Assessing RKI's Dividend Resilience Amid Eroding Earnings and Margins

For income-focused investors, Rhong Khen International Berhad (RKI) presents a paradox: a historically generous dividend yield paired with a recent slide in profitability. As the company navigates a challenging operating environment, the question looms: can long-term shareholders still benefit from dividends despite deteriorating earnings and margins?

Declining Earnings and Margins: A Cause for Concern

RKI's financials in 2025 reveal a stark divergence from its past performance. The company reported a net loss of -1.89 million MYR in the most recent quarter, a 120.89% plunge from the previous quarter's 9.04 million MYR profit. While EBITDA remains positive at 46.41 million MYR (8.67% margin), this metric masks underlying fragility. Gross margins have contracted to 12.65%, and net profit margins hover at a meager 1.68%, far below industry benchmarks.

The decline is not isolated to one quarter. Over the past five years, earnings per share (EPS) have shrunk by 8.1% annually, with Q3 2025 marking a loss of 0.01 MYR per share compared to a 0.003 MYR profit in 2024. This trend raises concerns about RKI's ability to sustain its dividend in the face of shrinking cash reserves.

Dividend Strategy: High Yields, High Risks

RKI's dividend history is a mixed bag. In 2024, the company offered a 5.30% yield, up from 3.10% in 2023, with a payout ratio of 109.38%—a red flag for sustainability. Recent reports suggest a payout ratio of 133%, further deepening the disconnect between earnings and dividend commitments. However, free cash flow coverage provides a glimmer of hope: dividends consumed only 14% of free cash flow in 2024, indicating the payout is currently supported by operational cash generation.

The proposed 2025 dividend of 0.03 MYR per share (final) and 0.06 MYR per share (interim) suggests management remains committed to shareholder returns. Yet, with EPS growth projected at 40.43% for 2025, analysts caution that this optimism hinges on unrealistic assumptions. If earnings fail to rebound, the payout ratio could balloon to unsustainable levels.

Historical Returns vs. Recent Performance

RKI's 10-year dividend growth rate of 2.4% annually pales in comparison to its 5-year EPS growth of 4.5%, underscoring a disconnect between historical returns and current realities. The stock has outperformed the MY Consumer Durables sector (-20.6%) and broader market (-6.1%) over the past year, with a 2.4% return. However, this outperformance is largely due to its low volatility (3.5% weekly) rather than robust fundamentals.

Analyst Outlook: A Tenuous Path Forward

Analysts remain divided. While some highlight RKI's strong free cash flow and conservative debt (2.1% debt-to-equity), others warn of a “dividend trap.” The projected 40.43% EPS growth in 2025 is contingent on a rebound in demand for wooden furniture and cost controls. Given RKI's exposure to volatile markets like Vietnam and Thailand, geopolitical or economic shocks could derail these plans.

Investment Considerations for Income Investors

For long-term shareholders, RKI's dividend strategy is a double-edged sword. The current 3.1% yield is attractive, but the high payout ratio and declining earnings pose significant risks. Investors must weigh the following:
1. Free Cash Flow Reliance: While dividends are well-covered by cash flow today, this could change if margins continue to erode.
2. Earnings Volatility: A single quarter's loss (-1.89 million MYR) highlights operational instability.
3. Growth Prospects: The 40.43% EPS growth forecast is optimistic and may not materialize.

Conclusion: Proceed with Caution

RKI's dividend remains a draw for income investors, but its sustainability is far from guaranteed. The company's ability to maintain payouts hinges on a rebound in earnings and disciplined cost management. While the current free cash flow position offers a buffer, the deteriorating margins and volatile earnings suggest a high-risk profile.

For those with a high-risk tolerance and a long-term horizon, RKI could be a speculative bet. However, conservative investors should prioritize companies with stronger earnings visibility and lower payout ratios. In a challenging operating environment, RKI's dividend strategy is a gamble—one that demands close monitoring of quarterly reports and cash flow trends.

Final Verdict: Hold for now. Investors should wait for clearer signs of earnings stabilization before committing to RKI as a core income holding.