final 460 term
TRANSCRIPT
DOMTAR CORPORATION (UFS)
Independent University, Bangladesh
Investment Management (FIN 460) SEC# I
Prepared by
Kazi Mustafizur Rahman ID: 0930161
Md. Golam Gaus Solaiman Chowdhury ID: 0830079
Nazmul Alam Khan ID: 0920526
Submitted to
Chowdhury Rajkin Mohsin
Lecturer of Finance
School ofBusiness
Date of Submission: April 5, 2012
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1.0 Company profile
“The Early Years
Founded in 1848 in England, Domtar’s ancestral company marketed a special process protecting
lumber from decay. Business boomed, as railways needed to protect millions of rail ties. In 1903,
the company, then called Dominion Tar & Chemical Company Ltd., set up shop across the
Atlantic. In 1914, when the First World War broke out, the company established its head office
in Montreal, Quebec, where it has remained to this day.
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In 1929, the now Canadian-owned company received its Canadian charter and was listed on the
Montreal and Toronto stock exchanges. By 1930, it also had unlisted trading privileges on the
American Stock Exchange.
The Domtar Era Officially Begins
From the mid-1950s to the 1960s, Domtar grew to be one of Canada’s largest companies. Its
widely diversified businesses included chemicals, consumer products, construction materials,
kraft and fine papers, newsprint, containerboard, and packaging. With this new landscape, by
1965, the company officially became known as Domtar.
Domtar came into its own in the 1970s and 1980s. It gradually divested other interests to focus
on paper in the 1990s. Management was determined to become a leader in paper manufacturing
and set about laying the groundwork for Domtar’s eventual rise to the highest ranks in the
industry.
First Major U.S. Expansion
The 1990s and the early 2000s were years of significant expansion, including the acquisition of
Ris Paper Company Inc., at the time one of the largest independent merchants of commercial
printing and business papers in the United States.
In 2001, Domtar acquired four Georgia-Pacific paper mills in the U.S. With this acquisition,
Domtar became Canada’s largest paper company in terms of sales and the third largest
manufacturer of uncoated freesheet paper in North America.
Focus on Sustainability
Throughout the expansions of the 90s and into the new century, Domtar’s focus on sustainability
grew along with its geographic footprint. By April 2002, Domtar became the first North
American paper company to achieve Forest Stewardship CouncilTM
(FSC®) certification. Domtar
also began to pursue the ISO 14001 certification of its forest management practices and of its
pulp and paper mill operations. Domtar was determined to be a sustainability leader in its
industry.
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The “New” Domtar
In March of 2007, Domtar combined its operations with the fine paper business of Weyerhaeuser
to create Domtar Corporation, a U.S. domiciled company valued at more than $6 billion. Under
the ticker symbol “UFS”, Domtar trades on the Toronto and New York stock exchanges.
This historic transaction has transformed Domtar into the largest integrated manufacturer and
marketer of uncoated freesheet in North America, and the second largest in the world. Domtar is
also one of North America’s largest manufacturers of papergrade pulp. It had reached the top
rung in its industry.
Still Writing History…
This once small British concern has traveled a long road since 1848. But no matter how much its
operations have been changed by time and technology, the enduring values remain to generate
growth, excellence, and pride
Today’s Domtar is among the most cost-competitive papermakers in North America. Our
strengths include the best workforce in the industry, efficient assets, high-quality products,
strong brands, and a seasoned management team with proven expertise.
Domtar has fulfilled its commitment to achieve FSC chain-of-custody certification for all of its
operations, most of which are also Sustainable Forestry Initiative (SFI) Fiber Sourcing certified
as well as SFI and PEFC chain-of-custody certified.
Sales of the FSC-certified Domtar EarthChoice® family of papers, officially launched in 2005,
continue to grow. In 2009, Domtar celebrated the sale of its millionth ton of FSC-certified
product, providing powerful testimony to its longstanding and continued commitment to
sustainability. This brand is unique in the paper industry for the support it has garnered from
environmental groups, including Rainforest Alliance and WWF-Canada. All EarthChoice
products proudly display the FSC logo and Rainforest Alliance seal and represent the widest
range of environmentally responsible papers in North America – and quite possibly in the
world.” http://www.domtar.com/en/corporate/overview/399.asp
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Corporate facts
“We operate the following business segments: Pulp and Paper, Distribution and Personal Care.
