Buy Telstra shares due to its 'excessive' discount

This telco giant's shares could be unnecessarily cheap according to Bell Potter.

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Telstra Group Ltd (ASX: TLS) shares could be trading at an unwarranted discount right now.

That's the view of analysts at Bell Potter, which are urging investors to snap up the telco giant's shares.

What is the broker saying about Telstra's shares?

According to a note from this morning, the broker has been busy updating its financial model to reflect recent developments. It explains:

We update our Telstra forecasts for the flagged restructuring costs of $200-250m across FY24 and FY25 due to the reduction of up to 2,800 staff. We assume the midpoint of the range and apply $100m in FY24 and $125m in FY25. Note there is no change in our underlying forecasts and our underlying EBITDA of $8.2bn and $8.6bn in FY24 and FY25 remain consistent with the guidance ranges of $8.2-8.3bn and $8.4- 8.7bn in each period.

Its analysts concede that these job cuts could be a sign that Telstra is finding it harder to reduce costs than it was expecting. They add:

Our overall view of the update last month was slightly net negative given the size of the job cuts suggests the $500m cost reduction target by FY25 is proving difficult and the turnaround in Enterprise is likely to be slow.

However, one thing that Bell Potter was happy with was the removal of Telstra's inflation-linked price increases. It explains:

But the removal of annual CPI price rises for postpaid mobile price plans we did not view negatively – as it provides flexibility – and in our view does not indicate increased competition in mobile (as supported by the price rises by Optus in late May).

'Excessive' discount

In light of the above, the broker has reaffirmed its buy rating and trimmed its price target by 1% to $4.20.

Based on where Telstra shares currently trade, this implies potential upside of 16% for investors. In addition, 5%+ dividend yields are forecast each year through to FY 2026.

Bell Potter believes that the company's shares are trading at an excessive discount to its large cap peers and expects this to change in time. Particularly given its attractive dividend yield. It concludes:

Telstra is trading on an FY25 PE ratio of 18.6x based on our underlying forecasts which is a 24% discount to the average 24.4x of the peers (ALL, COL, CSL, GMG, WES and WOW). We view some discount as appropriate but in our view this looks excessive, particularly given the forecast mid to high single digit EPS growth over the next few years, strong market position and the potential for some or all of InfraCo to be sold in the medium term. We also believe the forecast yield of c.5% is supportive of the share price which is higher than all of the peers.

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 has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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