The Telstra Group Ltd (ASX: TLS) share price has been going in the wrong direction in recent times. It's down 5% since 2 February and more than 12% lower than in June 2023.
The telco company recently reported its FY24 first-half result, which was a solid report with good growth.
The S&P/ASX 200 Index (ASX: XJO) is only down by 0.5% from early February, and it has increased by 4% since June 2023. The Telstra share price has noticeably underperformed.
How good was the result?
Most of Telstra's numbers went in the right direction.
In its HY24 result, the company reported that total income rose 1.2% to $11.7 billion, earnings before interest, tax, depreciation and amortisation (EBITDA) grew 3.8% to $4 billion, net profit after tax (NPAT) rose 11.5% to $1 billion and earnings per share (EPS) went up 12% to 8.4 cents.
Telstra increased its interim dividend by 5.9% to 9 cents per share, which, at the current Telstra share price, equates to a grossed-up dividend yield payment of 3.3%.
The company's mobile division is benefiting from more subscribers and the average revenue per user (ARPU), which I think is the key segment.
Telstra has a great deal of mobile infrastructure which it has invested a lot of money into. The more users it can spread that cost across, the stronger the profit margin is likely to be. Revenue growth is one thing, but being able to make more profit per revenue dollar is appealing.
Telstra's mobile division saw income growth of 4% to $5.3 billion and EBITDA growth of 13% to $2.5 billion. Its number of mobile services in operation (SIO) grew by 4.6%, while the average revenue per user saw 3.4% growth.
Is the Telstra share price too low?
In terms of the income statement, I think the most important number to look at is the earnings per share (EPS) because it tells us how much profit each share is assigned. This drives the underlying value of each share. As a reminder, Telstra saw an EPS of 8.4 cents for this result.
If we simply doubled that EPS and assumed 16.8 cents for FY24, the Telstra share price is valued at 23x of that annualised figure.
But, analysts think the company is going to generate more EPS than that (though forecasts can change or be wrong). On Commsec, the forecast EPS for FY24 is 18.1 cents, which suggests the Telstra share price is valued at 21x FY24's estimated earnings.
My view on Telstra shares
It's not exactly cheap for how fast it's growing, but if it can keep growing earnings then it could be undervalued today.
ASX mining shares are at the mercy of whatever happens with the commodity prices. ASX bank shares face a lot of competition and an uncertain period when it comes to arrears.
I actually think Telstra is well-positioned with its strong market position, inflation-linked ARPU growth, growing subscriber base and its compelling efforts to diversify earnings.
I'd prefer to buy Telstra shares at the moment than many other ASX blue-chip shares. If it can continue to successfully work on its cost base, improve profit margins and profit improve further, it could be quite appealing at this level.
The grossed-up dividend yield would be 6.7% if it pays another 9 cents per share dividend in six months.