We had revenues of $5.6 billion in 2011, of which approximately 85% was from the Pulp and
Paper segment, approximately 14% was from the Distribution segment and approximately 1%
was from the Personal Care segment. Our Personal Care segment was formed on September 1,
2011, upon completion of the acquisition of Attends.
Pulp and Paper
We produce 4.3 million metric tons of hardwood, softwood and fluff pulp at 12 of our 13 mills.
The majority of our pulp is consumed internally to manufacture paper and consumer products,
with the balance being sold as market pulp. We also purchase papergrade pulp from third parties
allowing us to optimize the logistics of our pulp capacity while reducing transportation costs.
We are the largest integrated marketer and manufacturer of uncoated freesheet paper in North
America. We have 10 pulp and paper mills (8 in the United States and 2 in Canada), with an
annual paper production capacity of approximately 3.5 million tons of uncoated freesheet paper.
Our paper manufacturing operations are supported by 15 converting and distribution operations
including a network of 12 plants located offsite of our paper making operations. Also, we have
forms manufacturing operations at one offsite converting and distribution operations and two
stand-alone forms manufacturing operations. Approximately 78% of our paper production
capacity is in the U.S., and the remaining 22% is located in Canada.
We produce market pulp in excess of our internal requirements at our three non-integrated pulp
mills in Kamloops, Dryden, and Plymouth as well as at our pulp and paper mills in Espanola,
Ashdown, Hawesville, Windsor, Marlboro and Nekoosa. We have the capacity to sell
approximately 1.7 million metric tons of pulp per year depending on market conditions.
Approximately 43% of our trade pulp production capacity is in the U.S., and the remaining 57%
is located in Canada.
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Distribution
Our Distribution business involves the purchasing, warehousing, sale and distribution of our
various products and those of other manufacturers. These products include business, printing and
publishing papers and certain industrial products. These products are sold to a wide and diverse
customer base, which includes small, medium and large commercial printers, publishers, quick
copy firms, catalog and retail companies and institutional entities..
Our Distribution business operates in the United States and Canada under a single banner and
umbrella name, Ariva. Ariva operates throughout the Northeast, Mid-Atlantic and Midwest areas
from 17 locations in the United States, including 13 distribution centers serving customers across
North America. The Canadian business operates in two locations in Ontario, in two locations in
Quebec; and from two locations in Atlantic Canada.
Personal Care
Our Personal Care business sells and manufactures adult incontinence products and distributes
disposable washcloths marketed primarily under the Attends® brand name. We are one of the
leading suppliers of adult incontinence products sold into North American hospitals (acute care)
and nursing homes (long-term care) and we have a growing presence in the domestic homecare
and retail channels. We operate nine different production lines to manufacture our products, with
all nine lines having the ability to produce multiple items within each category.
Attends operates out of the Southeastern United States from one location in Greenville, North
Carolina.
“OUR VISION
To be the leader in innovating fiber-based products, technologies, and services; committed to a
sustainable and better future.
OUR MISSION
As a world-class industry leader we deliver the highest value to our customers, empower our
employees to excel, and positively impact our communities.
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OUR VALUES
It’s in our fiber to be agile. Our industry is constantly changing. And we will be the ones
leading the way. When we need to change course, we do it. We are doers, not talkers. but when
we act, we act thoughtfully. We have the power to make decisions for the benefit of our
company and our customers. We’re always looking for simpler, more efficient ways to work.
It’s in our fiber to be caring. The people of Domtar care for each other. We treat each other
with compassion and respect. We look out for each other’s safety as well as our own. We never
forget that our company is woven into the fabric of our communities, and we treat environmental
stewardship as a sacred trust. We care deeply for our customers and invest ourselves fully in
their success.
