Why the Pact Group share price jumped 8% higher today

The Pact Group Holdings Ltd (ASX: PGH) share price is surging higher on Tuesday after announcing asset divestment plans this morning…

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The Pact Group Holdings Ltd (ASX: PGH) share price has been a strong performer on Tuesday.

In morning trade the packaging company's shares are up 6% to $2.85. At one stage they were up as much as 8% to $2.91.

This makes it the third-best performer on the All Ordinaries today. Its shares trail only Data#3 Limited (ASX: DTL) and Strike Energy Ltd (ASX: STX).

Why is the Pact Group share price surging higher?

Investors have been buying Pact Group's shares in response to news that it is planning to divest one of its assets.

According to the release, the company has commenced a sale process for its Contract Manufacturing division. Pact has appointed Citigroup to assist it with the matter.

Pact Group's Contract Manufacturing division includes the Jalco, Pascoe's, and Australian Pharmaceutical Manufacturers businesses.

It is a leading supplier of contract manufacturing services in Australia for the home care, personal care, and health and wellness segments. The division reported sales of $372 million and EBITDA of $25 million in the 2019 financial year.

Why is Pact Group selling the Contract Manufacturing division?

Pact Group's managing director and chief executive officer, Sanjay Dayal, explained the rationale behind the sale.

He said: "We have undertaken a detailed strategic review of our business, including a review of our portfolio. Contract Manufacturing is an attractive business that enjoys leading positions in sectors with strong growth potential. However, Pact's success over the longer term is dependent on our ability to deliver organic growth and restore margins in the core packaging business while growing our materials handling and sustainability businesses."

Mr Dayal believes that the simplification of its business will generate stronger returns for shareholders and strengthen its balance sheet.

He explained: "Divesting Contract Manufacturing will simplify the portfolio and sharpen our focus on driving improved returns in the remaining Group. Importantly, divestment will strengthen our balance sheet and improve our financial flexibility."

A further update on the sale process and its strategic review will be provided in February with its half year results.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Data#3 Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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