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Domtar (UFS) to Sell Personal Care Business for $920 Million

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Domtar Corporation (UFS - Free Report) recently entered into an agreement to divest its Personal Care business to American Industrial Partners (“AIP”) for $920 million. The divesture supports Domtar’s primary focus on building an industry-leading Paper, Pulp and Packaging business to maximize shareholder value. This move will also aid the company to strengthen its financial position, enhance liquidity and share repurchases.

Last August, Domtar initiated a strategic review to explore value-creating potential options for its Personal Care division. The divesture will provide the company with additional capital to fortify its business in the future. Domtar plans to utilize the sale proceeds to reduce debt by roughly $600 million and will repurchase approximately $300 million shares through an accelerated share-repurchase program and open market repurchases.

Asset Conversions Plan on Track

Domtar is on track to convert its Kingsport, TN paper mill, in a bid to enter the containerboard market. The company expects the mill construction to commence in the second quarter of the current year. Once in full operation, this will be the second largest recycled containerboard machine in North America, with an annual production capacity of around 600,000 tons of high-quality recycled linerboard and corrugated medium. The conversion is expected to be completed by the end of 2022. It also has the potential to become one of the lowest-cost recycled containerboard mills in the United States.

Domtar has embarked on an asset conversion plan, per which the company has identified up to four large scale paper machine/mill repurposing projects that have the ability to produce 2.5 million tons of containerboard and become a long-term supplier to the packaging industry. The containerboard market is North America’s largest pulp and paper market, and is currently a 40-million-ton market with an annual growth rate of 2%. Thus, Domtar is focused on building containerboard business into a significant revenue driver over time, while maintaining stable cash flow through its Paper and Pulp businesses.

Domtar has a leading market position in North America’s paper business with low cost paper mills. In fact, its paper business performed well amid the turbulent market environment and recovered from the pandemic-induced lows last April and May. The paper business is expected to benefit from cost reductions, strong operational performance at its mills and improving demand. Therefore, Domtar expects it will be an efficient cash-generative business in the coming years. In the pulp business, demand for softwood and fluff pulp will be strong in the near term on solid demand for tissue and towel.

Domtar is implementing cost-control actions to streamline operations, maximize productivity, enhance cost efficiency, improve operating margin, and amplify productivity and cash flow. The company is on track to deliver annual run-rate cost savings of $200 million by the end of 2021. The cost-saving initiatives include capacity reduction and asset closures, mill-level cost savings and rightsizing support functions.

Price Performance

The company’s shares have gained 57.5% over the past six months compared with the industry’s growth of 58.9%.

Zacks Rank & Other Stocks to Consider

The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some other top-ranked stocks in the basic materials space are Fortescue Metals Group Limited (FSUGY - Free Report) , BHP Group (BHP - Free Report) and Impala Platinum Holdings Limited (IMPUY - Free Report) , each currently flaunting a Zacks Rank #1.

Fortescue has a projected earnings growth rate of 53.6% for fiscal 2021. The company’s shares have soared 153% in a year’s time.

BHP has an expected earnings growth rate of 43.3% for fiscal 2021. The company’s shares have gained around 23.6% in the past year.

Impala has an estimated earnings growth rate of 131.7% for fiscal 2021. The company’s shares have surged around 43% over the past year.

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