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?

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The Telstra Group Ltd (ASX: TLS) share price was under pressure on Tuesday.

So much so, the telco giant's shares ended the day almost 3% lower at a new multi-year low of $3.57.

Why did the Telstra share price tumble?

Investors were hitting the sell button after the company released an update on its earnings guidance for FY 2024 and introduced its guidance for next year.

In respect to the former, the company has reaffirmed its guidance for FY 2024. It continues to expect underlying EBITDA in the range of $8.2 billion to $8.3 billion.

And looking to FY 2025, Telstra has advised that it is expecting its underlying EBITDA to increase to $8.4 billion to $8.7 billion. A key driver of this growth will be a $350 million cost reduction plan.

Broker reaction

Goldman Sachs has been running the rule over the update and has seen positives and negatives.

Let's start with the negatives. The main one relates to the company's decision to pull back on its inflation-linked price increases. It said:

Key negatives: (1) Removal of CPI linked-pricing mechanism is a negative for industry rationality in mobiles, with Telstra no longer clearly signaling its intent to lead market pricing higher each year (albeit, we do acknowledge Optus has not followed this lead in recent years); (2) It removes the contracted expectation from TLS customers that their mobile pricing will increase each year; (3) Although not having a CPI link provides the theoretical potential to do greater price rises, we believe in practice this is extremely unlikely; (4) We believe TLS mobile pricing decision in FY25 will now be significantly impacted by Optus pricing decisions- but unless announced around the FY24 result on 23rd May, we believe this is unlikely until after the new CEO commences in November; (5) Given franking constraints on our revised EBITDA estimate, alongside announced restructuring costs, we lower our FY25 dividend to 18.5c (from 19c).

There are positives, though. For example, Goldman Sachs highlights that the cost reductions are better than it was expecting. It said:

Key positives: (1) The 2/3 reduction in NAS products and the 10% headcount reduction are more significant than we had expected, benefiting both FY25 & FY26 earnings (c.$225mn/c.$100mn incremental earnings), allowing the mid-point of TLS EBITDA guidance to be broadly in-line with expectations, despite the deferred price rise; (2) The announced restructure should support a more favorable EBA outcome, ahead of the current deal expiring Sept-24; (3) 2H24 mobile sub growth of c.4% remains strong and ahead of GSe, suggesting limited competitive impacts.

Is this a buying opportunity?

The sum of the above has been the broker trimming its valuation for the Telstra share price to $4.25 (from $4.55) but retaining its buy recommendation.

Based on its current share price, this implies a potential upside of 19% for investors over the next 12 months. It commented:

Overall we revise TLS FY24-26 EBITDA -1% and EPS by -1% to -3%, reflecting the revised mobile outlook and broader restructure. Our 12m TP is -7% to A$4.25, given earnings and reduction in mobile EBITDA multiple to 6.0X (was 6.5X) on increased mobile uncertainty. Buy.

It has also reduced its dividend forecast for next year. It now expects 18 cents per share this year and then 18.5 cents per share in FY 2025.

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 Telstra Group. 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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