KUALA LUMPUR (Feb 17): The FBM KLCI reported that earnings are expected to record positive sequential growth of 3.6% on a quarter-on-quarter (q-o-q) basis for the fourth quarter of calendar year 2016 (4QCY16), according to MIDF Research.

In a strategy report today, MIDF reiterated its FBM KLCI year-end 2017 target at 1,830 points despite the short-term price volatility that is influenced by market sentiment other situational issues.

"[Based] on the expectation of further earnings recovery this year, we reiterate our 2017 FBM KLCI target at 1,830 points. The baseline target equates to PER17 of 17.1 times," it said.

For the quarter ended December 2016, the aggregate reported earnings of the bourse's current constituents is estimated at RM14.81 billion, said the research house.

"Against the combined RM14.3 billion earnings reported in preceding quarter, it is expected to record a positive sequential growth of 3.6% q-o-q in 4QCY16 while the on-year reported growth figure is estimated to drop by 2.9% year-on-year (y-o-y)," it said.

On the other hand, the FBM KLCI's adjusted earnings for extraordinary and non-recurring items may also arise to 4.3% for q-o-q basis and 1.1% for y-o-y performance.

Among the FBM KLCI's high-weighted sectors such as banking, utility, telecommunication, oil and gas (O&G) as well as plantation, MIDF Research anticipates positive on-year adjusted earnings growth performance for banking, plantation and O&G in 4QCY16.

Meanwhile, the aggregate adjusted earnings of utility and telecommunication constituents are expected to report sizable decline in the on-year growth.

On banking sector, the positive y-o-y growth of banks' earning in 4QCY16 would be driven by the tight control of operating expenditure and lower provisions due to bulk of impairment done in the first half of calendar year 2016 (1HCY16) and on possible writebacks on some of the performing loans accounts that was rescheduled and restructured either last year or at the start of CY16.

"We could also see better recoveries. Our top pick is CIMB Group Holdings Bhd with a target price of RM5.90 as its asset quality remains solid and improving, operational income is expected to continue to grow and cost to be rationalised further," the research house said.

In terms of utility sector, the sequential earnings growth is largely driven by solid growth in demand, which mainly comes from the commercial and consumer sectors despite a slight decline from the industrial segment; stable average tariffs; and lower liquefied natural gas uptake as Tenaga Nasional Bhd (TNB) managed to squeeze out an additional contribution from coal, MIDF said.

"We maintain our buy call on TNB with unchanged target price of RM16.80," it said.

For O&G sector, MIDF said: "We are expecting the three oil and gas constituent stocks to register a year-over-year growth in 4QCY16.

"We are expecting Petronas Dagangan Bhd's earnings to nearly double in 4QCY16 from a year earlier as the previous preceding quarter experienced low average selling prices in relation to the cost of sales," it said.

MIDF Research also expects the higher plant utilisation rate for Petronas Chemicals Group Bhd in 4QCY16 to provide higher earnings compared with 4QCY15.

As for Petronas Gas Bhd, higher take-up rate along with higher demand is expected to buoy earnings in 4QCY16 into FY17.

In addition, the expected decline in telecommunication is mainly attributed to the expected decline in Axiata Group Bhd's earnings.

"This is mainly brought about by our concern on Celcom's outlook. Intense price competition is expected to lead to further erosion in average revenue per user (ARPU)," said the report.

On plantation sector, it is likely to result in better earnings for plantation companies both q-o-q and y-o-y due to the 4QCY16 average crude price oil (CPO) price of RM2,935/mt, which was higher by 13% q-o-q and 36% y-o-y.

Although production declined y-o-y due to the lagged impact of strong El Nino, the sensitivity of earnings to CPO price is usually higher than fresh fruit bunch production.

"Our top pick is KLK (Kuala Lumpur Kepong Bhd) with the target price of RM29.25 as it is expected to benefit significantly from high CPO price as 64% of earnings contribution came from upstream plantation division," said MIDF Research.