price target of $4.55. Another broker, Ord Minnett, rates Telstra shares as a buy, with a price target of $4.60. Each of these targets suggest an upside of around 15% over the next year, if the brokers end up being right.
