Why Telstra shares could be dirt cheap in May

Goldman Sachs thinks the telco giant is undervalued at current levels.

| More on:
Two elderly men laugh together as they take a selfie with a mobile phone with a city scape in the background.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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%.

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 positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has positions in and has recommended Coles Group and Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Communication Shares

Communication Shares

Is the Telstra share price too cheap?

Could this be an opportunity calling?

Read more »

A man wearing a colourful shirt holds an old fashioned phone to his ear with a look of curiosity on his face as though he is pondering the answer to a question.
Communication Shares

What are brokers saying about the Telstra share price after this week's update?

Does the telco giant's guidance update change things for investors?

Read more »

A man looking at his laptop and thinking.
Communication Shares

Telstra share price slips amid 2,800 cuts for growth

Australia's biggest telco is setting its sights on improved profitability with this cost-cutting move.

Read more »

A man casually dressed looks to the side in a pensive, thoughtful manner with one hand under his chin, holding a mobile phone in his hand while thinking about something.
Communication Shares

How much could $10,000 invested in Telstra shares be worth next year?

What do analysts think this telco giant's shares could be really worth?

Read more »

A man looking at his laptop and thinking.
Communication Shares

Why is the Aussie Broadband share price slipping on Wednesday?

After opening higher, the Aussie Broadband share price has slipped into the red.

Read more »

Ordinary Australians waiting at the bus stop using their phones to trade ASX 200 shares today
Communication Shares

What does the latest 3G news mean for Telstra shares?

Telstra shares aren't budging from their new 52-week lows this week...

Read more »

A man in shirt and tie uses his mobile phone under water.
Communication Shares

The Telstra share price sank 5% in April and is now at 2-year lows. Time to buy?

With the Telstra share price at two-year lows, is now the time to buy the ASX 200 telco?

Read more »

A smiling young surf life saver at the beach shouts out on a megaphone.
Communication Shares

Telstra shares could reach $4.25 in 2025!

These experts aren't messing around on Telstra shares right now.

Read more »