Domtar Begins To Realize Synergies

As Domtar Corp. (UFS) begins to realize a promised $200-million in synergies after linking arms with Weyerhauser Company’s (HYH) fine paper business, the Montreal-based forestry company is attracting a warmer analyst reception.

Monday, RBC Capital Markets raised its rating from "sector perform" to "outperform", while holding steady on its C$10.50 share target, driving Domtar’s share price up 5% to C$8.86.

The optimism is driven by a recent drop in Domtar’s share price (it peaked over C$12 in mid-June), an impending C$285-million sale of its lumber assets – which is expected to stanch the company’s quarterly losses – and a series of favorable ratios.

It is currently trading at 6.3 times 2008 estimated earnings – compared to an average of 8.6 times among the forestry companies RBC analyst Mark Bishop covers – and has a 44% net debt to cap, giving it one of the stronger balance sheets in the industry.

An expected price increase for uncoated free-sheet paper this month could also help boost the company’s earnings per share, which Mr. Bishop revised up a penny to 33 cents for 2007.

At the same time, he wrote, “the company is only now beginning to post gains from anticipated deal synergies; more significant progress will no doubt be evident during the remainder of this year.”

UFS 1-yr chart: