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Domtar (UFS) Sells Personal Care Division, Announces Share Buyback

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Domtar Corporation (UFS - Free Report) recently completed the sale of its Personal Care division to American Industrial Partners for $920 million. The divesture aligns with Domtar’s primary focus on building an industry-leading Paper, Pulp and Packaging business. This move will also aid the company to strengthen its financial position, boost liquidity and share repurchases.

Last August, Domtar initiated a strategic review to explore value-creating potential options for its Personal Care division. On Jan 8, Domtar announced that it has entered into an agreement to divest the business.

Domtar had earlier stated that it plans to utilize $600 million of the sale proceeds to minimize debt and $300 million toward shares repurchase. In line with this, the company has entered into an accelerated share repurchase (ASR) agreement with JPMorgan (JPM - Free Report) to buy back $200 million shares. Per the agreement, Domtar will pay $200 million for an initial delivery of 4,430,906 shares. The company is funding the buyback program with available cash in hand and amount received from the divesture of the Personal Care segment.

Last month, the company reported fourth-quarter 2020 earnings. It delivered adjusted earnings of 34 cents per share as against the adjusted loss of 16 cents reported in the prior-year period. Revenues of $920 million declined 10.4% year over year. Both top- and bottom-line figures missed the Zacks Consensus Estimate.

Domtar’s paper business has been witnessing improved sales for the past few months, recovering from the lows seen in April and May 2020 caused by the pandemic. The paper business is likely to benefit from cost reductions, strong operational performance at its mills and rising demand. In the pulp business, demand for softwood and fluff pulp will be healthy 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.

Moreover, management 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.

Price Performance

The stock has gained 29.3% in the past year compared with the industry’s growth 44.7%.

Zacks Rank & Other Stocks to Consider

Domtar currently carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the basic materials space include Impala Platinum Holdings Limited (IMPUY - Free Report) , Fortescue Metals Group Limited (FSUGY - Free Report) Both of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Impala Platinum has an expected earnings growth rate of 195.9% for the current fiscal year. The company’s shares have surged 84% in the past year.

Fortescue has a projected earnings growth rate of 84.3% for the current fiscal year. The company’s shares have soared 182% in a year’s time.

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