KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research is striking an optimistic tone on the prospects of Gamuda Bhd
as it believes Australia's Sydney Metro West (SMW) project is too costly for the New South Wales government to abort given its current stage of progress.
"Taking cue from Gamuda’s progress rate, we reckon the other packages could be similar – where at the completion of the review process (October 23), potential loss and expense claims would have climbed even higher," it said in its latest update.
This comes amid reports from Australian media that the NSW government was mulling the feasibility of the project following a revision of its cost estimate to A$25bil, which is significantly higher than its initial estimate of A$16bil.
Based on its assumption that the project will continue, HLIB maintained a "buy" rating on Gamuda with an unchanged target price of RM4.92.
Reviewing the progress made on the project, the research firm estimates that the Western package undertaken by the Gamuda joint venture with Laing O' Rourke could be nearing 40% completion with one tunnel boring machine (TBM) in the ground.
Tunneling in the Central package, which was awarded to the Acciona-Ferrovial joint venture, has made the most progress among the three packages while the Eastern package has also commenced tunnelling operations.
"During this review period, we understand from management there has been no directive to slow down or pause on works," said HLIB.
The research firm said it believes the project-wide cost blowouts are inflation-driven and, thus, not surprising.
It also suggested that political pressure on the NSW premier from members of his own Labour party could also affect any future decision taken.
However, HLIB doesn't discount spillover effects to Gamuda's FY23 and FY24 Australian projects pipeline, which is valued at A$26.4bil, as NSW's Labour party reviews its direction on infrastructure.
Some 20% or A$3.5bil of Gamuda's Australian pipeline is within NSW although Gamuda's upcoming Suburban Rail Loop East packages fall under the purview of the state of Victoria.
As Victoria's state elections were held in November 2022, HLIB doesn't foresee any further state election risk to the pipeline.
Assuming the SMW project is cancelled, HLIB said its FY24 and FY25 earnings forecsts will decline 5.8% and 10.6% respectively.
However, it said Gamuda could have legal recourse to adequately recover its loss and expense incurred.
It said the SMW project forms 22.3% of Gamuda's unbilled orderbook as at end-April 2023.
