• Massive Serendah land not reflected in share price

• Development potential to unlock value of land

• Aggressive launches, stronger RM to drive 2H17

• Re-affirm contrarian BUY at higher TP of RM7.20

Target price raised. We re-affirm our BUY call on UMW and raise our TP to RM7.20/share (from RM6.50/share previously). On the back of our sector upgrade today we raise our valuation of UMW autos to 13x FY18F earnings, closer to its historical average of 14x.

Recognising hidden values. We also incorporate the value of UMW Development’s (UMWD) Serendah land into our SOP valuation. UMWD is a 90% owned unit (remaining 10% owned by Perbadanan Neger Selangor) housing most of UMW’s Serendah land, estimated to measure up to 711 acres. The plot of land is unencumbered and valued at RM2.33psf in UMW’s books. However, market value is estimated to be at RM16psf based on UEM Sunrise’s recent offer for a 680acre land there.

Crystallising Serendah land value. Some 511 acres of the 711 is slated for mixed development and is large enough for a township development. The remaining 160 acres have been identified as industria plots, likely to be sold as part of UMW’s plan to establish an aerospace manufacturing park. UMW will be looking for a property development partner as it lacks expertise in this sector. We suspect sister company Sime Darby Property is a potential candidate. More importantly, the development will unlock the value of this land which is neither reflected in UMW’s books nor in its share price. UMW’s Rolls Royce fan case manufacturing plant sits on a separate plot of Serendah land owned by UMW Corporation. Though we are positive, we conservatively tune down our FY17F/18F by 4%/6% to account for: (1) An extra one month in recognition of UMWOG losses as we had earlier expected the exercise to be completed by Jun17 instead of Jul17 (2) Conservatively assuming a delay in disposing off the non-listed O&G units up till end FY18F.

Thesis remains intact. The non-listed O&G units will only contribute minor losses of RM20m-32m/ann and are temporary. Importantly, it does not derail our thesis of improving earnings at the core auto division (given a stronger RM, strong TIV growth, improved underlying margins from EEV incentives) and value crystallisation of UMW’s massive Serendah land. Furthermore, we have already excluded UMWOG from our valuations and conservatively assume no value for its non-listed O&G units given the massive write-downs in FY16

Source: MIDF Research - 10 Jul 2017