Shares in timber company Woodbois (LSE: WBI) have changed hands for pennies over many years. But does an improving business outlook mean that the Woodbois share price – currently 4p – could make the shares a bargain to add to my portfolio?
Improving business performance
The reason I feel more optimistic about the business outlook for Woodbois is that its recent results have shown a business in growth mode. They also saw the firm record an operating profit for the first time.
In the first half of the year, turnover grew 38% compared to the same period last year. An operating loss of $654K last year turned into an operating profit of $15K this year. That is slim but, along with the strong growth in sales, I see it as a sign that the Woodbois business is moving in a positive direction.
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An operating profit is only one part of a company’s profit and loss account. Taking into account other expenses such as finance costs, the company still recorded a loss of over half a million dollars for the first half. Still, even that was a sharp improvement, as it was a 43% smaller loss than in the same period last year.
How to value shares
Despite an improving business performance, the Woodbois share price is now 9% lower than it was a year ago.
Does that mean it is a bargain? Not necessarily. After all, even though the shares are only 4p each, there are enough of them in circulation to add up to a total market capitalisation of £87m.
When it comes to valuing shares, it is important to distinguish between price and value. While the Woodbois share price may be 4p, what about the value of each share?
The Woodbois share price and value
I think the value of Woodbois shares depends on how much weight one attaches to proven business performance as opposed to the future potential of the company. That consists of both selling timber and potentially benefiting from carbon permit trading.
The company had always been loss-making at the operating level until the first half. I do not feel it has yet proven the long-term commercial viability of its business model.
It also faces a number of risks. Its operations are concentrated in two African countries. I think that could expose it to political risks, for example, if the tax regime changes in those countries as companies like Woodbois start to make profits.
Today’s share price could turn out to be a bargain if Woodbois can develop its timber and carbon credit businesses strongly enough. That may happen. But there are substantial risks along the way. In my opinion, although business performance is improving, the company has not yet proven that it has a viable business model that can be consistently profitable. Based on that, I do not see the Woodbois share price as a bargain and will not be investing.
