Telstra shares: 'Some healthy options that are underappreciated'

Telstra's fast-growing health business could be worth a closer look…

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Telstra Group Ltd (ASX: TLS) shares have started 2023 in a reasonably positive fashion.

Since the start of the year, the telco giant's shares have risen 2.5%.

The good news, though, is that one leading broker believes that this is only the start of greater gains.

Telstra shares tipped to rise

According to a note out of Morgans this morning, its analysts have reiterated their add rating and $4.60 price target.

Based on the current Telstra share price of $4.08, this suggests that its shares could rise almost 13% over the next 12 months.

In addition, Morgans continues to forecast a 16.5 cents per share fully franked dividend in FY 2023. This equates to a 4% dividend yield, boosting the total potential return to approximately 17%.

'Some healthy options that are underappreciated'

Morgans has been looking at Telstra's healthcare business, Telstra Health, and believes it has "some healthy options that are underappreciated." It commented:

Telstra Health combines MedicalDirector (medical practice management software), PowerHealth (hospital management software) and Telstra's existing e-Health businesses. It helps healthcare providers and governments digitally connect the health, aged care and social service systems by enabling the seamless flow of information across the continuum of care.

Telstra Health resembles Enterprise Resource Planning / accounting firms like TNE, OCL and XRO. It provides the core business software and processes. This means long-duration (sticky) customers but also means sales cycles and software implementations can take years to complete. Peers trade on high multiples reflecting impressive delivery and characteristics of defensiveness and growth.

The broker notes that the business currently generates $250 million of sticky revenue and is aiming to double this by FY 2025. If successful, it believes it could add $50 million in earnings by then. It adds:

Telstra Health generates ~$250m revenue now and is targeting $500m by FY25, which requires a 26% revenue CAGR. Today it's broadly cash flow breakeven. Based on peer benchmarking and some broad assumptions we think Telstra Health could generate ~$50m of EBIT by FY25.

All going to plan Telstra Health could be worth ~$1.5bn /11cps for TLS shareholders on our estimates. While not material, we think it is underappreciated.

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 has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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