The Telstra Corporation Ltd (ASX: TLS) share price has been an impressive performer in 2021.
Since the start of the year, the telco giant's shares have stormed 25% higher.
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Is the Telstra share price still good value?
There are a few ways to judge whether Telstra shares are good value. Traditionally investors would use a price to earnings ratio (which divides the Telstra share price by its earnings per share), but that isn't necessarily a suitable method at this point due to the composition of its earnings.
It is for this reason that some analysts prefer a sum of the parts (SOTP) valuation method.
This method values all the parts of the business and ascribes a multiple to them. The total sum is then divided by the number of shares on issue, resulting in a valuation or price target.
Telstra's sum of the parts
Fortunately, Goldman Sachs recently did a SOTP valuation for the Telstra share price, and I will take you through it now.
The broker's SOTP valuation is based on its forecasts for FY 2023. Goldman expects:
- Mobile EBITDA of $4,387 million
- Total Fixed EBITDA of $2,081 million
- International EBITDA of $386 million
While different parts of businesses can be ascribed different multiples, on this occasion Goldman has given each of these divisions an EBITDA multiple of 7x. This results in these businesses having a combined enterprise value of $48 billion.
But it doesn't stop there. There is also NBN compensation to consider. It expects:
- Recurring NBN EBITDA of $933 million
- One-off NBN EBITDA of $115 million
Goldman ascribes the recurring NBN earnings a 16x multiple and the one-off earnings a 1x multiple. This results in approximately $15 billion of enterprise value.
If we add these both together, we get an enterprise value of $63 billion. And then if we subtract the estimated net debt of $13.9 billion from that year and divide it by its total shares outstanding, we get a Telstra share price valuation of $4.20.
Does this make it good value?
Given that the Telstra share price is fetching $3.77 at present, this price target implies potential upside of 11.4% over the next 12 months before dividends.
In light of this above-average potential return, Goldman believes its shares are good value and has put a buy rating on them.
