SLP Resources Berhad: A Contrarian Play in Packaging with a 5.5% Dividend Yield

SLP Resources Berhad (KLSE: 7248) operates in Malaysia's packaging industry, a sector that often flies under the radar of global investors. Yet, beneath its modest stock price of MYR 0.87 lies a company with no debt, a MYR 86.6 million net cash position, and a 5.49% dividend yield—metrics that make it a compelling contrarian opportunity. For investors willing to look past short-term headwinds, SLP offers a blend of income potential and valuation upside in a volatile market.

The Contrarian's Case: Dividends, Cash, and Undervaluation

Key Investment Angle: SLP's dividend yield is 5.49%, among the highest in its sector, yet its stock has fallen 8.95% over the past year (beta of 0.30, suggesting muted volatility). This disconnect hints at a market undervaluing its cash-rich balance sheet and long-term stability.

1. Dividend Sustainability: Cause for Caution or Confidence?

The dividend payout ratio of 121.63% (based on trailing net income of MYR 12.38 million) is alarmingly high. However, two factors temper this concern:
- Cash Reserves: SLP holds MYR 86.6 million in net cash, or MYR 0.27 per share—equivalent to 31% of its current market cap. This cushion could fund dividends for years even if profits stagnate.
- Free Cash Flow: The company generated MYR 13.8 million in free cash flow over the last 12 months, covering dividends (MYR 5.4 million annualized) comfortably.

While the payout ratio is unsustainable if profits decline further, the cash buffer and steady free cash flow suggest management can maintain dividends without drastic cuts.

2. Valuation: A P/E of 22.15 in a 65.44 Average Industry

SLP's price-to-earnings (P/E) ratio of 22.15 is 60% below its 10-year average of 65.44. This stark discount raises questions:
- Is the market overreacting to margin pressures? Q2 2024 saw net income drop 7.2% despite a 11% revenue rise, due to higher expenses. Yet, full-year 2024 net income grew to MYR 14.04 million, up 32% from 2023.
- Is the sector undervalued? The packaging industry in Malaysia and Asia is poised for growth, with forecasts of 6% annual revenue expansion over the next three years. SLP's current valuation may not reflect this tailwind.

3. Contrarian Catalysts: A Cash Machine in a Defensive Sector

• Low Debt, High Liquidity: With zero debt and a current ratio of 8.60, SLP is financially bulletproof. This stability is rare in cyclical sectors like packaging.
• Global Footprint: The company supplies polybags, hygienic packaging, and resins to markets in Japan, Australia, and beyond. A weaker ringgit could boost export profitability.
• New Client Momentum: A new Japanese client order secured in May 2025 promises margin improvements in 2026, offering a catalyst for future growth.

Risks to Consider

• Margin Pressures: Rising expenses (Q2 2024 profit margin fell to 7.7%) could limit earnings growth unless costs stabilize.
• Dividend Overhang: The payout ratio above 100% is unsustainable long-term without profit recovery. A dividend cut could spook investors.
• Industry Competition: SLP's projected revenue growth of 5.1% annually trails Malaysia's packaging sector's 6% forecast, signaling competitive challenges.

Investment Thesis: Buy the Dip, Harvest the Yield

SLP Resources Berhad is a classic contrarian pick: high yield, low volatility, and a valuation discount that doesn't align with its cash-rich profile. While risks exist, the MYR 0.27 per share in cash and consistent free cash flow provide a safety net. For income-focused investors, the 5.5% yield offers a compelling entry point, especially if the stock's recent 1.1% uptick (Q1 2025) signals a bottom.

Actionable Strategy

• Entry Point: Accumulate shares near MYR 0.85–0.90, using dips as buying opportunities.
• Hold for: 12–18 months to capture dividend income and valuation reversion.
• Exit Signal: A P/E ratio exceeding 30 (closer to its historical average) or a dividend cut.

Conclusion

SLP Resources Berhad isn't a high-growth darling. But for contrarians seeking stability and income in a volatile market, it offers a rare blend of cash, dividends, and undervaluation. While risks like margin pressures linger, the company's financial fortress and sector tailwinds justify a closer look. In a world of uncertainty, this MYR 0.87 stock could be a quiet winner.

Disclaimer: Always conduct independent research and consult a financial advisor before making investment decisions.