Domtar Corporation (TSX: UFS) is a leading provider of a wide variety of fiber-based products including communication, specialty and packaging papers, market pulp and absorbent hygiene products. 

Due to the ongoing restriction and lower demand scenario on account of COVID 19, the Company has lowered its FY20 capacity. The Company has opted for a temporary halt of its mill located in Kentucky from May 05, 2020 and is expected H1 paper machine to be operational from June 2020, while H2 paper machine will remain idle until July 2020. To balance the excess inventory levels, the Company will be cutting down its capacity by 227,000 tons.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, UFS revenue came in at USD 1,278 million, lower than USD 1,376 million in the previous corresponding quarter. The decline was majorly attributable to a decline from pulp and paper segment, while partially offset by an improved revenue from personal care segment. Operating income dipped to USD 19 million, as compared to USD 115 million in the previous corresponding period, due to lower revenue, while partially offset by a lower selling, general and administrative expenses. Net earnings for the period stood at USD 5 million, significantly lower than CAD 80 million in pcp. The Group exited the quarter with cash, and cash equivalent of USD 152 million and total assets was reported at USD 4,833 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock has corrected ~52% in the last one year due to a weak demand scenario. To weather the current crisis, the Company will layoff of 400 employees at the Hawesville mill along with temporary suspension of dividend payment and stock repurchase program, which is likely to provide cushion to cash flow and liquidity levels. Within the paper segment, UFS is expecting a significant decline in demand in Q2FY20. However, demand for softwood and fluff pulp is expected to remain high in the near-term driven by accelerated growth in tissue and towel. Demand from Personal Care segment is likely to sustain driven by higher usage along with new client addition in the recent past. Raw material costs are expected to remain stable. The stock is currently trading below its 20-days and 50-days simple moving average of CAD 30.18 and CAD 30.83, respectively, which indicates a bearish sentiment. We are skeptical about the immediate demand recovery in the coming quarters and prefer to remain on the sidelines. Hence, we recommend a ‘Watch’ stance on the stock at the current price of CAD 27.67 on May 25, 2020.

UFS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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