It’s in our fiber to be innovative. We always look to the future beyond the horizon. We’re
never satisfied with things as they are; we always want to make them better, and we work
together to do it. We bring our resourcefulness and creativity to bear for long-term success. We
relish challenges of all kinds, whether they come from our clients or from within, and never rest
until we’ve solved them.” http://www.domtar.com/en/corporate/index.asp
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2.0 Competitor analysis
Direct Competitor Comparison (Yahoo finance)
UFS PVT1 PVT2 IP Industry
Market Cap: 3.50B N/A N/A 15.37B 650.46M
Employees: 8,700 N/A N/A 61,500 2.60K
Qtrly Rev Growth (yoy): -0.30% N/A N/A -2.50% 9.10%
Revenue (ttm): 5.61B N/A N/A 26.03B 2.84B
Gross Margin (ttm): 25.68% N/A N/A 27.17% 21.01%
EBITDA (ttm): 1.10B N/A N/A 3.65B 275.12M
Operating Margin (ttm): 12.83% N/A N/A 8.91% 5.75%
Net Income (ttm): 365.00M N/A N/A 1.29B N/A
EPS (ttm): 9.08 N/A N/A 3.07 0.35
P/E (ttm): 10.47 N/A N/A 11.45 9.51
PEG (5 yr expected): N/A N/A N/A 2.07 0.94
P/S (ttm): 0.62 N/A N/A 0.59 0.42
Pvt1 = Boise Cascade Holdings, L.L.C. (privately held)
Pvt2 = Georgia-Pacific LLC (privately held)
IP = International Paper Company
Industry = Paper & Paper Products
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Domtar Corporation (UFS) Competitors
Competitor Industry: Paper (NASDAQ)
UFS
$95.38 0.27 0.28% 287,732 Shares Traded
Company Name
Symbol: Market
Last
Sale
Net
Change
Volume
Today's
High/Low
52 Weeks
High/Low
P/E
Ratio
Market Cap
Abitibi Bowater Inc.
ABH: NYSE $ 14.28 -0.22 182,946
$ 14.67
$ 14.28
$ 28.34
$ 13.70 34 1,386,473,760
Boise Inc.
BZ: NYSE $ 8.21 -0.09 1,365,452
$ 8.42
$ 8.20
$ 9.85
$ 4.36 11.56 824,866,910
Buckeye Technologies,
Inc.
BKI: NYSE
$ 33.97 -0.23 325,775 $ 34.69
$ 33.86
$ 38.50
$ 22.45 17.51 1,336,481,710
Clearwater Paper
Corporation
CLW: NYSE
$ 33.21 0.07 106,104 $ 33.50
$ 33.14
$ 41.15
$ 30.44 19.89 791,261,460
Domtar Corporation
UFS: NYSE $ 95.38 0.27 287,732
$ 96.18
$ 94.23
$ 105.82
$ 62.28 10.57 3,446,460,920
Fibria Celulose S.A.
FBR: NYSE $ 8.39 0.24 1,837,355
$ 8.39
$ 8.12
$ 16.98
$ 6.65 NE 525,918,760
Glatfelter
GLT: NYSE $ 15.78 -0.23 212,541
$ 16.09
$ 15.78
$ 16.359
$ 11.73 16.97 672,575,160
International Paper
Company
IP: NYSE
$ 35.10 -0.06 3,863,855 $ 35.35
$ 34.77
$ 36.50
$ 21.55 11.4 15,341,683,500
KapStone Paper and
Packaging Corporation
KS: NYSE
$ 19.70 -0.73 274,659 $ 20.65
$ 19.67
$ 21.31
$ 12.44 7.55 915,931,800
MeadWestvaco
Corporation $ 31.59 0.13 1,489,884
$ 31.69
$ 31.24
$ 34.51
$ 22.75 21.49 5,400,594,810
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Company Name
Symbol: Market
Last
Sale
Net
Change
Volume
Today's
High/Low
52 Weeks
High/Low
P/E
Ratio
Market Cap
MWV: NYSE
Mercer International
Inc.
MERC: NASDAQ-GS
$ 7.99 -0.09 142,889 $ 8.145
$ 7.96
$ 15.27
$ 5.3011 5.71 445,674,210
Neenah Paper, Inc.
NP: NYSE $ 29.74 -0.31 151,234
$ 30.565
$ 29.67
$ 31.66
$ 12.92 16.34 466,204,240
OfficeMax
Incorporated
OMX: NYSE
$ 5.72 -0.15 1,667,520 $ 5.95
$ 5.70
$ 14.36
$ 3.90 15.46 492,869,520
Orchids Paper Products
Company
TIS: AMEX
$ 17.99 -0.08 15,335 $ 18.07
$ 17.93
$ 19.249
$ 8.53 22.49 135,536,660
Schweitzer-Mauduit
International, Inc.
SWM: NYSE
$ 69.06 -0.80 107,452 $ 70.78
$ 68.80
$ 74.68
$ 47.18 12.65 1,101,714,180
United Stationers Inc.
USTR: NASDAQ-GS $ 31.03 0.18 351,762
$ 31.31
$ 30.85
$ 37.215
$ 25.75 12.72 1,313,624,020
Verso Paper Corp.
VRS: NYSE $ 1.88 0.05 197,244
$ 1.89
$ 1.80
$ 5.44
$ .85 NE 98,876,720
Wausau Paper Corp.
