Domtar Should Benefit from Tighter Uncoated Paper Market

Includes: CTLUF, UFS
by: FP Trading Desk

A tightening market for uncoated freesheet paper is brightening the prospects for industry heavyweight Domtar Corp.(UTS), Raymond James analyst Daryl Swetlishoff wrote in a report on Tuesday.

The recently-released July printing and writing statistics show that production of the paper product fell by 7.3% while demand fell only 3.6% compared to the same period in 2007.

Mr. Swetlishoff wrote:

Tightening supply conditions were a product of 2Q08 closures, with Domtar’s Port Edwards mill shut and other producer curtailments/conversions. This supports our view that Domtar operates within a disciplined industry, and remains committed to keeping markets tight.

Take those factors alongside improved second-quarter results and Domtar is primed for a near-50% rise in its share price, wrote Mr. Swetlishoff, who set a target price of $8.50 and an outperform rating. Domtar, whose credit rating was also recently raised by Moody’s to Ba2, closed Tuesday at $5.70.
The prospects for other paper-makers don’t look quite as rosy, however. Mr. Swetlishoff targeted a share rise of 10% to C$1.25 for Catalyst Paper Corp. (CTULF.PK), which he rated market perform.

He wrote:

Despite rising spot paper prices and positive execution on controllable factors we remain cautious on Catalyst Paper. The potential for layering cyclical paper demand reductions on top of structural headwinds remains a key issue. Also, with coastal sawmill closures and a likely restart of Pope & Talbot’s Harmac pulp mill we do not see near-term fibre availability relief.