Strategy
Strategy: 2Q26 Results Wrap: Positive Earnings Breadth With Constructive Outlook, But Downside Risks Are Building
Analyst
Analyst
Analyst
Highlights
- The improvement in earnings breadth in 2Q26, reflected by a higher proportion of positive surprises and fewer disappointments, was partly due to more prudent cost assumptions incorporated during the previous reporting season amid the Middle East conflict.
- While we remain constructive on Malaysian equities in 2026, supported by a selective earnings recovery and thematic opportunities, we are increasingly mindful of downside risks heading into 4Q26, including persistent geopolitical tensions, a higher-for-longer cost environment, volatile foreign fund flows and profit-taking following the market’s recent rally.
- We stay selective, favouring high-quality, large-cap domestic leaders with resilient earnings, robust cash flows and strong balance sheets.
- Top picks: 99 Speedmart, CIMB Group, Eco World Development, Greatech, Kuala Lumpur Kepong, MISC, Solarvest Holdings and Tenaga Nasional.
Analysis
- Earnings breadth improved during the 2Q26 results season as positive surprises (20% vs 1Q26: 10%) outpaced disappointments (16% vs 1Q26: 34%). Sector wise, autos (2 above, 1 below), gloves (2 above, 1 in-line), NFOs (2 above) saw the highest proportion of beats. Other notable positive surprises include IJM Corporation, Nestle, Petronas Dagangan, Inari and Vitrox. Misses were scattered this quarter with oil and gas (2 above, 3 in-line, 2 below) and tech (3 above, 5 in-line, 4 below) being mixed bags. Other notable misses include Oriental Kopi, SP Setia and Gas Malaysia (see overleaf table for details).
- Trimming our 2026 forecasts. After the results announcements, we trim our 2026 earnings forecasts for our coverage universe by 0.8%. However, we raise our 2027 earnings estimate marginally by 0.1%. We also cut our 2026/27 FBMKLCI earnings forecasts by 2.3%/1.9% respectively. The 2026 earnings downgrade is largely concentrated in the electronics manufacturing services (EMS) technology segment as well as construction and utilities. Looking to the KLCI segment, aside from the sectors mentioned above, banking also saw minor cuts to earnings (see overleaf table for details).
- We now expect our coverage universe to deliver 2026/27 earnings growths of 8.1%/9.4% respectively and the FBMKLCI to deliver 2026/27 earnings growths of 8.8%/7.7% respectively (previously 8.3%/9.6% for our coverage and 10.1%/7.3% for the FBMKLCI).
Action
- We maintain our end-26 FBMKLCI target at 1,760, which broadly implies -0.5SD PE (15.6x 2026F) vs the 10-year mean of 16.2x (our bottom-up FBMKLCI target is 1,968) after earnings updates.
- Entering into 4Q26, while speculation of an early general election has eased following indications that the Prime Minister may defer the national polls until 2H27, we expect market volatility to persist amid the growing impact of a higher-for-longer cost environment, as reflected in the recent reporting season and evolving geopolitical developments in the Middle East. With sentiment likely to remain cautious particularly following the outperformances of small- and mid-cap and cyclical names, we would look to progressively adopt a more defensive stance in 4Q26, hence we favour high-quality, large-cap domestic leaders offering resilient earnings, robust cash flows and defensive characteristics while selectively participating in mid-cap growth themes.
Highlights
- The improvement in earnings breadth in 2Q26, reflected by a higher proportion of positive surprises and fewer disappointments, was partly due to more prudent cost assumptions incorporated during the previous reporting season amid the Middle East conflict.
- While we remain constructive on Malaysian equities in 2026, supported by a selective earnings recovery and thematic opportunities, we are increasingly mindful of downside risks heading into 4Q26, including persistent geopolitical tensions, a higher-for-longer cost environment, volatile foreign fund flows and profit-taking following the market’s recent rally.
- We stay selective, favouring high-quality, large-cap domestic leaders with resilient earnings, robust cash flows and strong balance sheets.
- Top picks: 99 Speedmart, CIMB Group, Eco World Development, Greatech, Kuala Lumpur Kepong, MISC, Solarvest Holdings and Tenaga Nasional.
Analysis
- Earnings breadth improved during the 2Q26 results season as positive surprises (20% vs 1Q26: 10%) outpaced disappointments (16% vs 1Q26: 34%). Sector wise, autos (2 above, 1 below), gloves (2 above, 1 in-line), NFOs (2 above) saw the highest proportion of beats. Other notable positive surprises include IJM Corporation, Nestle, Petronas Dagangan, Inari and Vitrox. Misses were scattered this quarter with oil and gas (2 above, 3 in-line, 2 below) and tech (3 above, 5 in-line, 4 below) being mixed bags. Other notable misses include Oriental Kopi, SP Setia and Gas Malaysia (see overleaf table for details).
- Trimming our 2026 forecasts. After the results announcements, we trim our 2026 earnings forecasts for our coverage universe by 0.8%. However, we raise our 2027 earnings estimate marginally by 0.1%. We also cut our 2026/27 FBMKLCI earnings forecasts by 2.3%/1.9% respectively. The 2026 earnings downgrade is largely concentrated in the electronics manufacturing services (EMS) technology segment as well as construction and utilities. Looking to the KLCI segment, aside from the sectors mentioned above, banking also saw minor cuts to earnings (see overleaf table for details).
- We now expect our coverage universe to deliver 2026/27 earnings growths of 8.1%/9.4% respectively and the FBMKLCI to deliver 2026/27 earnings growths of 8.8%/7.7% respectively (previously 8.3%/9.6% for our coverage and 10.1%/7.3% for the FBMKLCI).
Action
- We maintain our end-26 FBMKLCI target at 1,760, which broadly implies -0.5SD PE (15.6x 2026F) vs the 10-year mean of 16.2x (our bottom-up FBMKLCI target is 1,968) after earnings updates.
- Entering into 4Q26, while speculation of an early general election has eased following indications that the Prime Minister may defer the national polls until 2H27, we expect market volatility to persist amid the growing impact of a higher-for-longer cost environment, as reflected in the recent reporting season and evolving geopolitical developments in the Middle East. With sentiment likely to remain cautious particularly following the outperformances of small- and mid-cap and cyclical names, we would look to progressively adopt a more defensive stance in 4Q26, hence we favour high-quality, large-cap domestic leaders offering resilient earnings, robust cash flows and defensive characteristics while selectively participating in mid-cap growth themes.
Analyst
Analyst
Analyst
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