This article first appeared in The Edge Malaysia Weekly on May 31, 2021 - June 6, 2021

THE verdict of arbitrators, which found George Kent (M) Bhd to have acted in breach of its shareholder agreement in regard to its joint-venture company (JVCo) with Malaysian Resources Corp Bhd (MRCB), has added an interesting narrative to the situation.

The deadlock is likely to end in only one party taking control of the JVCo, George Kent MRCB Sdn Bhd, unless both parties are able to resolve their dispute or if MRCB withdraws its notice concerning the shareholder agreement breach.

“I believe it has gone beyond the point of resolving the dispute, otherwise, this would not have dragged on or be allowed to be taken to arbitrators,” says a person familiar with the issue.

“Obviously, MRCB would be a more natural choice to take on the project given their experience in civil engineering. They were involved in LRT 2 and also MRT 2, and they have the financial capacity to take on the project. They also have the backing of the Employees Provident Fund (EPF), which is a 36% shareholder,” he adds.

While the announcement to Bursa Malaysia last week (May 24) saw the arbitration decision in favour of MRCB, it also said an independent audit firm will be brought into the JVCo to carry out a valuation of the company’s shares on a discounted cash flow basis.

Upon conclusion of the valuation exercise, unless both parties resolve their dispute or if MRCB withdraws its notice concerning the shareholder agreement breach, MRCB must make an unconditional cash offer to buy all of George Kent’s shares in the JVCo, and unconditionally offer to sell all of its shares in the JVCo to George Kent at the same price.

The deadlock resolution process is expected to take four months.

Notably, the JVCo in question is the project delivery partner for the RM11.4 billion Light Rail Transit 3 (LRT 3) project that links Bandar Utama to Klang.

That said, the question that looms now is whether George Kent will be able to show that it has the funds to take over the JVCo and the LRT 3 project.

People in the industry believe that it will be a difficult feat for George Kent given that the reason for the arbitration, which started in August 2019, was due to a dispute over the options for securing financing requirements for the JVCo.

Furthermore, it is understood that MRCB has put in a bank guarantee for the project of just under RM600 million while George Kent has yet to do so. The amount is more than George Kent’s market capitalisation of RM422 million at its close last Thursday.

As at Jan 31, 2021, George Kent had cash, including financial assets, amounting to RM236.74 million while its borrowings totalled RM82.79 million, leaving it with net cash of RM154 million.

While it is in a net cash position, its revenue growth in recent years has been on the decline. Over the past five years, its revenue has halved from RM598.96 million in FY2017 to RM276.211 million in FY2021.

Financing aside, industry observers point out that ultimately, George Kent is a water meter specialist with little experience in rail construction projects.

Notably, the company recently secured a new contract worth RM624.1 million — its first construction contract since 2016 if the re-awarding of the LRT 3 turnkey contract in 2019 is excluded.

The contract is part of an agreement whereby it has been invited to acquire a 40% stake in Dynacare Sdn Bhd, a wholly-owned subsidiary of Johan Holdings Bhd, which will undertake glove manufacturing.

Johan is a company in which Tan Sri Tan Kay Hock holds a 61% stake. Tan also owns 45% equity interest in George Kent, where he is the chairman.

The project includes RM213.4 million worth of jobs relating to infrastructure and utilities for a new glove manufacturing plant and RM410.7 million for the supply of equipment, machinery and ancillary system.

Some have attributed the success of George Kent before 2018 to strong political connections as Tan is known to be a close associate and golfing buddy of former prime minister Datuk Seri Najib Razak.

Its fortunes changed after it diversified into railway construction, largely through joint ventures.

Meanwhile, MRCB’s books show total cash and bank balances, plus investment securities, of RM842 million as at Dec 31, 2020, and total borrowings of RM1.93 billion, giving it a net gearing ratio of 0.24 times.

Its revenue has also halved in the last five years from RM2.4 billion in FY2016 to RM1.2 billion in FY2020.

MRCB’s largest shareholder is the EPF with a 36.2% stake, followed by Garpuna Sdn Bhd with 15.48% and Lembaga Tabung Haji with 5.9%. Garpuna is the private vehicle of businessman Tan Sri Mohamad Salim Fateh Din, who is the father of MRCB group managing director Mohd Imran Mohamad Salim.

While MRCB looks like the obvious choice, observers say the company that takes over the project would still likely need the green light from the government, given that LRT 3 is a public-interest project.

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