On Nov 10, we issued an updated research report on
Domtar Corporation
UFS
. The company is advancing well on its asset conversion roadmap to generate earnings growth. Efforts to grow in the attractive containerboard market will act as a catalyst, going forward. Further, strong demand in tissue and towel will continue to fuel demand for softwood and fluff pulp. Improving sales in the paper business over the past few months also hold promise. The Personal Care segment is anticipated to benefit from new customer wins and productivity gains. The company’s ongoing focus on cost control will help sustain margins.
Asset Conversions Plan on Track
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. 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%. Given the growth prospects, Domtar plans to foray in the containerboard market with the conversion of its Kingsport, TN paper mill. Once fully operational, the mill will become 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. It has the potential to become one of the lowest-cost recycled containerboard mills in the United States.
The company also plans to complete the conversion of the Ashdown, AR mill to 100% softwood and fluff pulp over the next nine to 12 months. The mill will produce additional market hardwood pulp until it converts the fiberline to softwood pulp. Following the fiberline conversion, Ashdown will be a world-class market pulp mill with an annual production capacity of 775,000 tons of fluff and softwood pulp. During third-quarter 2020, the Ashdown mill successfully restarted the bale pulp dryer — a significant milestone in its asset conversion plan.
Cost Control Efforts to Boost Margins
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.
Segments Poised Well for Growth
In the paper business, the company has been witnessing improved sales over the past few months, recovering from the lows in April and May caused by the pandemic. The business is also expected to gain from cost reductions and strong operational performance at its mills. In the pulp business, demand for softwood and fluff pulp will remain strong in the near term on strong demand in tissue and towel. Fluff pulp is a key component in infant diapers and adult incontinence products. Higher demand, maintenance outages and restocking in China will drive the business in the near term.
Domtar continues to deliver on its margin-improvement plan within the Personal Care Division, announced last November. As part of this plan, the company closed its Waco, TX Personal Care manufacturing and distribution facility, relocated certain of its manufacturing assets, and reduced its workforce across the division. Domtar has been undergoing a strategic review process to explore value-creating alternatives for its Personal Care segment, which may include sale of the business. Meanwhile, the segment will continue to benefit from productivity gains and new customer wins.
Price Performance
The company’s shares have gained 34.5% over the past six months compared with the
industry
’s growth of 38%.
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 in the basic materials space are
Agnico Eagle Mines Limited
AEM
,
Newmont Corporation
NEM
and
Bunge Limited
BG
. All of these stocks flaunt a Zacks Rank #1.
Agnico Eagle Mines Limited has an expected earnings growth rate of a whopping 103% for the current year. The company’s shares have rallied 12% over the past six months.
Newmont has a projected earnings growth rate of 98% for 2020. The stock has gained 3% in the past six months.
Bunge has an estimated earnings growth rate of 43% for the ongoing year. Its shares have appreciated 72% in the past six months.
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