October 27, 2011 / 11:55 AM / in 6 years

UPDATE 3-Domtar profit beats, pulp worries linger

* Q3 adj EPS $3.10 vs est. $2.50/share

* Sales down 4 pct

* Expects pulp prices to fall further

* Shares rise 6 pct (Adds conference call details, analyst comments, updates shares)

Oct 27 (Reuters) - Paper and pulp producer Domtar Corp posted third-quarter profit that topped market estimates, helped by lower maintenance costs and higher paper prices, sending its shares up 6 percent.

The company, which has been grappling with weak pulp prices and higher input costs, however said is expects pulp prices to fall further.

Domtar is one of North America’s largest producers of uncoated freesheet paper, which is used in electronic printers and copiers.

The company has some exposure to pulp but most of its revenue and earnings growth will come from uncoated freesheet paper, Raymond James analyst Daryl Swetlishoff told Reuters.

“We think investors are focusing too heavily on their pulp segment,” Swetlishoff said. “Even assuming lower pulp prices in 2012, we still see this as a very inexpensive stock.”

In 2012, pulp will account for about 20 percent of Domtar’s revenue.

“Pulp is a volatile business and will continue to face a few bumps in the road,” Chief Executive John Williams said on a conference call.

Softwood pulp prices, which peaked in June to $1,040 per metric tons, were about $993 per metric tons in the third quarter.

Domtar bought privately held diaper maker Attends Healthcare in August to escape volatility in the paper and pulp industry.

“There has been consolidation in the white paper (uncoated freesheet paper) business, as a result the industry structure is very much like an oligopoly,” Swetlishoff said.

“If we do have weaker economic growth, the big players will not produce paper for inventory,” he added.

Domtar together with larger rival International Paper make up over 60 percent of capacity of the uncoated freesheet paper industry.

Q3 BEATS ESTIMATES

Domtar’s third-quarter net profit fell 39 percent to $117 million, or $2.95 a share, on weaker pulp prices and higher input costs.

Excluding items, it earned $3.10 a share, beating analysts average expectation of $2.50 a share, according to Thomson Reuters I/B/E/S.

Sales fell about 4 percent to $1.41 billion.

“We are still forecasting our total capex for 2011 to be at the low end of the financial assumption of between $140-$160 million,” the company said.

Shares of Montreal-based Domtar were at C$82.89 on Thursday afternoon on the Toronto Stock Exchange. (Reporting by Bhaswati Mukhopadhyay in Bangalore; Editing by Supriya Kurane)

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