Industry Reports

Deutsche Bank Reports Summaries

070228 Deutsche Bank Report - New Domtar Valuation

Deutsche Bank - Equity Research

Domtar {Ticker: DTC.TO, Closing Price: USD C$9.76, Target Price: USD C$14.00, Recommendation: Buy}.

* Boosting target price & maintaining Buy rating

As the proposed merger with Weyerhaeuser's white paper business draws close, we recently hosted the senior management of Domtar at a series of investor meetings. Following these meetings and a build- out of a pro forma model (summarized below) for the "New Domtar", we are raising our target price from C$9.50 to C$14. Despite a significant run-up in the stock over the last few months, we think there is still significant value in the stock at current levels.

* Our '07 EBITDA estimate is US$1.16B

Pro forma '06 EBITDA was about $820MM. Higher current prices could add $160-215MM in y/y EBITDA, and we view another round of price hikes as likely. Merger synergies are $200MM, but most of these won't hit in '07. Finally, energy costs are currently trending below '06 averages.

* Valuation - "New Domtar" worth as much as US$15.00?

Based on our estimates, Domtar is trading at only 5.8x '07 on an EV/EBITDA basis - far below a peer group mean of 8.1x and International Paper at 9.4x. The cross-cycle cashflow potential at Domtar looks compelling. Our modified DCF analysis (outlined below) suggests US$15/share, which we've "haircut" to US$12 to allow for execution risks. US$12 equates to about C$14 at current exchange rates.

* Risks

The greatest risks involve the merger with Weyerhaeuser's paper business. The other big risk is the economy. To the extent that the economy falters, reduced activity could reduce demand for Domtar's products, which would affect volumes, prices, and profitability.  Other risks include the C$ exchange rate, higher energy, fiber, and freight costs, which could cause unit costs to rise.