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Corporate earnings: Tepid 1Q results prompt target downgrades
Higher proportion of companies miss expectations amid persistent macroeconomic headwinds and policy uncertainty
by RUPINDER SINGH
MALAYSIA'S corporate earnings season for the March 2025 quarter (1Q25) ended with more disappointments than positive surprises, prompting research houses to revise their earnings forecasts and lower year-end targets for the FTSE Bursa Malaysia KLCI (FBM KLCI).
Both Hong Leong Investment Bank Bhd (HLIB Research) and RHB Investment Bank Bhd (RHB Research) characterised the season as broadly underwhelming, with a higher proportion of companies missing expectations amid persistent macroeconomic headwinds and policy uncertainty, especially in the US.
More Misses Than Beats
In HLIB Research's coverage universe of 112 stocks, only 14% beat expectations, while 33% fell short and 53% came in line.
'On a sequential basis, the above-to-below ratio fell to 0.43 times from 0.73 times (consensus: 0.38 times from 0.57 times),' it said in a results round-up titled 'More Fizzle Than Sizzle'.
Similarly, RHB Research noted that '34% of the companies we cover chalked numbers that missed expectations, while 14% beat', compared to the previous quarter where 31% missed and 28% beat. The firm described the outcome as 'broadly in line with our expectations, in view of the prevailing macroeconomic vulnerability exacerbated by the (US President Donald) Trump administration's mercurial trade initiatives'.
The sectors that delivered positive surprises were construction and healthcare (RHB Research), and construction and gloves (HLIB Research).
On the other hand, earnings disappointments were concentrated in the automotive, oil and gas (O&G), gaming, technology and property sectors.
Notably, HLIB Research said earnings growth for its cover- age universe rose 3% quarter-on- quarter (QoQ), but declined 2% year-on-year (YoY), 'dragged chiefly by the gaming sector, IOI Proper- ties Group Bhd, Petronas Chemi- cals Group Bhd, Sime Darby Bhd and YTL Power International Bhd.'
Target Cuts, Earnings Revisions
Both research houses trimmed their FBM KLCI targets following weaker-than-expected earnings.
HLIB Research slashed its end-2025 FBM KLCI target to 1,640 from 1,690, based on an unchanged 14.5 times price-to-earnings (PE) ratio, reflecting 'our reduction in core profit'.
The firm now projects 2025/2026 FBM KLCI core earnings growth of +3.1%/+6.6%, compared to its earlier forecast of +6.1%/+5.8%.
Meanwhile, RHB Research lowered its target to 1,600 points from 1,650, citing a 3.5% downgrade to forward earnings estimates since early 2Q25.
'We have also trimmed financial year 2025 (FY25) and FY26 earnings estimates for RHB Research's coverage universe by 2% and 1.6%,' it said.
The FBM KLCI large-cap constituents saw modest negative adjustments, with the banking and O&G sectors contributing most to the downgrades.
'Negative adjustments in the bank and O&G sectors made up most of the cuts, exacerbated by lower earnings for IOI Corp Bhd and Sime Darby,' RHB said.
Banks' guidance remained stable, though RHB Research flagged risks of 'lower loan growth and smaller margins from one Overnight Policy Rate (OPR) cut'.
Tactical Opportunities Amid Uncertainty
Despite the cautious tone, both research houses see tactical opportunities amid recent market pullbacks.
HLIB Research believes its 'sell on strength' strategy has worked well, with the FBM KLCI down about 5% from its recent peak.
'We foresee investor clarity and confidence being restored in 4Q25, paving way for more sustained KLCI re-rating towards year-end,' it said.
The firm recommends a 'buy on weakness' strategy focused on high-beta, domestic-centric names that have declined more than 10% year-to-date (YTD) or offer dividend yields above 4%.
Among its top picks are CIMB Group Holdings Bhd, Sunway Bhd, Gamuda Bhd, 99 Speed Mart Retail Holdings Bhd, AMMB Holdings Bhd, IOI Properties, Dialog Group Bhd, Deleum Bhd and SMRT Holdings Bhd.
RHB Research also advocates a similar strategy but with a defensive tilt.
'We still advocate a buy-on-weakness strategy centred around defensive, domestic-centric names,' it said.
It cautions that 'near-term upside for equities will likely be capped by risks of further negative earnings revisions' and warns of lingering uncertainties due to 'the Trump administration's track record for unpredictability and frequent policy reversals'.
Outlook Hinges on External Risks
Both houses flagged external risks that could weigh on sentiment going forward, especially from US fiscal and trade policies.
HLIB Research warned: 'We believe markets are not pricing in adequate US tariff and fiscal risks… it could manifest with a lag and potentially weigh on FBM KLCI performance in 3Q25.'
RHB Research echoed similar concerns, highlighting second- and third-order effects from global trade deterioration and US fiscal strains.
'Potential US rate cuts, rising US debt levels, large US treasury bills issuances…raise the risk of a weaker US dollar, higher long-term bond yields, and potential mark-to-market losses for owners of long-dated papers.'
While domestic liquidity remains ample, both firms agree that investor confidence may take time to recover.
As such, stock-picking and timing will be key in navigating the remainder of the year.
This article first appeared in The Malaysian Reserve weekly print edition
