Telstra Group Ltd (ASX: TLS) shares have been well and truly out of form in recent times.
So much so, this week the telco giant's shares hit a two-year low this month.
This weakness hasn't gone unnoticed by analysts at Goldman Sachs.
In fact, the broker has been looking at its earnings forecasts to make sure it isn't missing something. Particularly after New Zealand telco Spark New Zealand Ltd (ASX: SPK) downgraded its earnings guidance.
The good news is that Goldman remains confident that Telstra can deliver on expectations. As a result, it feels that its shares could be dirt cheap at current levels.
What did the broker say?
Commenting on the recent Telstra share price weakness, the broker said:
Following the underperformance of Telstra shares YTD (-8% vs. ASX200 +3%), alongside the recent downgrade in SPK FY24 guidance, we outline why we remain confident in our forecast $8.61bn in EBITDA (+$351mn yoy) for TLS in FY25E.
Goldman believes the key to achieving this will be increasing mobile phone plans in line with inflation. And while there are doubts around doing this in the current environment, the broker feels it is the most likely outcome. It said:
The key uncertainty to this growth is whether a full CPI mobile price rise will be introduced in Jul-24. We think this is the most likely outcome, given (1) Strong operating trends and NPS through to Feb-24; (2) TLS price-premium vs. history provides some scope to increase; (3) The Government owned, monopoly NBN recently announced CPI price rises of +4.1%; (4) Telstra returns are significantly below supermarket peers WOW/COL (who have faced price gouging accusations).
As mobile makes up 70% of estimated earnings, that is the segment doing the heavy lifting. However, the broker also expects growth from other areas.
It expects the Fixed Enterprise business to add EBITDA of $30 million in FY 2025, which represents 9% of total EBITDA. This is being underpinned by the soon-to-be-announced Fixed Enterprise restructure.
Goldman is also forecasting an $83 million increase from the InfraCo/Amplitel business, representing 24% of EBITDA. It highlights that this "growth is largely locked in, given it relates to CPI (NBN Recurring) and internal data/customer growth."
Big returns on offer with Telstra shares
In light of the above, the broker has retained its buy rating and $4.55 price target on the company's shares. This implies a potential upside of 25% for investors over the next 12 months.
In addition, the broker is forecasting a 4.9% dividend yield in FY 2024 and then a 5.2% dividend yield in FY 2025. This boosts the total potential 12-month return to approximately 30%.
