The turmoil in credit markets and the economic risk it has created is hurting the prospects for a number of Canadian-headquartered forestry companies, according to a research note published by Scotia Capital analyst Benoit Laprade earlier this week.
Mr. Laprade trimmed his valuation multiples for paper producers Catalyst Paper Corp. (CTLUF.PK) and Domtar Corp. (UFS) in light of the larger financial problems assailing markets and demand.
As a result, he cut his 12-month target for Catalyst to C$1.15 per share – down from C$1.30 – and trimmed Domtar to $7.75 per share, from $8.20.
“We continue to prefer Domtar over Catalyst and AbitibiBowater (ABH) for those seeking paper exposure,” Mr. Laprade wrote. Domtar should, among other things, benefit from higher uncoated free sheet prices and a weaker Canadian dollar.
Mr. Laprade wrote:
In addition, we believe Domtar has a solid balance sheet, with a net debt/cap ratio of about 40%, no debt maturity before 2011, and $750-million available under its undrawn revolver maturing in 2012.
Catalyst, on the other hand, has “very limited limited financial flexibility” and is faced with a raft of problems that include higher input costs, difficulty in accessing raw material and “relatively weak cash flow generation.
The economic problems that have hurt Canadian forestry companies are causing pain on the other side of the world, Mr. Laprade wrote, as he lowered his target for Sino-Forest Corp. (SNOFF.PK) to C$18.50 from C$25. He based the new number on “a higher discount rate of 15% (from 11.5%; C$6/share) reflecting the current financial crisis.”
