The Telstra Corporation Ltd (ASX: TLS) share price could be heading a lot higher from here according to one leading broker.
Who is bullish on Telstra?
Goldman Sachs has been looking at the impact the second wave could have on the telco giant's performance and remains very positive on its prospects.
According to the note, the broker has retained its conviction buy rating and lifted its price target slightly to $4.10.
This price target implies potential upside of 18% over the next 12 months excluding dividends. If you include its 16 cents per share dividend, which Goldman Sachs believes is sustainable for the foreseeable future, this potential return stretches to over 22.5%.
What did Goldman Sachs say?
Goldman has revised its earnings estimates for Telstra following the resurgence of COVID-19 infections in Australia and the six-week lock down of Melbourne.
It explained: "We revise lower our Telstra FY21 EBITDA by -3%, reflecting: (1) ongoing international travel restrictions; (2) extended Melbourne support measures; and (3) further delays in redundancies associated with its productivity program."
It now expects Telstra to post a 4% decline in FY 2021 underlying EBITDA to $7.14 billion, before recovering +6% to $7.55 billion the following year.
This recovery is expected to be driven by cost savings and efficiencies.
It notes: "With digital servicing having materially increased (digital first contacts rising to 70% from 50%, 4mn app downloads in 8 weeks), we believe Telstra has increased scope to improve efficiencies in its retail store network and customer service. We remain constructive on the total quantum of savings (GSe A$2.6bn by FY22), and expect further benefits in FY23."
The broker is also very positive on the company's infrastructure and has updated its analysis of Telstra InfraCo.
It wrote: "In an uncertain, low-rate environment, we see telco infrastructure as highly attractive. We update our Telstra InfraCo analysis, which suggests a potential valuation of A$38bn, or 14.9x FY23 EBITDA. This would imply that Telstra's retail business is trading on an EV/EBITDA of just 3.4x."
Should you invest?
I think Goldman Sachs is spot on and I would be a buyer of Telstra's shares right now. Especially if I were an income investor, given its attractive fully franked 4.6% dividend yield.
Overall, I feel it is the best option in the space and would choose it ahead of rival TPG Telecom Ltd (ASX: TPG).
