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071107 Deutsche Bank Report - Domtar's 3Q in 100 Words

Deutsche Bank - Equity Research

Domtar {Ticker: UFS, Closing Price: USD 8.14, Target Price: USD 14.00, Recommendation: Buy}.

In-line qtr.  Reporting GAAP EPS of $0.07 and pointing to $0.08 net of special items.  Add another $0.01 for unusual tax adjustments, and it looks like $0.09.  DB & consensus were both @ $0.09.  EBITDA was $14MM ahead of our estimate, but higher tax rate dropped EPS in- line with expectations. 

Segments:

Paper.  EBIT = $133MM, 2Q = $92MM.  Lower maintenance costs helped $21MM q/q.  4Q should see another $5MM.  Vol's up 4.3% q/q (industry -1.5% q/q) and -0.5% y/y (industry -3.6% y/y).  Market downtime = 84K tons, up from 76K tons in 2Q.

Merchants.  EBIT = $6MM, 2Q = $2MM.  Nice quarter, helped by a $2MM decline in allowance for doubtful accounts.

Wood.  EBIT = $(13MM), 2Q = $(20MM).  Nice q/q improvement, considering stronger C$ and industry prices about flat q/q.  Court hearing set for 11/16 on Domtar's challenge to Quebec revocation of cutting rights.

Other issues:  (1) Capex just $65MM YTD, and pointing to $300MM for '08 (still only 60% of D&A).  (2) Still on track for $200MM in merger synergies ($80MM run-rate by year-end).  (3) Considering revival of Prince Albert as a pulp mill.  (4) C$ still a big issue - each US$0.01 move = $11MM EBITDA impact.

Change in view?  Not really.  Estimates need to be trimmed, due to sharp surge in C$, but stock still looks cheap.  Even on our reduced '08 numbers, FCFE = 12% of market cap.  Recently announced moves by WPP and IP should help UFS markets.  Maintain Buy and $14.00 price target.  Estimates: 4Q goes from $0.11 to $0.09, and '08 goes from $0.60 to $0.40.