Why this broker is calling Telstra (ASX:TLS) shares a buy today

The Telstra Corporation Ltd (ASX: TLS) share price has had a pretty pleasant few weeks of late. On 30 October, just under 2 weeks ago, Telstra shares were plumbing new depths, drifting as low as $2.66 a share. That price was a new 52-week low and was dangerously close to an all-time low for Telstra.  This means a lot when a company has been on the market for more than 2 decades.

But what a difference 2 weeks can make. Today, the Telstra share price is trading at $3.12 at the time of writing, a good 16% higher than 30 October’s levels. In fact, Telstra shares are up 11.2% over just the past week, and up 4.4% since market close on Wednesday.

No doubt Telstra shareholders will be pleased with this news, but a major broker reckons there’s plenty of petrol left in the tank on this one.

Why is Telstra’s share price rising?

Investors seem to be, in part,  reacting to the news that Telstra released yesterday before market open as part of the company’s ‘annual investor day’ presentation. This news outlined how Telstra plans to split itself into 3 distinct legal entities: InfraCo Fixed, InfraCo Towers and ServeCo. The 2 ‘InfraCo’ divisions will house Telstra’s infrastructure assets like cabling, towers, ducts and data centres. The ‘ServeCo’ entity will house the ‘customer-facing’ and ‘active’ parts of the business, such as spectrum rights.

Its partly this restructuring program that has broker Goldman Sachs bullish on Telstra. Goldman reiterated its ‘buy’ rating on Telstra this morning with a $3.75 target price, citing the potential value creation from this restructuring. Goldman estimates that Telstra has an implied valuation of $3.55-$5.15 per share if the 3 entities are separated. Further, Goldman reckons Telstra will be able to achieve a 7.6% return on investor capital (ROIC) metric by FY2023.

Yesterday, Telstra’s CEO Andy Penn stated that achieving a ROIC of “close to 8%” was the company’s goal by FY2023, which he implied would help sustain Telstra’s 16 cents per share (cps) annual dividend. On the dividend, Goldman is bullish, stating that “the 16cps dividend is sustainable, and could be supplemented by meaningful TowerCo proceeds”.

A Telstra share price of $3.75 (as Goldman Sachs targets), implies a further upside of more than 20% on the current share price (not including any dividend returns). And if Telstra ever reaches the upper price target that Goldman states of $5.15 a share, it would imply upside of another 65%. Telstra hasn’t seen that kind of price in front of its name since way back in 2016.

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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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