Can-One Berhad: Dividend Sustainability Under Strain Amid Cash Flow Volatility

Can-One Berhad (KLSE:CANONE) has long been a symbol of dividend consistency in Malaysia's equity market, but recent financial trends raise critical questions about its ability to sustain payouts in a volatile economic environment. Despite maintaining a MYR0.04 annual dividend since 2020, the company faces headwinds from deteriorating profitability, erratic cash flows, and declining returns on capital. This analysis dissects the sustainability of Can-One's dividend and its growth potential through the lens of cash flow stability, earnings trends, and dividend coverage.

Cash Flow Stability: A Rollercoaster Ride

Can-One's operating cash flow has been anything but stable. After peaking at RM466.8 million in 2022, it plummeted to RM174.99 million in 2024—a 60% drop—while free cash flow turned negative for the first time in five years (-RM10.32 million). This volatility stems from inconsistent revenue generation and elevated capital expenditures, which hit RM385.67 million in 2022. While the dividend remains covered by free cash flow (8.8% payout ratio), the 2024 free cash flow deficit signals a critical turning point.

Investors should note that negative free cash flow often precedes dividend cuts, especially when paired with losses. Can-One reported a net loss of RM0.10 per share in FY2024, funded by reserves rather than earnings—a practice unsustainable without a turnaround.

Earnings Trends: Decline and Uncertainty

The company's earnings trajectory paints a bleak picture. Earnings per share (EPS) dropped from RM0.17 in 2023 to a loss of RM0.082 in 2024, while its Return on Capital Employed (ROCE) fell to a mere 2% in 2024, far below the packaging industry's 8.9% average. Analysts predict a modest 12.3% EPS growth over the next 12 months, but this hinges on cost control and revenue recovery.

The stock's 15% decline over five years reflects investor skepticism about these projections. Without sustained profitability, the dividend's 1.9% yield—below the industry average of 4%—offers little comfort to income-focused investors.

Dividend Coverage: A Delicate Balance

Can-One's dividend has been maintained through cash reserves and operational cash flow, but this strategy is increasingly risky. The payout ratio turned negative in 2024 (-22%), meaning dividends were funded by losses, not profits. While the dividend's cash coverage remains positive (8.8%), it is narrowing as free cash flow deteriorates.

The dividend yield's slide to 1.9%—below even the bottom 25% of Malaysia's equity market (2.2%)—highlights its diminished appeal. Competitors like Cartona Packaging (KLSE:CARTONA), with a 5.6% yield, now offer better income prospects.

Investment Outlook and Recommendations

Risk Factors:
1. Profitability Crisis: Persistent losses and low ROCE indicate inefficiencies that may take years to resolve.
2. Cash Flow Risk: Negative free cash flow in 2024 suggests reserves are dwindling, raising the specter of dividend cuts.
3. Valuation Pressure: The stock's 15% five-year decline reflects skepticism about management's ability to turn the ship around.

Investment Thesis:
- Bull Case: If Can-One achieves its projected 12.3% EPS growth and reverses ROCE to above 5%, the dividend could remain intact. However, this requires aggressive cost-cutting and revenue growth—unlikely in a stagnant market.
- Bear Case: A further EPS decline or prolonged negative free cash flow would force a dividend reduction, triggering a sell-off.

Actionable Advice:
- Hold for Now: The dividend's current coverage allows a wait-and-see stance, but only for investors willing to tolerate high volatility.
- Avoid for Income: The yield is uncompetitive, and payout sustainability is too uncertain.
- Watch for Catalysts: Monitor Q3 2025 results for signs of margin improvement or cost discipline. A positive ROCE trend or positive free cash flow reversal could shift sentiment.

Conclusion

Can-One Berhad's dividend sustainability hangs by a thread. While cash flow coverage remains positive, the erosion of profitability and free cash flow points to risks that outweigh rewards for most investors. The stock's valuation and yield offer little margin of safety, and growth potential is contingent on execution risks management has yet to prove they can mitigate. For now, a cautious “hold” stance is warranted, but income seekers should look elsewhere.