Many investors who until recently had never heard of Woodbois (LSE: WBI) have suddenly been looking into the company. Woodbois shares have moved a lot lately, with at least some investors hoping this penny share could be the next big thing for their portfolio.
I have also been spending time getting to know more about the timber firm. In weighing whether it could be a good fit for my own portfolio, I have identified several things I think are positive about the investment case. But there are also some factors that put me off buying Woodbois shares.
Customer trends and the Woodbois brand
Sourcing wood from trusted supply chains and then turning it into beautiful veneers for people’s homes seems to me like an idea that will continue to grow in popularity over time.
I think Woodbois has done a good job in identifying an attractive and growing market segment. Just this week, for example, it announced a partnership with World Forest ID that it said would “enhance the traceability and identification of timber, originating from the company’s forest concessions”.
Many customers care deeply about the environmental impact of sourcing exotic wood and are willing to pay a premium for things like traceability and, perhaps ironically, offsetting the carbon involved in chopping down a tree.
By building a brand appealing to this target customer base, I think Woodbois should benefit from a growing market size for its products. That could help boost the price of Woodbois shares in future.
Positive business momentum
I think improving business performance could also be good for the shares. In its most recent quarter, sawmill production grew 24% over last year’s quarterly average while veneer production was up 13%. Sales also improved, with $5.6m of revenue representing a 22% increase on the same quarter last year.
One quarter is just a snapshot of how a company is doing. But with the expansion of its footprint in Gabon, where it has been buying up forestland, I think Woodbois is setting the scene for ongoing production growth that hopefully will also translate into sales.
However, while those things appeal to me, I also have some concerns about Woodbois shares as a fit for my portfolio.
Market capitalisation
The company has a small market capitalisation, of around £120m.
On its own, a small market cap is not a negative thing in my view. Businesses all need to start from somewhere, and many companies with huge market caps today once had much smaller valuations.
But as a private investor, buying shares in a company with a small value like that of Woodbois can present different risks for me than investing in a company with a huge market cap. That is partly because of the role large shareholders can play in monitoring the way a business is being run.
For example, Apple has a market cap of $2.25trn. Warren Buffett’s company Berkshire Hathaway owns a bit more than 5% of Apple. That means the stake is worth over $100bn. If you own $100bn of shares in one company, you are very highly motivated to follow its fortunes closely. So Buffett, as a large shareholder, acts as a form of check on Apple management. If I bought just a few Apple shares, I could never have any meaningful impact on the firm. But that might not bother me much, as I would expect large investors such as Berkshire to help protect the interests of shareholders generally, which would incidentally help me.
But at a company with a fairly modest market cap such as Woodbois, I could not rely on large investors having very high incentives to protect shareholder interests.
Political risk
Next, my question is: where is Gabon? Maybe you could pinpoint it on a map, maybe you could not. Either way, Gabon is important to the performance of Woodbois shares as its sawmill and factory are there. Concentrating production in a single location can increase risk in the event of something unexpected happening in that place. On top of that, if it is a country with heightened political risks, that could hurt the share price should things go wrong.
A recent example of this is Ferrexpo. The iron ore pellet producer has seen its share price crash by 63% in the past year. That is largely because its production is centred on one location – Ukraine.
While Gabon may not face elevated war risks, I do see sizeable political risks for a company like Woodbois. Its timber source and production facilities are physically rooted in the country, meaning it cannot easily relocate to another location. That effectively makes it captive if the Gabonese government decides to tax the company more heavily. At some point in future, if the Woodbois operating profits surge, there is a risk that the Gabonese government could respond by upping its take. So an improved business would not necessarily help the Woodbois share price.
Lack of proven profitability
The company has not yet proved that it has a consistently profitable business model.
In some ways that is understandable. Setting up operations in Africa, getting wood concessions, selling into end markets and dealing with complex logistics all take time and money. Hopefully, over time, costs grow slower than revenues and the company could become profitable.
Woodbois shares have already been traded for 15 years, though. A large accounting profit last year did not equate to free cash flow. So although last year’s profit and loss account could make it look like the shares are very undervalued, I do not think they are.
I usually like to invest in companies that should be profitable in future but have already demonstrated in the past that they can make a profit. That is because I see profit as proof of a business concept. Lots of promising sounding business ideas rack up losses year after year and never figure out how to make it into the black.
That is why, for now at least, I will not be buying Woodbois shares for my portfolio.
