It DOES work on undead, I've proved it as a WHM. I put it on, at low health, ran up to an undead, /waved /welcomed and even did a little dance.
As soon as I removed it (and I still had sneak on) I got aggro from the undead.
On that same note, I've put it on three times while being tracked by a gob, and STILL gotten hit. Track by scent things are stupid. This won't prevent those.