We do not see any positive catalysts for us to upgrade the stock from our current SELL rating given the intensified competition within the automotive segment, the poor consumer spending and impact of weaker Ringgit. Moreover, O&G business will continue to face delays in recovery. After revisiting our forecasts, we lower our TP for UMW to RM4.23. We believe that UMW dropping out from the FBMKLCI constituent will likely garner less investor attention now.

Automotive sales would remain challenging

As we enter into 2017, we expect automotive sales will continue to face headwinds due to weak consumer spending. Apart from that, we also highlight that the recent weakening of RM against US dollar would work against UMW.

Rough road to O&G recovery

While the positive development in the oil market seems to have set the gears in motion, our view on its listed subsidiary UMWOG remain unchanged, as we believe earnings recovery will continue to be a laggard. UMWOG will see one jack up rigs come off charter in 2QCY17 (upon completion of 50 days contract), leaving only two rigs with a long time charter until 2019 while the rest of the six rigs will be left idle.

Unlocking value of Serendah land

In our view, business outlook could remain challenging in the near term. However, plans to develop the Serendah land, if materializes could potentially be a good growth story, and unlock value for investors. To date, only 30 acres out of the total land bank of 861 acres have been used to build a manufacturing plant for Rolls Royce fan cases. UMW has plans to transform it into an aerospace industrial park.

Maintain SELL with a lower TP of RM4.23

We maintain our SELL rating on the stock but lower our SOTP-based 12- month TP to RM4.23 (from RM4.52 previously) after making adjustments and rolling forward our valuation horizon to 2017. We value the automotive segment based on 12x P/E multiple, O&G business on 0.5x P/BV, and equipment, manufacturing and engineering business using 10x P/E multiple. Key risks to our call would be recovery in consumer spending and recovery in jack-up rigs demand

Source: Affin Hwang Research - 30 Dec 2016