Telstra turning a corner by breaking up old business models

For the first time in quite a while, Australia’s national telecommunications giant Telstra (ASX:TLS) looks to have turned a corner.

Last week, the telco’s share price popped by 5.15%, and TLS is looking better and better every day. The stock has been quietly recovering, rising 27% in the year to date.  The recent rise came on the back of $2.8 billion part-sale of its towers business. While it might not equate to higher earnings, analysts across the board have upgraded their price targets and are seemingly bullish on the company.

Here are the broker comments:

• Credit Suisse has an ‘outperform’ recommendation with a target price of $4.15. The broker is fairly positive on the sale saying “the monetisation of Towers would be a positive catalyst, but the sale price was well ahead of expectations.” Telstra has gone one step further and indicated it will return 50% of the $2.8 billion in net proceeds to shareholders. The broker estimates that Telstra could “undertake a $1 billion buyback and still maintain its 16-cent dividend in FY22.”
• Morgan Stanley has an ‘overweight’ recommendation with a target price of $4.20. The broker also agrees that the Telstra sale is valued higher than expected, with an “implied $5.9 billion price tag compared with Morgan Stanley’s estimate of $3.6 billion-$4.8 billion.” What it shows is that there is strong demand. Any option to unlock more value from infrastructure assets will be more medium-term. Overall, the sale is positive with upside potential. Morgan Stanley forecasts a full year FY21 dividend of 16 cents and earnings per share (EPS) of 15.12 cents.
• Morgans has upgraded to “add” from a “hold” recommendation with a target price of $4.19. The broker was a little shocked with the early sale, considering bids were due by December 2021. Nonetheless, the deal is good for shareholders, as Telstra keeps control and a high price was reached. The broker says “The company will use roughly 50% of the proceeds to pay down debt. The balance (around 11cps) will be returned to shareholders.”

All in all, a great announcement for Telstra’s long-suffering shareholders, who can now expect a $1 billion-plus capital return.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.