Tunnel Vision

Lendlease Group recently stopped work for several days on two tunnel boring machines at the Melbourne Metro Tunnel as tensions escalated between the Victorian government and the construction consortium, of which Lendlease is a member, over delays and cost blow-outs. Work on the tunnel has since restarted after mediation, although there appears to be no detail on how overruns on the project will be handled.


The tunnel is Lendlease’s largest engineering project and is being built by the Cross Yarra Partnership (CYP). Besides Lendlease, the consortium includes John Holland, Bouygues Construction and Capella Capital.


Lendlease is close to agreeing a sale of its engineering and services (E&S) business, and the stoppage has a number of potential implications. The most likely is that the sale concludes, albeit with a contingent liability for Lendlease’s part in the tunnel consortium. Media reports suggest the amount in question is $200–300m in total, which would be equivalent to 4–5% of the project’s $5.3bn revenue, of which Lendlease’s share would be $65–100m. We note three weeks ago Lendlease reaffirmed its flagged restructuring cost of $450–550m (pre tax).


If the extent of the problem at Metro Tunnel is much larger than expected, the rail project could affect a sale of the engineering unit and result in an impairment. As the services division buyer is reported to be John Holland, a CYP consortium partner, it is also possible the services transaction could be affected. The work stoppage increases this risk, in our view.


Lendlease is in a sound capital position, and its gearing level should stabilise at the mid to upper point of its target range of 10–20% as two key development projects (Barangaroo South in Sydney and TRX in Kuala Lumpur) ramp up production over the next three years. Barangaroo South is also a catalyst for Lendlease to trade at a higher multiple, in our view, given its strong forecast profit contribution in FY23 and FY24.