Timber company Woodbois (LSE: WBI) has had a rollercoaster few months on the stock market. Woodbois shares are now far below their May highs. But over a one-year period, they are only 1% lower. Given some of the stock market volatility we have seen lately, that performance seems creditable to me.
So could the coming weeks be an opportune time for me to add Woodbois to my portfolio?
Improving business performance
Although Woodbois shares are roughly where they were a year ago, I think the business looks in markedly better shape now than it did back then.
The company’s interim results last month showed it has been improving its business performance strongly. The revenue for the first six months of the year was 38% ahead of the equivalent period last year.
Total sawn timber production was 37% higher, while veneer production grew by 50%. Those are all impressive rates of growth. A second veneer line has been installed that should mean sales of that premium product could keep growing swiftly.
Not only did the top line improve, but so did the bottom line. An operating cash inflow (before income taxes and finance costs) marked a turnaround from an outflow in the same period last year. The company recorded its first ever operating profit. Admittedly it was pretty small beer at $15,000. Still, that was better than the operating loss recorded at the interim stage last year.
Risks remain
But although the business is improving, the price of Woodbois shares is not. Why?
I think partly there is a basic valuation question here. Yes, Woodbois has now turned an operating profit. But its market capitalisation is more than £90m. To me that still looks high for a company with a first half operating profit of just $15,000.
The business model also remains to be proven. Woodbois has recorded many lossmaking years at the operating level. Last year’s earnings, and therefore the firm’s price-to-earnings ratio, were flattered by the accounting treatment of a one-off land transaction. However, the firm has still not proven it can make profits consistently. Growing sales volumes might help it spread fixed costs more widely, which could boost profit margins. But, for now, it remains to be seen if that actually happens.
I also see a risk from the company’s concentration of most operations in a single African country. That exposes it to political risks, including changes in the tax or property regime there adding costs.
I’m not buying Woodbois shares
Although Woodbois shares sell for pennies, that does not in itself make them cheap. The market-cap looks high to me for a company with a business model that remains largely unproven when it comes to making profits.
So although the shares trade far below their May highs, I see no urgency in adding them to my portfolio. I will therefore not be buying them in October or, indeed, any time soon. Instead, I will wait for more evidence that the Woodbois business model can generate sizeable profits on an ongoing basis before I consider investing.
