Sometimes a little-known share can suddenly capture an investor’s imagination, even after many years on the stock market. I think that describes what has happened lately with Woodbois (LSE: WBI).
The share price makes it a penny stock. Over the past year, it has gained only 6% in value. But the past few weeks saw it almost double in price before losing steam again.
Is Woodbois a company I should add to my portfolio?
Long-term growth prospects
The company is involved in trading African timber. It has a sawmill and factory in Gabon producing veneers and hopes to increase its exports of them to Europe and the US soon.
In principle, I think that is an attractive enough business. It is taking a commodity (wood), adding some value to it through processing, and then selling it on. Some veneer buyers are willing to pay high prices for the right product quality. There is a finite amount of certain types of wood in the world that can be processed and sold in this way.
But I see a number of risks to the business that could hurt the Woodbois share price. It is heavily concentrated in a single country far from its end markets — and with considerable political risk. It also has a concentration risk in its limited processing facilities. An unexpected event like a fire could take production offline completely in a way that would be less problematic for a company operating across a range of sites.
On top of that, I think the barriers to entry for this industry are fairly low. Getting access to the right kinds of wood in sufficient quantities can be a challenge. But processing and selling them is something other firms could easily do.
Financial outlook
All of that helps explain why the company has been historically lossmaking. Last year was the first time Woodbois recorded positive earnings before interest, tax, depreciation and amortisation (EBITDA). But this was driven by a non-cash gain. As Woodbois detailed in its annual accounts, that arose due to a difference in accounting frameworks used by Woodbois and a Gabonese company it acquired.
That acquisition could certainly help Woodbois, as it gives it access to an additional 71,000 hectares of forest. But last year’s accounting profit was exceptional. I do not necessarily think it is indicative of what to expect from Woodbois in future. While the paper profit may look large, the company ended last year with less than $1m in net cash.
My move on the Woodbois share price
I do not necessarily see Woodbois as a value trap. It has an operational business with revenue growth prospects. I think the market capitalisation of £123m looks punchy given the fairly small revenues but if the company can scale up its output the way it hopes, revenues could increase sharply in coming years.
But I definitely do not think it is a bargain for my portfolio. The lack of consistent profitability concerns me. The industry’s low barriers to entry could constrain future profit margins. I am particularly concerned by the company’s risk profile. Its footprint in Gabon involves political risks I may not be well-placed to assess.
So despite the Woodbois share price being in pennies, I will not be adding it to my portfolio.
