Here's why Goldman Sachs just became even more bullish on Telstra shares

Hold the phone! Things could be better than expected over at Telstra.

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Key points

  • Goldman Sachs has just reiterated its buy rating on this telco giant's shares
  • The broker has also lifted its valuation and increasing its earnings estimates
  • This is being underpinned by its expectation of larger than expected mobile price increases

Now could be the time to snap up Telstra Group Ltd (ASX: TLS) shares.

That's the view of analysts at Goldman Sachs, which have just reiterated their buy rating on the telco giant's shares with an improved price target.

According to the note, the broker has lifted its valuation to $4.70, which implies potential upside of 9.3% for investors over the next 12 months.

It is also forecasting a 4% dividend yield in FY 2023, boosting the total potential return beyond 13%.

What did Goldman say about Telstra shares?

Goldman Sachs highlights that Telstra's mobile pricing across prepaid and JB Hi-Fi Limited (ASX: JBH) has been lifted meaningfully ahead of its postpaid pricing review.

It believes this is a sign that the telco will increase its prices by the full CPI rate, which is more than it was expecting. And while this won't be good news for consumers, the broker expects it to give Telstra's earnings a boost. It explains:

Following recent (and significant) mobile prices changes from Telstra (Prepaid, JB-HiFi), we now believe they are more likely to fully utilize CPI (GSe +7% in Mar-23) at the upcoming postpaid mobile price review – raising plan pricing by c.$4-6/m. This is ahead of our prior forecast for a c.$2-3/m, so drives our FY24-25E EBITDA +1.6%/+1.1% and EPS +4%/+2% (higher pricing, partly offset by lower postpaid sub growth).

Ahead of the July price rise, Telstra needs to ensure that its postpaid/prepaid premium is correctly managed, to prevent significant 'spin-down' to prepaid (noting stronger prepaid SIO growth in 1H23). Hence the announced $5 increase on Prepaid plans in July provides scope to increase postpaid plans by $4/m (or CPI), while keeping the postpaid/prepaid premium below its historical +41% average (+$4 increase results in +38% premium).

In light of the above, Goldman Sachs believes that the market is underestimating the company's mobile earnings growth. As a result, it sees the upcoming price increase announcement as a potential catalyst to driving Telstra shares higher. It concludes:

Ultimately, we continue to believe consensus mobile forecasts look conservative, and now sit +3% ahead of FY24 postpaid ARPUs. We expect updated mobile pricing expected to be announced in coming weeks (to give sufficient notice to the Jul-23 introduction), which should be positively received. We re-iterate our Buy rating on Telstra, and increase our 12m TP to $4.70, in-line with earnings.

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 Australia has recommended Jb Hi-Fi. 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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