Stronger domestic sales. To recap, the company's 9M12 earnings of RM405.9m were broadly in line given that the results are usually strong in the first 9M (ranging between 77% and 90% of the full year performance). This is because its advertising and promotion costs are commonly skewed towards the end of the year, targeting the holiday season. The robust 9M12 8.9% sales growth YoY was due to the increased sales mainly from the domestic front (+11.2% YoY). We believe the strong  growth was driven by its effective consumer marketing to take the full benefit of the strong domestic economy and partially also from the increase of unit selling prices. Export sales grew only at 2.7% YoY. The flattish export sales were due to destocking activities and the economic slowdown in the ASEAN region.

Higher margins. The 9M12 gross profit margin improved 1.3 ppt YoY to 33.5% due to favourable raw material costs. Despite prices having stabilised in recent months, material prices are still hovering at quite a high level. The results improvement above was due to a higher unit selling prices. For instance, the company increased Milo prices by 4-5% in Jan 2012 to counter the effect of the higher materials prices. We believe the better margins (partially from the price increases) will help to offset the higher marketing expenses spending for the 100^th  celebration campaign of Nestle in Malaysia.  

Maintaining FY12-13E earnings of RM482m-RM508.  We  do  not  expect any material impact from the implementation of the minimum wage, which is effective in Jan 2013. We reckon that the big MNC companies such as Nestle would have a better scale than the small to medium size companies to overcome the issue. In other words, the magnitude of the wage increase should be minimal to the company. Thus, we remain positive on the company's prospect in the near future.  

Buy-on-Weakness.Since our last upgrade of the stock from a MARKET PERFORM to an OUTPERFORM on 4 Oct 2012 at a market price of RM61.90, the share price has surged to its all-time high of RM70.20, representing a capital appreciation of 13.4%. We then downgraded our call to a MARKET PERFORM. Together with the weaker market sentiment during Nov, the share price has since corrected sharply to the current market price of RM61.00. We believe a 'Buy-on-Weakness' strategy is appropriate now due to reasons highlighted earlier above and are upgrading our call again back to an OUTPERFORM. Our TP is maintained at RM72.10, which is based on a +3SD above its 5-year average PER level of 22.2x at 33.4x. At the current price, the stock is trading at a FY13E PER of 27.8x and FY14E PER of 26.8x, which are close to the +2SD level only.   

Source: Kenanga