IT is not every day that you see joint-venture partners in the construction industry go to arbitration over a difference of opinion about funding requirements.

This is why the business community was taken by surprise when George Kent (M) Bhd announced last week that it had served a notice of arbitration on Malaysian Resources Corp Bhd (MRCB) regarding a funding dispute involving their JV company, MRCB George Kent Sdn Bhd.

“There are so few jobs around that it is surprising there is a dispute of this nature when there is a huge contract at stake,” says an observer.

To recap, in early September 2015, MRCB George Kent, which is equally owned by the publicly traded companies, was appointed the project delivery partner for the RM31.45 billion LRT3 project linking Bandar Utama to Klang.

However, after Pakatan Harapan took over the government last year, it was decided that the structure of the LRT3 project would be changed to a fixed-price model. Its cost was thus slashed to RM11.4 billion (RM16.63 billion including land acquisition and financing costs).

“George Kent and MRCB have a difference of opinion in the interpretation of certain provisions of the shareholders’ agreement with regard to the options for securing of the financing requirements for the JV company. George Kent has, in exercising its rights under the shareholders’ agreement, referred the matter to arbitration to seek certain declarations as to the interpretation of those provisions of the shareholders’ agreement,” George Kent says in its announcement to Bursa Malaysia.

As this is uncommon in the industry,  one wonders whether it is just arbitration or if there is more to it than meets the eye?

At this juncture, the details of the funding requirements in dispute have not been made known, but questions have arisen as to whether George Kent is looking to exit the JV.

“A company like George Kent suing its partner, a GLC like MRCB, is not something you see often,” says the observer.

MRCB’s largest shareholder is the Employees Provident Fund (EPF) with a 35.95% stake, followed by Garpuna Sdn Bhd with 16.08% and Lembaga Tabung Haji with 7.02%. Garpuna is the private vehicle of businessman Tan Sri Mohamad Salim Fateh Din.

George Kent is controlled by its chairman Tan Sri Tan Kay Hock, who owns 42.21% of the company. He is known to be a close associate and golfing buddy of former prime minister Datuk Seri Najib Razak.

Considering the shareholding structure, it seems more likely for MRCB to want to end ties with George Kent,  remarks a construction industry executive. “MRCB is backed by the EPF, which owns 40% (41.92%) of RHB (Bank Bhd) …  so MRCB looks to be on a stronger footing to undertake such a huge contract but I am not sure about George Kent, which is not even known as a construction company.”

George Kent may be more of a water meter manufacturer than a construction company but its balance sheet is healthy with net cash of 37.6 sen per share as at April 30. However,  its revenue growth in recent years came to a halt in its financial year ended Jan 31, 2019. Revenue fell 30% year on year to RM431.63 million.

Its first quarter ended April 30 also saw a smaller revenue of RM82.78 million compared with RM99.76 million a year ago while net profit shrank 37% year on year to RM13.51 million.

However, George Kent is only likely to undertake a substantial investment into LRT3 if it is planning to remain a construction player.

Against this backdrop, analysts are concerned that George Kent’s current level of earnings might not be sustainable after the completion of LRT3, thanks to the scaling back of infrastructure projects.

For its part, MRCB has got its debt under control with net gearing at 0.23 times as at March 31. For that quarter, revenue was down 45.3% year on year to RM234 million, largely due to the completion of several big property projects last year while the newer projects were in the early stages of construction.

Some say George Kent’s success in recent years was due to its strong political connections. The group’s fortunes changed after it diversified into railway construction, largely through joint ventures.

The observer likens the JV between MRCB and George Kent to an arranged marriage, and suggests that now that Barisan Nasional is no longer in power, there is less motivation for the two companies to work together.

There is also concern that the arbitration may reveal other aspects of the contract, for example how the LRT3 project’s cost was reduced from RM31.45 billion to the current level.

Undoubtedly, the arbitration has raised many questions on the health of the George Kent-MRCB JV.