Investors that are on the lookout for exposure to the telco sector might want to listen to what analysts at Goldman Sachs are saying about two major players.
The two shares in question are Telstra Group Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPG).
According to recent notes, the broker believes that investors should be selling one of these telco stocks and buying the other. But which is which? Let's find out.
Sell TPG shares
This morning, Goldman Sachs has reiterated its sell rating on TPG shares with a slightly improved price target of $4.40. Based on its current share price of $4.96, this implies potential downside of 11% for investors over the next 12 months. This reduces to approximately 7.5% when including its forecast 3.6% dividend yield.
While TPG delivered a result and guidance that was largely in line with expectations, it hasn't been enough for the broker to change its mind. Commenting on its sell rating, Goldman said:
We are Sell rated on TPG, given its risk/reward profile is skewed to the downside. Despite improved mobile market rationality in Australia, we see downside risks of continued enterprise headwinds, elevated fixed competition and higher cost growth for TPG over the medium term.
Buy Telstra shares
The broker believes Telstra is the superior option for investors that are looking for telco sector exposure this month.
Last month, its analysts responded to Telstra's results by retaining their buy rating with a $4.35 price target. Based on the latest Telstra share price of $3.93, this implies potential upside of almost 11% for investors.
In addition, Goldman is forecasting a fully franked 4.8% dividend yield in FY 2025, lifting the total potential return to a touch under 16%.
Its analysts like Telstra due to its low risk earnings growth and meaningful opportunity to unlock value through asset sales. They explain:
We believe the low risk earnings (and dividend) growth that Telstra is delivering across FY22-25, underpinned through its mobile business, is attractive. We also believe that Telstra has a meaningful medium term opportunity to crystallise value through commencing the process to monetize its InfraCo Fixed assets – which we estimate could be worth between A$22-33bn.
Although there is some debate around the strategic benefits, we see a strong rationale for monetizing the recurring NBN payment stream, given its inflation linked, long duration cash flows could be worth $14.5bn to $17.9bn, with no loss of strategic benefit.
All in all, Telstra shares are the way forward according to the broker.
