The New Domtar: The Upgrade is Not Just On Paper

The closing of Domtar Inc.’s merger with Weyerhaeuser Co.’s (WY) fine-paper business marks another chapter in the consolidation of the forestry sector, but also means the creation of a new corporate entity, Domtar Corp. (UFS).

UFS stands for Uncoated Free Sheet.

Exchangeable Domtar (Canada) Paper Inc. shares will also be traded in Toronto under the symbol UFX and can be converted into Class B common shares [UFS].

Domtar has been removed from Canadian indices, but analysts think the company could be added to some U.S. indices later this year.

Based on synergies from this deal, the possibility of better supply conditions and prices, and what Desjardins Securities analyst Pierre Lacroix considers an inexpensive valuation for the stock, he has increased his price target to US$10.75 from C$9.50.

He also upgraded his recommendation on Domtar shares to “buy” from “hold,” saying the stock should stabilize now that the volatile period during which the deal was being finalized is over.

“It is expected that the new Domtar, with its 34% market share in the uncoated freesheet market, will have significant influence over supply, and will favour better equilibrium in the uncoated freesheet paper market and support a better pricing situation,” Mr. Lacroix said in a research note, adding that Domtar is now the largest UFS producer in North America, ahead of International Paper (IP).

UFS 1-yr chart