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How do you value the Telstra (ASX:TLS) share price?

How do you know if Telstra shares are good value?
The post How do you value the Telstra (ASX:TLS) share price? appeared first on The Motley Fool Australia. –

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.

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.

The post How do you value the Telstra (ASX:TLS) share price? appeared first on The Motley Fool Australia.

Should you invest $1,000 in Telstra right now?

Before you consider Telstra, you’ll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and Telstra wasn’t one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of May 24th 2021

More reading

FY 2021 results preview: What is built into the Telstra share price?

Leading brokers name 3 ASX shares to buy today

ASX 200 Weekly Wrap: ASX grinds to a halt following new all-time high

2 ASX shares rated as strong buys by brokers

Top ASX shares to buy in August 2021

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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