• We raise UMW to BUY from Trading Buy and raise our TP to RM6.00 (from RM5.15)

• Demerger of O&G units will deleverage balance sheet, drive earnings turnaround and allow better focus on core divisions

• UMW Toyota’s renewed focus on EEV models will drive structural cost reduction and price advantage, potentially reversing the market share loss in the past 3 years

• Wildcard to our call is if major shareholder decides to further consolidate its position in the auto sector, which could accelerate a return to the index once the cycle turns

We raise UMW to BUY from Trading Buy and raise our TP to RM6.00/share (from RM5.15/share previously) following our recent meeting with UMW’s President and Group CEO, CFO and its Investor Relations team recently. Notwithstanding the upcoming large impairment for UMW’s non-listed O&G unit, issues revolving this division are largely behind with the disposal of its main O&G asset in 2Q17. Coupled with potential a potential recovery in Toyota market share this year, we now peg UMW at 1.25x FY17F PBV, at par to pre-O&G historical average.

Positive news flows coming up. Newsflows on disposals of the nonlisted O&G unit will be key near-term catalysts on top of potential expansion in the equipment and M&E divisions. For autos, while the Ringgit is weak and will pose a challenge, this should have been largely priced in during the past 12 months’ share price downcycle - our forecast already factor in 4.30 average rates for FY17F. In fact, volume should have bottomed in FY16 and the introduction of the new EEV incentivized models should provide meaningful cost advantage and drive significant volume recovery this year.

What if? A key wildcard is if PNB intends to further consolidate its auto units post Sime Darby de-merger, which might count UMW as one of its key components and which in turn, may accelerate a return to the index once the cycle turns. As it is, UMW and Sime Darby (post spin off) entail an estimated RM14b in combined market cap.

UMW is now underowned. After having been excluded from the index and given the multi-year earnings compression, share price has almost halved over the past 24 months and more importantly, UMW is now well under-institutionalized. Its two major shareholders; PNB and EPF now collectively control circa 70% of UMW while the rest of the shareholders comprise very little of institutional funds. UMW is now trading at a depressed 1x PBV, at 1-standard deviation below its pre-O&G historical average PBV of 1.25x. With the upcoming earnings improvement from the O&G demerger, potentially improved auto market share and already very low expectations priced in, we think share price could see a positive re-rating in the near-term.

Source: MIDF Research - 22 Feb 2017