KUALA LUMPUR (July 31): Gamuda Bhd shares went through a sharp decline on Monday (July 31) morning, amid a slew of negative news linked to the Sydney Metro West project, casting uncertainties on the group’s contract in the Australian metro project, triggering a round of profit-taking on the stock that was on a steady rise since the beginning of last year.

Gamuda fell as much as 7.6% to RM4.16 on Monday, before paring some losses to close at RM4.30, down 20 sen or 4.4%, giving it a market capitalisation of RM11.45 billion.

Last week, Australia New South Wales Premier Chris Minns reportedly refused to rule out cancelling or delaying the AU$25 billion project, which cut travel time between the Sydney CBD (central business district)and Parramatta to about 20 minutes.

“I’m faced with a situation where[in] the project is nearly 60% over budget… it hasn’t begun yet and the original timeline, which would be a completion date in the mid-2020s, is obviously not going to happen,” he reportedly said.

Gamuda, through a joint venture with Laing O’ Rourke, bagged an AU$2.16 billion (RM6.5 billion) 9km (kilometre) tunnelling works project between Westmead and Sydney Olympic Park in March last year.

The scope of works involve excavation and civil works for new metro stations in the Parramatta CBD and Westmead health precinct; earthworks, civil structures, utilities and connecting tunnels for a maintenance and stabling facility at Clyde; and excavation and underground structures for the services facility at Rosehill.

According to an analyst who attended Gamuda’s recent briefing, management believes that the contract is “highly unlikely” to be affected, given the progress is almost at 40%, with one tunnel-boring machine working and the second one to start in two months.

Hong Leong Investment Bank has kept its “buy” rating and RM4.92 target price on Gamuda on Monday, despite concerns arising that the Sydney Metro West project, which forms 22.3% of the group’s unbilled orderbook as at end-April, might be scrapped by the government.

“Decision could come from October 2023 onwards, post-review. We take the view that based on [the] current progress, the project is likely too costly to abort with no end product.

“Nevertheless, we do not rule out possible cost cutting measures inflicted on other smaller, or yet to be awarded packages,” said Hong Leong analyst Edwin Woo in his report on Monday.

“During this review period, we understand from management [that] there has been no directive to slow down or pause on works,” he added.

Woo also noted that the project cost overrun might be driven by inflation over the past few years and hence, might not be surprising.

“Additionally, the New South Wales premier has also come under fire from members within the Labor party,” Woo said.

In the worst-case scenario with the Sydney Metro West project cancelled, Woo said it will result in 5.8% and 10.6% decline to his earnings forecast for Gamuda in financial years ending July 31, 2024 (FY2024) and FY2025, still translating to a “reasonable” price-to-earnings multiples of 14.5 times and 13 times.

“Under this scenario, we reckon that Gamuda may have legal recourse to adequately recover loss & expense incurred (including tunnel-boring machines),” he said.

For the nine-month period ended April 30, 2023 (9MFY2023), net profit derived from overseas construction activities amounted to RM68.21 million, equivalent to 11.2% of the group’s total core net profit of RM608.36 million.