WPP: NYSE $ 9.38 -0.22 173,125
$ 9.70
$ 9.36
$ 9.86
$ 5.82 NE 462,396,480
The biggest competitor of Domtar Corporation is International Paper Company with almost five
times its market capitalization. But UFS’s current market price is $95 while IP’s share is trading
for only $35. This information shows that though the market capital of IP is much higher than
UFS, market price of UFS is highly overvalued.
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3.0 Financial Statements Income Statement
Annual Data All numbers in thousands
Period Ending Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Total Revenue 5,612,000 5,850,000 5,465,000
Cost of Revenue 4,171,000 4,417,000 4,472,000
Gross Profit 1,441,000 1,433,000 993,000
Operating Expenses
Research Development - - -
Selling General and Administrative 336,000 358,000 (152,000)
Non Recurring 137,000 77,000 125,000
Others 376,000 395,000 405,000
Total Operating Expenses - - -
Operating Income or Loss 592,000 603,000 615,000
Income from Continuing Operations
Total Other Income/Expenses Net - - -
Earnings Before Interest And Taxes 592,000 603,000 615,000
Interest Expense 87,000 155,000 125,000
Income Before Tax 505,000 448,000 490,000
Income Tax Expense 133,000 (157,000) 180,000
Minority Interest - - -
Net Income From Continuing Ops 365,000 605,000 310,000
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Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -
Net Income 365,000 605,000 310,000
Preferred Stock And Other Adjustments - - -
Net Income Applicable To Common Shares 365,000 605,000 310,000
Currency in USD.
Balance Sheet
Annual Data All numbers in thousands
Period Ending Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Assets
Current Assets
Cash And Cash Equivalents 444,000 530,000 324,000
Short Term Investments - - -
Net Receivables 816,000 794,000 1,087,000
Inventory 652,000 648,000 745,000
Other Current Assets 22,000 28,000 46,000
Total Current Assets 1,934,000 2,000,000 2,202,000
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Long Term Investments - - -
Property Plant and Equipment 3,459,000 3,767,000 4,129,000
Goodwill 163,000 - -
Intangible Assets 204,000 56,000 85,000
Accumulated Amortization - - -
Other Assets 109,000 203,000 103,000
Deferred Long Term Asset Charges - - -
Total Assets 5,869,000 6,026,000 6,519,000
Liabilities
Current Liabilities
Accounts Payable 705,000 700,000 717,000
Short/Current Long Term Debt 11,000 25,000 54,000
Other Current Liabilities - - -
Total Current Liabilities 716,000 725,000 771,000
Long Term Debt 837,000 825,000 1,701,000
Other Liabilities 417,000 350,000 366,000
Deferred Long Term Liability Charges 927,000 924,000 1,019,000
Minority Interest - - -
Negative Goodwill - - -
Total Liabilities 2,897,000 2,824,000 3,857,000
Stockholders' Equity
Misc Stocks Options Warrants - - -
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Redeemable Preferred Stock - - -
Preferred Stock - - -
Common Stock - - -
Retained Earnings 671,000 357,000 (216,000)
Treasury Stock - - -
Capital Surplus 2,326,000 2,791,000 2,816,000
Other Stockholder Equity (25,000) 54,000 62,000
Total Stockholder Equity 2,972,000 3,202,000 2,662,000
Net Tangible Assets 2,605,000 3,146,000 2,577,000
Currency in USD.
Cash Flow Statement
Annual Data All numbers in thousands
Period Ending Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Net Income 365,000 605,000 310,000
Operating Activities, Cash Flows Provided By or Used In
Depreciation 376,000 395,000 405,000
Adjustments To Net Income 133,000 (41,000) 224,000
Changes In Accounts Receivables (12,000) (73,000) (55,000)
Changes In Liabilities (2,000) 213,000 (380,000)
Changes In Inventories 2,000 39,000 261,000
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Changes In Other Operating Activities 21,000 28,000 27,000
Total Cash Flow From Operating Activities 883,000 1,166,000 792,000
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures (144,000) (153,000) (106,000)
Investments - - -
Other Cash flows from Investing Activities (251,000) 211,000 21,000
Total Cash Flows From Investing Activities (395,000) 58,000 (85,000)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid (49,000) (21,000) -
Sale Purchase of Stock (494,000) (42,000) -
Net Borrowings (41,000) (952,000) (414,000)
Other Cash Flows from Financing Activities 10,000 (3,000) -
Total Cash Flows From Financing Activities (574,000) (1,018,000) (414,000)
Effect Of Exchange Rate Changes - - 15,000
Change In Cash and Cash Equivalents (86,000) 206,000 293,000
Currency in USD.
