Why the Optus result is good news for Telstra shares

Everything seems to be falling into place for Telstra this year.

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If you're an owner of Telstra Group Ltd (ASX: TLS) shares, then I have some good news for you.

The release of the results of Optus-owner, Singtel, this week is being seen as a positive for Australia's largest telco.

What happened?

Goldman Sachs has been running the rule over the result and management commentary and believes it points to rational competition continuing in the sector for the foreseeable future.

This is great news because when the big telcos compete on price, they whittle away at their margins. However, with Optus and Telstra focusing less on price, returns look likely to strengthen in the near term. The broker explains:

Consistent with recent industry commentary (incl. TLS CEO at Commsday), Singtel remains committed to improving its ROIC, as evident in an increase in its target from high-single to low-double digit in the mid-term (vs. 8.3% FY23), with Optus a significant driver in this improvement (c.1.3% FY23 GSe) – supporting a rational AU market.

Optus sees a steady improvement over time to be achievable through driving pricing tied to higher customer value, exiting unprofitable businesses, targeted cost reduction and disciplined capital investment.

The broker then adds:

Optus was positive on the current industry rationality, noting that it has announced prepaid pricing increases (follows TLS). However on its more material postpaid plans, it was noncommittal on raising pricing, as it is considering the impact of cost of living pressures on postpaid customers before acting.

However, given: (1) the focus on improving returns; (2) the quantum of increases from Vodafone (c.$5) and Telstra ($3-6) this year; and (3) recent increases to entry level TLS MVNO pricing, which had been a key issue for Optus (Aldi increasing entry level plan +$2 to $17/m, Boost planned Jul-23 increases, Woolworths recently removing its $10 prepaid plan, Belong raising pricing) we believe Optus will likely follow Telstra's recent changes in the coming months, which would be positive for TLS/TPG.

Are Telstra shares good value?

In light of this, Goldman Sachs remains positive on Telstra and sees value in its shares.

The broker has retained its buy rating and $4.70 price target. This implies potential upside of 8.5% from current levels.

In addition, the broker is forecasting a 3.9% fully franked dividend yield this year, stretching the total potential return to over 12%.

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 Tpg Telecom. 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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