Treasure Chest: Tide Turns For Telstra?

This story features TELSTRA GROUP LIMITED. For more info SHARE ANALYSIS: TLS

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today's idea is on Telstra

Whose Idea Is It?

Analysts at Wilsons

The subject:

Telstra Group ((TLS))

By Sarah Mills

Wilsons asserts in a special report titled Unbundling Telstra’s Hidden Value that the tide is turning for Telstra, an Australian telecommunications icon that needs little introduction.

The analyst has added Telstra to its Focus Portfolio at a weighting of 3%, appreciating the company’s strong asset backing, defensive qualities and “hidden value”, which Wilsons observes often yields strong and uncorrelated returns.

As sector fundamentals improve (high inflation has disincentivised price wars, posits Wilsons), and the company emerges from a period of heavy investment (think NBN and 5G roll outs) and industry consolidation (the field is down to three majors), Wilsons believes Telstra is well-placed to boost its return on capital.

Of particular note, Wilsons maintains the company’s share price on a sum-of-the-parts basis does not reflect the value of its high-quality infrastructure assets.

Quality infrastructure assets are moving into a period of strong, sustained demand, observes the analyst, which could trigger a sharp re-rating of the stock and allow Telstra to undertake a major capital management rejig.

Having sold its minority stake in Amplitel in 2021, the broker believes InfraCo Fixed Assets is likely to be the next logical asset from which the Telstra will seek to extract value.

More rational earnings from the company’s highly defensive mobile business as telcos shift their focus to inflation and the 5G rollout continues, should also generate both top-line growth and margin expansion.

All this at a time when the broader investment market is expected to remain challenged as the green transition kicks in and interest rates remain under pressure.

And let’s not forget the company’s cost-out programs. Telstra’s T22 strategy yielded $2.7bn, and the company is now rolling out T25, with a target to cut costs by -$500m. 

Wilsons expects this will support earnings per share growth and return on invested capital while boosting the company’s dominance in the 5G market.

After running the numbers, Wilsons calculates an implied value for Telstra of $5.51 per share, which compares with the April 26 share price of $4.29.

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Wilsons' optimism is shared by other analysts.

Goldman Sachs perceives the long-term story for Telstra to be positive and also expects InfraCo (valued between $22bn and $33bn) could prove a lucrative source of value. 

The analyst expects NBN payment streams offer strong upside potential.

Goldman Sachs holds a Buy rating and $4.60 target price.

Morgan Stanley is another advocate, appreciating Telstra’s strong organic growth prospects in Mobile and InfraCo (not to mention the option to unlock value in the latter’s assets).

The broker expects both investments will yield surplus free cash flow and dividends. 

After modelling a potential sale or securitisation of the 25-year NBN contract (which yields $1bn a year), Morgan Stanley considers Telstra shares to be trading at a -30% discount relative to global peers.

Morgan Stanley holds an Overweight rating and $4.75 target price. Industry view: In-line.

Ord Minnett does advise caution, however, observing no upgrade to FY23 guidance in the interim results, and believes Telstra will struggle to cut core fixed costs given persistent inflation, while suspecting rises in post-paid mobile pricing could subdue subscriber growth.

While Wilsons acknowledges this possibility, on balance, it considers the market to be highly defensive and expects demand will hold, particularly given strong forecast migration.

Ord Minnett maintains a Hold rating and $4.20 target price.

UBS agrees with Wilson on the demand and immigration thesis but holds a Neutral rating and $4.40 target price, believing the company to be fully valued based on recent trading.

Elsewhere, Macquarie holds an Outperform rating and $4.64 target price, and Morgans holds an Add rating and $4.70 target price.

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