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4.0 UFS Ratios
Ratios 2011 2010 Industry
Net Profit
Margin
(365,000/5,612,000)*100
= 6.5%
(605000/5850000)*100
=10.34%
9.0%
Debt Ratio (2,897,000/5,869,000)*100
=49.36%
(2099000/6026000)*100
= 34.8%
Current Ratio (1,934,000/716,000)
=2.7 times
(2000000/725000)
= 2.76 times
Market to book
value
1.17 1.8
5.0 Ratio Summary From the above calculations the ratios are showing a downward trend of the company. The net
profit margin has fallen by almost 4% while performing below the industry. Again debt has been
building up from 2010 and rose to almost 50% from just around 35%. The current ratio has also
fallen, though very insignificantly; it shows a sign of liquidity problem.
Again the market to book value of the share is below the industry average. Overall the company
is underperforming in current times from the past as well as the industry. Finally this
fundamental analysis is a good measure to find a signal of keeping away from investments into
this company.
6.0 Cash flow summary The comparison of the cash flow statement over the past three years shows that in 2011 the
company has more cash outflow than inflow. The company had positive cash flow even in 2010
and 2009 but fell significantly in 2011 which is a threatening signal both for the company and
potential investors.
The net income of the company is almost half of that in 2010 as well as building accounts
receivables and decreasing liabilities. This shows that the cash cycle of the company has fallen
sharply in 2011 and outflow has become much quicker than the inflow from operating activities.
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Cash flows from capital expenditures and investment activities are negative as the previous years
and show no significant change. But the underlying question is that whether the company has
been able to earn the returns or has incurred losses disturbing the cash flow; whether the capital
expenditures have been completely worthless.
Domtar Corporation has been paying dividends on a quarterly basis which is very favorable on
investors’ part and the most significant thing is that the company had given up huge amount to
pay up the long term debt obligations. But it has got new borrowing in the current year but in
lower volume than previous years.
Therefore it seems that paying off the debt in recent year has been the main reason behind its
negative cash flow. This indicates that the company is making enough profit to retain and meet
its debt obligations on time.
7.0 NASDAQ Analysis
Consensus Recommendation
Detailed Analyst Recommendation
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12-Month Price Target Range
Consensus
105
90
95.38
Previous Close
140
Consensus Recommendation
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From the above chart the analyst recommendation is to invest in the share and hold for a long
time. And the consensus is that the future price might hit the 100 mark and reach up to 105
maximum. The momentum also suggests the same thing. Only one analyst has given an upgrade
but most importantly there is no downgrading for the share.
The earning per share is 8.19 but the growth rate reflects something else. Since it has a very high
beta, any effect in the industry will cause the share to react rapidly. The industry has no
estimated growth rate while UFS might fall by 27.18% which makes investment into this share
very risky as well as demands a high return.
Apart from its riskiness the company has reported its earnings in the last 2 quarters above the
estimated and so it has good chances of doing well in future as growth seems to be imminent for
this company.
But how much it is doing well can only be assessed after comparing these events with the
industry. The P/E ratio of is quite below the industry average which makes it less risky and less
volatile to the industry and a good choice of investment. Still the PEG ratio states that the share
price is highly overvalued, almost four times the actual growth and so might fall drastically in
case of any adverse effect.
8.0 Factors that could affect the share price of UFS
“Domtar Corp is the largest manufacturer of uncoated freesheet paper in North America and
second largest in the world based on production capacity. Focusing primarily on the production
of paper and paper-grade wood pulp, the company also operates the Domtar Distribution Group,
a purchasing, warehousing, and distribution network which sells both Domtar's and other
producers' paper products. Domtar also sells some lumber and wood products, which it produces
at its Canadian mills. The company earned $5.5 billion in revenue and $310 million in net
income in 2009.
Unlike most of its closest competitors, Domtar focuses mainly on only one type of forest
product, paper (specifically, the uncoated freesheet grade - most commonly used as office and/or
basic copier paper, but also used in the newspaper and specialty publication industries). This
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could leave revenues particularly susceptible to fluctuations in demand for that specific grade of
paper. One key trend to watch that affects demand for Domtar's products is the progress of
digital documentation and data storage in the workplace; greater use of such electronic resources
usually encroaches on roles previously filled by paper usage.
