CGS International
Date of Report: September 3, 2025
Malaysia Market Outlook 2025: Why Investors Should Look Beyond Weak Earnings for a Brighter KLCI Future
Executive Summary: Navigating a Challenging Earnings Patch
The Malaysian equity market has faced a challenging first half of 2025, with aggregate core earnings for both the CGS International coverage universe and the KLCI slipping by 5.5% and 2.5% year-on-year, respectively. In this in-depth analysis, we break down sector-specific performance, key results, and strategic stock recommendations, and explain why investors should remain optimistic for a market rebound as macroeconomic catalysts line up for the months ahead.
2Q25 Results: Disappointments and Bright Spots Across Sectors
The 2Q25 earnings season saw mixed results across the 94 stocks under active coverage by CGS International:
61% of companies reported earnings in line with expectations.
29% posted results below expectations.
Only 11% managed to surpass forecasts.
Compared to the previous quarter, the ratio of positive to negative surprises slipped slightly, suggesting a persistent but not escalating softness in corporate performance.
Key Sector Performance: A Closer Look
| Sector | 2Q24 (RM m) | 1Q25 (RM m) | 2Q25 (RM m) | QoQ Change | YoY Change | 1H24 (RM m) | 1H25 (RM m) | YoY Change |
|---|---|---|---|---|---|---|---|---|
| Agribusiness | 1,134 | 1,284 | 1,248 | -2.8% | 10.1% | 1,909 | 2,532 | 32.7% |
| Automotive | 473 | 196 | 356 | 81.6% | -24.8% | 977 | 551 | -43.6% |
| Construction & Materials | 660 | 703 | 682 | -3.0% | 3.3% | 1,277 | 1,385 | 8.5% |
| Consumer | 962 | 1,096 | 910 | -16.9% | -5.4% | 2,032 | 2,005 | -1.3% |
| Financials | 9,042 | 9,442 | 9,211 | -2.4% | 1.9% | 17,863 | 18,653 | 4.4% |
| Healthcare | 669 | 613 | 626 | 2.2% | -6.4% | 1,325 | 1,239 | -6.5% |
| Oil & Gas | 1,222 | 721 | 753 | 4.4% | -38.3% | 2,273 | 1,475 | -35.1% |
| Technology | 189 | 184 | 168 | -8.8% | -10.9% | 389 | 352 | -9.4% |
Sectors Facing Headwinds
– Consumer: Disappointments mainly due to company-specific factors. – Gloves: Slower-than-expected sales volume recovery. – Healthcare: Restrictions on claims procedures from payors led to a tapering of patient volumes. – Technology: Cost pressures weighed on results.
Sectors Outperforming
– Transport: MISC’s LNG earnings were underestimated and Westports’ container volume was higher than anticipated, thanks to US tariff frontloading.
Aggregate Earnings: Normalizing After Post-Pandemic Boom
The modest decline in aggregate core earnings (-5.5% YoY for the coverage universe, -2.5% YoY for KLCI constituents) is understandable given: – The higher base from strong post-pandemic growth (9.3% CAGR between 2022-2024). – External volatility, especially from US tariff changes post-Liberation Day.
If loss-making outliers (Hibiscus, LCTitan, PChem) are excluded, 1H25 core earnings are nearly flat (-1.4% YoY).
Macro Tailwinds: Why Investors Should Stay the Course
Despite the soft results, CGS International strongly advises investors to look beyond the current patch and prepare for a potential US Federal Reserve rate cut cycle. Key points: – Softer US inflation in July 2025 and Fed Chair Powell’s dovish tone at Jackson Hole suggest a rate cut could come as soon as September 2025. – A reduction in the Fed Funds Rate (FFR) and a narrowing spread with Malaysia’s Overnight Policy Rate (OPR) would be positive for the ringgit and Malaysian equities. – Historically, a narrowing FFR-OPR spread led to an 11.3% surge in the ringgit in 3Q24 and a 7.3% rally in the KLCI. – The KLCI and FFR-OPR spread show a -41% inverse correlation, indicating further potential upside for the market, particularly with foreign shareholding now at a record low (18.8% as of August 2025).
Revised KLCI Target: Room for Optimism into Year-End
– 2025F/2026F KLCI earnings growth now projected at 4.0%/7.2% (from 5.4%/7.3% previously). – Year-end KLCI target raised slightly to 1,690 (from 1,670), using a 14.9x P/E (-0.5 standard deviation). – High Conviction (HC) list is rebalanced: CIMB removed, RHB Bank added.
