What could propel Telstra shares over the next year?

Can investors call on the telco's stock to deliver returns this year?

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Key points

  • Telstra has a diversified set of earnings and assets in the business
  • Its fibre business could have a lot of value, which the telco could decide to monetise
  • The broker Macquarie now rates Telstra as outperform

Telstra Group Ltd (ASX: TLS) shares could go higher in 2023 if the company is able to unlock hidden value within the business.

There are a number of different parts to the business, including its mobile segment, NBN earnings, Telstra Health, the acquired Digicel Pacific, and so on.

While some areas are seen as core parts of the business, Telstra has been selling off some of the assets it doesn't see as integral.

Expert upgrades rating

According to reporting by The Australian, the broker Macquarie has recently upgraded its rating on Telstra to outperform, up from neutral. The target price was increased 13% to $4.50. This implies that Telstra shares could rise by 10% over the next year.

What was the cause of the upgrade to the rating?

Macquarie said (according to The Australian):

Telstra is trading largely in line with our measures of fair value.

However, we believe the monetisation of Telstra's FibreCo will be a catalyst for the stock in the next 6-12 months.

In addition, we expect a positive result in February 2023 as subscriber numbers are likely to be a positive surprise to consensus.

While Telstra generates a lot of its earnings from its mobile segment, the company is working on other infrastructure as well. In the company's annual general meeting (AGM), it outlined some of its projects:

Our inter-city fibre project announced in February will provide ultra-fast connectivity between capital cities and improved regional connectivity. We have finalised contract negotiations for the first stages of the build and we have held detailed discussions with customers including signing up Microsoft as a major anchor tenant.

In satellites, Telstra will build and manage the ground infrastructure and fibre network in Australia for Viasat's new series 3 satellite system and construct a major fibre project to build state-of-the-art inter-city dual fibre paths across the country. We also announced an MOU [memorandum of understanding] with LEOSat provider OneWeb and are working towards building a commercial relationship with testing of their network underway.

In terms of mobile subscribers, in FY22 the business added 155,000 net retail postpaid mobile services including 121,000 branded ones. Retail prepaid unique users were up 215,000. Telstra may also be benefiting from subscribers moving from Optus after the cyber hack of the business.

Telstra share price valuation

Looking at the current estimates on Commsec, Telstra is projected to generate earnings per share (EPS) of 16.5 cents per share. This would put the Telstra share price at 24 times FY23's estimated earnings.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Microsoft. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Macquarie 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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