1. FINANCIAL RISK
UFS share price has gone through several spectacular gains and crashes, apparently the result of
baseless rumors.
In March 2005, an analyst at DBS Vickers announced that if UFS’s Satui pulp mill project goes
ahead, shares in UFS could be worth 90 cents, up from the 39.5 cents that UFS shares sold for at
the time. DBS Vickers set a 12-month target price of 54 cents. Within five weeks shares had
reached this value. In mid-April 2005, UFS’s share price fell within a week from 53.5 cents to 25
cents, apparently as a result of rumours that UFS was under investigation by the Singapore
Police’s Commercial Affairs Department and that UFS’s main financier was pulling out.
In April 2005, Business Times asked Wisanggeni Lauw about UFS share prices. “I’m not trying
to influence the stock. . . I have no idea, I’m not trading shares, I’m just an investor,” Lauw said.
But Lauw does buy and sell UFS shares – in large quantities. Between July and August 2003, for
example, Lauw sold 30 million shares in UFS as a result of “financial obligations”, according to
Business Times. This sale came after shares in UFS had increased by 370% in the three months
to June 2003. In March 2004, Lauw sold 63 million UFS shares.
On 11 April 2005, a court ordered Wisanggeni Lauw to transfer 10.6 million shares to Kang Hwi
Wah, former managing director of Amcol, an electronics and property group. Kang had earned
the shares for helping Lauw buy Poh Lian Holdings in April 2002. Lauw transferred the shares to
Kang on Friday 15 April 2005. The following Monday, the share price collapsed and continued
to fall all week. Five days after he transferred the shares to Kang, Lauw was buying again. On 20
April, Lauw increased his interest in UFS from 11.1% to 14.98%.
UFS has a US$159 million equity line of credit agreement with Cornell Capital Partners
Offshore under which Cornell is repaid in shares. According to Philip Ho, Cornell’s managing
director for global capital markets, Cornell brokered its first deal of this type with UFS in 2004.
To get the cash, UFS issues new shares to Cornell in tranches of not more than US$5 million
over the next five years to a total value of US$165 million. UFS also has a US$50 million loan
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note agreement with Cornell.
Since setting up the deal with Cornell, UFS has issued millions of new shares. In January 2006,
for example, UFS issued 22.5 million new shares to Tektronix in January. UFS had previously
borrowed the shares from Tektronix to repay part of a loan to Cornell. In April 2006, UFS issued
48.99 million new shares at S$0.10 each to Tektronix in exchange for shares it borrowed earlier.
In September 2006, UFS issued another 61.49 million new shares in order to return shares that it
borrowed from Tektronix, again to repay a loan from Cornell.
In November 2006, UFS issued another 180 million new shares as part of an equity placement
agreement with a group of investors including Stark Investments (Hong Kong) Ltd. As a result of
the transaction Stark holds 5.6% of the shares in UFS.
2. POLITICAL RISK
In November 2006, more than 100 organizations and individuals signed on to a letter to Merrill
Lynch, Australia and New Zealand Banking Group (ANZ), Cornell Capital, Development Bank
of Singapore and Cellmark with “deep concern” about their involvement in UFS’ projects.
Referring to the Financial Action Task Force Anti-Money Laundering rules, regulations and
laws, the signatories urged the banks and companies involved to “cancel plans for your support
of these ill-advised projects”. The letter highlighted the substantial involvement of “publicly
exposed persons” and “publicly exposed companies” in these projects and the fact that the
Indonesian government has identified illegal logging as an offence under the country's money
laundering laws.
3. ENVIRONMENTAL AND SOCIAL RISK
The letter also referred to a 2006 World Bank report on the Bank’s strategy for Indonesia’s
forests. The report points out that the Indonesian government is “considering several risky or ill-
advised initiatives that will further threaten forest resources”, including “potential investments to
further expand unsustainable industrial capacity.” The report noted that “timber plantations are
insufficient and performing poorly,” and that “forest conversion – an unsustainable harvest
method – has been the fastest growing source of timber supply in recent years and is a major
source of supply for pulp mills.” The Bank's report concluded that “forest loss and forest crime
dominate the [Indonesian forestry] sector”.
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A series of independent studies has documented that UFS cannot demonstrate that it has
sufficient raw material supplies in its plantations to keep its pulp operations running – without
using timber from forests and illegally harvested timber.
