Lysaght Galvanized Steel Berhad: High-Yield Dividends Amid Economic Crosswinds

Lysaght Galvanized Steel Berhad (KLSE:LYSAGHT) has long been a darling of income investors, offering a steady dividend stream despite its small-cap status. With a recent dividend yield of 6% and a RM91 million cash war chest, the company appears to balance stability and opportunity. However, its first-quarter 2025 results revealed cracks in its growth narrative. This article examines whether Lysaght can sustain its dividend policy—or if investors are overlooking mounting risks.

Financial Health: Debt-Free, But Profitability Wobbles

Lysaght's debt-free balance sheet is its strongest asset. With zero long-term debt and RM91 million in cash, the company has ample liquidity to navigate cyclical downturns. Its equity position is robust (RM171 million total shareholder equity), and short-term assets far exceed liabilities, mitigating liquidity risks.

However, profitability has stumbled. Revenue fell 19% in Q1 2025 compared to the prior year, while net income dropped 59% to RM1.49 million. This contraction pushed the profit margin to 8.2%, nearly halving from Q1 2024's 16%. The EPS plunged to RM0.036, down from RM0.086, raising questions about the sustainability of its dividend policy.

Dividend Track Record: High Yield, But Payout Ratio Risks

Lysaght's dividend policy has been inconsistent but generous. In 2024, it paid RM0.50 per share annually, including a final dividend of RM0.07 announced in June 2025. This payout, yielding 6% at current prices, is tempting for income seekers.

The problem lies in the payout ratio. Analysts project that maintaining the RM0.07 dividend would require a payout ratio of 176% of trailing earnings if Q1's weak performance persists. Historically, the payout ratio has fluctuated—reaching 140% in 2021—but such levels are unsustainable long-term. Lysaght's 5-year EPS growth of just 4.7% further underscores the challenge of growing dividends without eroding earnings.

Growth Potential: Economic Headwinds and Management Concerns

Lysaght's reliance on Malaysia's construction and manufacturing sectors exposes it to macroeconomic risks. A slowdown in infrastructure spending or rising raw material costs (e.g., steel scrap) could exacerbate profit pressures. The company's Q1 revenue decline may signal a broader demand slump.

Adding to concerns, three key directors resigned in June 2025, including the Audit Committee chairman. While the reasons are unclear, leadership turnover can disrupt strategic planning and investor confidence.

Investment Considerations

Pros:
- High yield: The upcoming RM0.07 dividend offers attractive income for conservative investors.
- Cash-rich balance sheet: No debt provides a safety net against short-term shocks.
- Dividend history: Despite volatility, the company has prioritized payouts over share buybacks.

Cons:
- Earnings volatility: Quarterly revenue swings (e.g., a -27% YoY drop in 2023) suggest fragility.
- Payout ratio risks: A payout ratio exceeding 100% could force dividend cuts or equity dilution.
- Management uncertainty: Leadership changes may delay growth initiatives.

Verdict: A High-Yield Play, but Proceed with Caution

Lysaght Galvanized Steel Berhad is a compelling option for income investors seeking yields above Malaysia's benchmark bond rates. Its dividend, backed by strong cash reserves, is likely safe in the near term. However, the company must stabilize revenue and improve margins to avoid overextending its payout ratio.

Recommendation:
- Hold for income: Investors focused on dividends may retain shares, but monitor quarterly results closely.
- Avoid for growth: The lack of top-line growth and macro risks make it a poor pick for capital appreciation.
- Risk management: Set a stop-loss if the stock price falls below RM2.00 or if the payout ratio exceeds 150%.

In conclusion, Lysaght remains a high-yield outlier in Malaysia's industrial sector, but its dividend future hinges on stabilizing profitability and retaining strong leadership. For now, it's a trade for income—but not a buy-and-forget investment.