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In recent months, the Telstra Group Ltd (ASX: TLS) share price has faced a downward trajectory. These times are marked by the persistence of inflation rates above the desired levels and a series of interest rate hikes aimed at addressing these concerns. With the possibility of another interest rate increase by the Reserve Bank of Australia (RBA) looming on the horizon, it's imperative to analyze the outlook for Telstra, its profit prospects, and its ability to weather the economic headwinds.
Prospects for Profit Growth
Telstra's performance is inherently forward-looking, and despite the economic challenges, its profits saw an uptick in FY23. The critical question is whether this trend of rising profits will persist in the near term and long term.
Telstra has offered guidance indicating that it expects its earnings before interest, tax, depreciation, and amortization (EBITDA) to rise by 2.5% to 5%, despite grappling with the adverse effects of inflation on its cost base.
A key factor aiding Telstra in offsetting these costs is the steady increase in its revenue. Telstra has aligned its mobile prices for subscribers with inflation, providing an organic boost to its financials. UBS, a prominent brokerage firm, has noted that mobile postpaid prices are "generally sticking better than expected," leading to optimism that Telstra can achieve growth in postpaid average revenue per user (ARPU) in FY24.
But what drives customers to accept higher prices? UBS suggests it's due to "continued improvements in Telstra brand perceptions on network coverage, reliability, and fast internet speeds." The brokerage firm also recognizes that Telstra is leading in overall price growth, which is viewed positively for the industry's dynamics, underlining the potential impact of revenue growth on Telstra's share price and profit in the coming years.
On the cost management front, Telstra has been diligently working towards achieving its $500 million net 'cost out' target by FY25, as part of its T25 strategy. In response to the inflationary environment, Telstra has announced a headcount reduction of approximately 472, potentially saving between $70 million to $90 million. Additionally, the shift of subscribers to fixed wireless from the National Broadband Network (NBN) presents an opportunity to capture more margin.
Continuing the focus on cost reduction, Telstra is actively decommissioning legacy infrastructure and integrating artificial intelligence (AI) into key processes. UBS sees potential for additional efficiencies beyond FY25, driven by operational streamlining and optimization of InfraCo Fixed as it is reintegrated into the Telstra structure.
Telstra Share Price Valuation
UBS' current forecasts point to the possibility of Telstra's earnings per share (EPS) and dividend per share increasing annually between FY24 and FY28. For FY24, Telstra could generate an EPS of 19 cents and pay a dividend per share of 18 cents.
This would position the Telstra share price at 20 times the estimated earnings for FY24, offering a grossed-up dividend yield of 6.75%. Despite market challenges, Telstra's commitment to cost management, revenue growth, and positive investor sentiment about its prospects indicate a potential for resilience in the face of economic headwinds.
