• 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 Negeri 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 industrial 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.

Aggressive launches in 2H. UMW Toyota (UMWT) 1H17 performance was already great at +19%yoy up till May17, but we expect meaningful improvement in 2H17. UMWT is scheduling four launches in 2H17, which we expect to comprise of mainly facelift models. Management is tight lipped on the models to be introduced but our best guess would be for Vios, Avanza and Innova. The CH-R (B-segment SUV) could arrive either late 2017 or early 2018, we think. Toyota TIV should reach an inflection point, growing by 13% in FY17F after having fallen some 32% in FY16 and -8% in FY15.

Stronger Ringgit is a boon. The stronger Ringgit against the USD is positive for UMW’Ts earnings as it will lower import cost, estimated to account for 24% of total cost. The Ringgit has strengthened to USD:RM4.3 levels vs. a low of USD:RM4.5 levels seen in 1Q17. Our in-house economics team projects the Ringgit to end 2017 at USD:RM4.2. Every 1% strengthening of the Ringgit impacts our FY17F by 6%.

Undemanding valuations. After having seen share price more than halve in the past 24 months, UMW is now trading at an undemanding 12x FY18F PE, at a 14% discount relative to historical average PE of 14x. Key catalysts: (1) Demerger of O&G units will deleverage balance sheet, drive earnings turnaround and allow better focus on core divisions (2) Reversal of prior years’ market share loss given UMW Toyota’s renewed focus on EEV models which will drive structural cost reduction and price advantage (3) More than quadrupling of M&E division earnings once its aerospace division reaches full scale production (4) A 13%yoy Toyota TIV growth after a 32% fall in FY16 (5) An attractive 7% dividend yield if investors were to realise the value of UMWOG shares to be redistributed to UMW’s shareholders by Jul17 (6) Improved balance sheet post UMWOG demerger positions UMW well for acquisitive growth.

Source: MIDF Research - 10 Jul 2017