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.