The Telstra Corporation Ltd (ASX: TLS) share price could be in the buy zone according to one leading broker.
Although Goldman Sachs has taken the telco giant off its conviction buy list, its analysts still have a regular buy rating and $3.60 price target on its shares. This price target implies potential upside of over 27% for the Telstra share price excluding dividends.
But why is the broker positive on Telstra? It has named four reasons it believes that the company's shares are a buy at the current level. They are summarised below:
Mobile revenue growth.
The first is the arrival of 5G internet, which it believes will bring about an inflection in mobile revenues. This should be supported by the return of roaming revenues in FY 2022 once the pandemic passes and international travel resumes.
The broker explained: "A mobile inflection is approaching in 2H21 with ARPU growth to accelerate in FY22 given the 5G price changes and roaming recovery. Mobiles is the most important segment for Telstra (53% of FY21 underlying EBITDA), so ARPU growth is critical to drive ROIC higher. Positive ARPU inflections also typically drive share price outperformance (+2.6% / +5.5% alpha in subsequent 30/180 days)."
Cost saving opportunities.
A second reason to be positive is Telstra's cost savings opportunities beyond its ongoing T22 strategy.
It said: "We expect significant productivity savings to continue past FY22, as TLS benefits from the accelerated Covid-19-driven digitization and continued reductions in the estimated $1bn in legacy fixed network costs."
Generous dividend yield.
Another reason it is positive on the company is its generous dividend yield. Like myself, the broker believes that Telstra can maintain its dividend at 16 cents per share in FY 2021.
"Although DPS risk has increased post FY20 results, we still believe that 16c can be sustained, supported by FCF which will improve from an FY21 trough. Irrespective, given global yield compression, TLS could pay a dividend of 12c and still trade in line with its historical yield gap (to 10Y AU Bonds)."
Unlocking infrastructure value.
A final reason to be bullish on Telstra is the underappreciated value of its infrastructure.
Goldman said: "We continue to see compelling Infrastructure in Telstra, particularly the $1bn p.a. in risk-free NBN recurring payments. We estimate that InfraCo could be worth $38bn, implying RetailCo is trading on just 2.1X FY23 EV/EBITDA. Although unlikely to be a near term catalyst, at its Nov 12th Investor day, the 'next steps towards potential monetisation' will be outlined."
Should you invest?
I completely agree with Goldman Sachs and believe the recent weakness in the Telstra share price is a gift for investors. This is particularly the case for income investors in this low interest rate environment.
