Domtar (UFS) Revisited

10 Apr 2016 15:22

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Domtar Corporation (UFS) designs, manufactures, markets, and distributes communications papers, specialty and packaging papers, and absorbent hygiene products in the United States, Canada, Europe, Asia, and internationally.

Last September I did a review of UFS based on their 2014 annual report and from that analysis identified areas of improvement that I would like to see. Recently UFS released their 2015 annual report and lets see how or if they improved.

Target Improvement 2015 2014
Receivables Turnover Rate 8 8.4 7.35 Pass
Return on Assets 7% 3% 7% Fail
Gross Profit Rate 30% 21% 21% Fail
Interest Rate Coverage Ratio 5 2.18 3.53 Fail

Ouch! On the surface all I see is a company maintaining existing cost structures and margins I am disappointed to not even see marginal improvements, with just this alone I would give the UFS management team a grade of C.

Digging into the annual report the only positive I could find was the growth of their personal care products which saw sales increase 24.49% over last year. While not enough to compensate for declining paper & pulp sales it is a step in the right direction from a long term perspective.

Free cash flow, after a $100M dividend payment, was $109M, Still decent enough to keep forward dividends safe and provide some room for growth.

Because of the small positives I would give management an Overall Grade of C+.

My conclusions from last September still stand and UFS management has done nothing to change my outlook.

Last September Conclusions

  • Domtar’s current dividend is safe and they have a growth path.
  • Moving more into the consumer market will require continued improvements to their financials.
  • Domtar would be a good small position to add to your portfolio. Would not initiate a major position until they have more dividend growth history and improved conservative set of financials.

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