In May 2006, CIFOR’s then-director, David Kaimowitz said, “It is imperative that a detailed
wood supply plan and social environmental impact assessment be fully conducted and publicly
reviewed before any decision is taken to finance (any) expansion by Kiani Kertas.” UFS has
never publicly released any such studies. In October 2006, in response to a request for copies of
independent studies of raw material supplies to the various proposed projects, UFS director
Wong Vun Khi stated that “All forestry studies prepared by independent consultants engaged by
UFS are confidential documents which we use when evaluating a business and which should not
be made available to competitors or other parties outside our company.”
UFS is over-optimistic about the growth rates of the trees in its plantations. In October 2006,
UFS’s Wong Vun Khi stated that the growth rate was 20 m3/ha/yr. [42] Forestry consultants
Jaakko Pöyry assumed a growth rate of only 15 m3/ha/yr.
The area of UFS’s plantations is also disputed. UFS's 2005 Annual Report states that “The
independent review of the plantation areas shows a decline in the plantation area from 58,000
hectares to 46,000 hectares.” In October 2006, Wong Vun Khi stated that “In total, HRB [UFS’s
plantation company] has planted around 75,000 ha. Some plantations were lost mainly during the
mid-90 [sic] heat wave, but these areas will be replanted within short [sic].” Field data from
Indonesian NGO Wahli South Kalimantan indicates that an area of only 15,000 hectares of UFS’
plantations is in good condition.
Much of the area that has been planted has been destroyed, or is at risk. Jaakko Pöyry notes in a
2004 report, “There is limited firefighting capacity within PT HRB [UFS’s plantation company]
and there was evidence of open cast coal mining, fire damage, stream degradation due to gold
mining and small scale native forest clearance within the concession area.” Pöyry’s report
includes photographs of plantations encroached by coal mining operations. Coal mining
involves removing all vegetation and topsoil. The associated roads allow “access to land by gold
miners, illegal loggers and shifting cultivators,” note Pöyry’s consultants.
UFS claims that it will not use wood from forests and that it will not clear forests to make way
for its plantations. But, as CIFOR points out, “UFS has not produced a detailed and accountable
forest management plan that ensures protection of the natural forest areas that currently remain.”
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In 2003, UFS described these forest areas as “Waste Forest”. In a January 2004 letter to CIFOR,
Sven Edström, chairman of UFS, wrote: “UFS as a public company and as the rightful owner of
this MTH [mixed tropical hardwood] forest has to consider this as an asset with value.” In fact,
in its 2005 Annual Report, UFS reports the value of the area of mixed tropical hardwood in its
plantation concession as more than S$150 million. Yet in October 2006, Wong Vun Khi stated
“there is hardly any mixed tropical hardwood forest left in South Kalimantan”.
4. PULL-OUTS
Several companies have looked at Kiani Kertas and either decided not to risk getting involved, or
the deal has fallen through. In February 2006, the Financial Times reported that Merrill Lynch
had decided against funding UFS’s bid for Kiani Kertas.
In 2005, JP Morgan pulled out of a consortium formed with Kingsclere. The consortium would
have sold 80% to UFS and JP Morgan would have kept 20% of Kiani Kertas. [54] “According to
people close to the deal at the time, environmental concerns raised by JP Morgan were partly
responsible for the dispute,” the Financial Times reported. In August 2005, JP Morgan started
another bid for Kiani Kertas in competition with Kingsclere. JP Morgan set up a deal with PT
Sampoerna Strategic (part of a giant Indonesian clove cigarette company). In January 2006,
Sampoerna pulled out and the deal fell apart.
In 2003, Milieudefensie (Friends of the Earth Netherlands) campaigned against the involvement
of Akzo Nobel in UFS’s proposed pulp mill at Satui. An Akzo Nobel subsidiary, EKA
chemicals, was to build a plant producing bleaching agents. Akzo Nobel subsequently pulled out.
In December 2005, Deutsche Bank pulled out of its involvement in UFS’s plans to take over
Kiani Kertas after pressure from Robin Wood, Rettet den Regenwald, urgewald and Global
2000.
In January 2005, at a meeting with representatives of NGOs Global 2000 and Environmental
Defense, Andreas Ecker, Head of Communications at Raiffeisen Zentralbank said that he wished
his bank had never got involved with UFS. “We would be glad if we had not invested in this
project,” he said. “It’s a lot of trouble.”
In late 2003, UFS applied for political risk insurance through the World Bank’s Multilateral
Investment Guarantee Agency (MIGA). In 2003, Environmental Defense sent a letter to MIGA,
signed by 65 NGOs from 19 countries, to persuade it to pull out from the project. UFS dropped
its application to MIGA and subsequently approached OeKB, Austria’s ECA, for support. OeKB
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turned them down on environmental grounds.