Detailed Company Analysis and High Conviction List
Below is a full breakdown of the highlighted stocks, including target prices, valuations, and forward dividend yields.
| Company | Ticker | Market Cap (US\$ m) | Share Price (Local) | Target Price (Local) | 2025 P/E (x) | 2026 P/E (x) | 2025 P/BV (x) | 2026 P/BV (x) | 2025 Dividend Yield | 2026 Dividend Yield |
|---|---|---|---|---|---|---|---|---|---|---|
| Tenaga Nasional | TNB MK | 18,241 | 13.24 | 18.00 | 17.9 | 15.7 | 1.3 | 1.2 | 3.9% | 3.8% |
| Hong Leong Bank | HLBK MK | 10,267 | 20.04 | 30.70 | 9.1 | 9.2 | 1.1 | 1.0 | 4.6% | 4.9% |
| SD Guthrie Bhd | SDG MK | 8,238 | 5.04 | 5.85 | 20.4 | 25.6 | 1.6 | 1.6 | 2.4% | 2.0% |
| Gamuda | GAM MK | 7,692 | 5.61 | 7.30 | 27.9 | 21.3 | 2.7 | 2.4 | 1.0% | 1.0% |
| RHB Bank Bhd | RHBBANK MK | 6,804 | 6.60 | 7.36 | 9.0 | 7.8 | 0.8 | 0.8 | 6.4% | 7.6% |
| Telekom Malaysia | T MK | 6,277 | 6.92 | 8.70 | 14.1 | 12.4 | 2.4 | 2.3 | 4.1% | 4.8% |
| Axiata Group | AXIATA MK | 5,319 | 2.45 | 3.40 | 39.5 | 25.6 | 1.0 | 1.0 | 4.0% | 4.3% |
| Mr D.I.Y. Group (M) Bhd | MRDIY MK | 3,336 | 1.49 | 2.09 | 22.3 | 18.8 | 6.9 | 6.3 | 3.4% | 4.3% |
| Fraser & Neave Holdings | FNH MK | 2,351 | 27.12 | 36.50 | 17.0 | 15.9 | 2.5 | 2.3 | 3.2% | 3.3% |
| Dialog Group Bhd | DLG MK | 2,534 | 1.90 | 2.55 | 23.0 | 19.7 | 1.7 | 1.6 | 1.8% | 2.1% |
| Malayan Cement Bhd | LMC MK | 1,843 | 5.75 | 7.60 | 11.4 | 11.0 | 1.1 | 1.0 | 2.4% | 2.4% |
| Duopharma Biotech Bhd | DBB MK | 314 | 1.38 | 1.74 | 15.4 | 13.2 | 1.8 | 1.6 | 2.8% | 2.9% |
| Mynews Holdings Berhad | MNHB MK | 98 | 0.56 | 0.75 | 25.1 | 15.4 | 1.6 | 1.5 | 1.5% | 3.2% |
| Optimax Holdings | OPTIMAX MK | 73 | 0.57 | 0.81 | 17.7 | 16.9 | 4.2 | 3.8 | 3.8% | 3.0% |
Company-Specific Highlights
- CIMB Group Holdings Bhd: Removed from the High Conviction list after 1H25 net profit fell short (46% of forecast) due to lower-than-expected net and non-interest income.
- RHB Bank Bhd: Added to the HC list. Notable for above-industry loan growth, improving operational efficiency, and projected ROE growth (9.6% in FY25F to 10.6% in FY27F). High dividend yield forecasted (6.4% in 2025F, 7.6% in 2026F).
Strategic Investment Outlook: Actionable Takeaways for Investors
– The short-term softness in earnings is being treated as a normalization phase after a period of exceptional post-pandemic growth. – The macro environment, particularly the likely narrowing of the FFR-OPR spread and a stronger ringgit, is expected to drive a market rebound. – The KLCI and coverage universe are positioned for mid-single digit earnings growth in 2025 and accelerating into 2026. – Investors are encouraged to accumulate fundamentally sound stocks, especially those on the High Conviction list.
Summary Table: CGS International Ratings Distribution (as of June 30, 2025)
| Rating | Percentage of Coverage | Investment Banking Clients (%) |
|---|---|---|
| Add | 70.6% | 1.1% |
| Hold | 20.5% | 0.5% |
| Reduce | 8.9% | 0.5% |
Final Thoughts: Why Malaysia Remains a Top ASEAN Equity Bet
Despite a softer patch in 1H25 earnings, Malaysia’s equity market remains poised for recovery. The combination of easing US monetary policy, a strengthening ringgit, and a compelling risk-reward profile—especially with record-low foreign ownership—makes Malaysia one of the more attractive markets in the region for investors looking to ride the next upcycle.
