The Telstra Corporation Ltd (ASX: TLS) share price will be on watch this morning after the telco giant was the subject of a broker note out of Goldman Sachs.
According to the note, although the broker still rates the company as a buy and has increased its price target to $4.20, it has removed Telstra's shares from its coveted conviction list.
Why did Goldman Sachs remove Telstra from its conviction list?
Goldman made the move largely on valuation grounds after a strong share price rally since the start of the year.
Its analysts explained: "With TLS +36% YTD (vs. ASX +20%), we remove TLS from the Conviction List, but retain our Buy, given: (1) our A$4.20 TP implies roughly +15% TSR, with the 4.2% div yield supportive in a low rate environment."
What else did Goldman Sachs say?
The broker also took a moment to look at four topical issues that could impact Telstra's business both positively and negatively in the coming years.
The first was potentially tough conditions in the Enterprise market. With NBN Co targeting $1 billion in Business revenues by 2022 (which Goldman believes is achievable), it estimates that this could result in an additional $222 million EBITDA headwind for the company across FY 2019-FY 2022 due to lost regional wholesale revenue and increased competition.
However, the broker sees reason to be positive on the Mobile market.
It said: "With VHA/Optus increasing pricing in July (+A$2-11/m) and VHA postpaid subs declining in 1Q20, the mobile outlook for Telstra continues to improve. We expect strong sub momentum in 2H19 (supported by 5G), and we revise higher our FY20/21 mobile ARPU forecasts."
Another positive is a potential asset sale which could create value. The broker advised: "We estimate TLS could crystallize an additional 9-12cps of value through its flagged A$2bn asset sale program. We also highlight c.A$2bn+ of 'redundant' exchanges (17-22cps)."
And finally, another reason that Goldman Sachs remains positive on Telstra is falling bond yields.
With the broker expecting a further 50 basis points of easing by the Reserve Bank in the near term and Telstra's shares offering a 4.2% fully franked dividend yield, it expects this to be supportive of its shares.
What else has happened?
Interestingly, Telstra wasn't the only share that was removed from Goldman Sachs' conviction list this morning.
Due to its strong share price gain since being added to the list, Bingo Industries Ltd (ASX: BIN) shares have been taken off the list and downgraded to neutral with a $2.80 price target.
Going the other way is the ResMed Inc. (ASX: RMD) share price which has been upgraded from neutral to a buy rating with a $21.20 price target.