At a meeting with NGOs in September 2006, MIGA confirmed that it had re-entered into talks
with UFS, but Philippe Valahu, MIGA’s Acting Director of Operations and Global Head of
Infrastructure said, “MIGA is not considering this project. We no longer have interest in it.” The
World Bank’s Indonesia Country Director explained, “We just don't think it's a good idea for the
World Bank to support this project.”
In October 2006, Moray McLeash, IFC’s representative in Jakarta confirmed that IFC has not
provided any financing to UFS. “We have no plans to do so,” he wrote. “IFC has no relationship
with UFS.” The World Bank’s Indonesia Country Director was no less blunt: “The IFC would
have to be crazy to support this project.” http://www.pulpmillwatch.org/companies/ufs/
9.0 Stock Valuation The dividend Discount Model
Dividend paid (D0) = $ 1.40
Growth Rate (g) = Return on Equity (ROE) * Retention Rate (RR)
G = 11.82% * 87% = 10.0% (Correct to the nearest number)
Return on stock (k) = Risk free rate (Rf) + Beta (β) * [Rm (Return on market) – (Rf)]
= 0.84% + 2.46 * (5.20% - 0.84%)
= 11.6% (Correct to 1 d.p.)
Rm = 5.20% (S&P500)
Rf = 0.84% (US treasury bill)
β = 2.46 (yahoo finance)
Stock Value =
=
Current Price = $95.38
Comment: The share is underpriced or undervalued. Good opportunity to invest.
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The Relative pricing models
1)
P/E Industry = 5.8
RP/EPS (UFS) = 5.8
RP = 5.8 * 10.10 = $ 58.8
2) Book Value =
RP/Book value = Industry (1.8)
RP = 1.8 * 82.26 = $148.00
3) Cash flow per share = -86000000/36131200 = -$2.4
RP/Cash flow = 65.70
RP = 65.70 * (-2.4) = -$157.68 (N/A)
4) Sales per share =
RP/Sales = Industry average (Data not available)
Comment:
From the relative pricing model we can see that the Price Earnings ratio shows that the current
price of the share is overvalued while the price to book value ratio shows the market price is
undervalued. Therefore the relative pricing model at this instant is not appropriate for investment
into the stock in this case. Moreover the cash flow is negative for UFS while other firms in the
industry are having a positive cash flow.
The limitation of this model is only in its Relative price to sales ratio. The industry average was
unavailable and so the comparison only with the two vulnerable ratios is quite doubtful.
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10.0 Five years stock chart
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11.0 Technical Analysis
Average Directional Index (ADX) = 20<Price<40 = No signal
Bollinger Band (BOL) = No signal
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Commodity Channel Index (CCI) = No signal
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Keltner Channels = Sell or short sell signal since share price continually touches the lower
bound.
Moving average convergence divergence (MACD) = No signal
Parabolic Stop and Reversal (SAR) = No signal
Relative strength index (RSI) = No signal
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Simple moving average (SMA) = Buy signal in large volume
Stochastic (STC) = Though the %K line crosses the %D line investment decision is uncanny
since STC is between 20 and 80
Williams %R = No signal
Recommendation: Keep away from investment into the stock since there is contra relationship
between two of the indicators and no signal from the rest of the 8 technical indicators.
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12.0 Investment Recommendation From the above fundamental and technical analysis it is recommendable to keep away from
investment into the stock. Firstly the price is highly overvalued as per the price to earnings ratio,
price to growth ratio and so on. The company has a positive growth trend but there are other
companies in the market doing better in terms of profit and market capitalization. Therefore this
stock seems to be a very risky one. Moreover the valuations also do not give proper indication.
Even with a constant dividend growth rate from current times show that the market price of the
share is undervalued while the relative price to earnings with the industry shows that the price of
the share is highly overvalued.
In this phenomenon making a proper investment decision is quite susceptible to errors and high
risk. Additionally in the recent year the company’s overall performance has deteriorated
compared to the past years. Starting from net profit margin to cash flow has changed all of a
sudden in 2011 in an adverse way. So it provides a skeptical view of the company and its future
performance.
Finally the trading indicators also do not provide any type of trading signal for the stock. Two of
the indicators imply completely opposite trading signal and the rest eight indicators do not
provide any type of trading signal. Therefore it is mostly recommendable to stay away from
investing into the stock.