Woodbois (LSE: WBI) shares hit a high of 8p at the start of May, but have since fallen 25% to 6p. Short-term pullbacks such as this aren’t unusual with penny stocks, which can be more volatile than shares in larger companies.
I’m wondering if this could be a chance for me to buy shares in this Africa-focused forestry company at an attractive price.
A $90m profit in 2021?
Woodbois’s sales rose by 14% to $17.5m in 2021, but the group’s profits surged ahead to a whopping $90m.
If you look at the company information on some online financial data services, you might see that Woodbois shares are trading on a historic price/earnings ratio of six.
At first glance, the shares look like they might be cheap. But there’s a catch. It’s unusual for a company to report profits that are higher than sales, but it can happen. The most common example is when a company has generated a large profit by selling part of its business.
The explanation for Woodbois is a little different. Last year, the company bought 71,000 hectares of forest in Gabon for $1.5m. This seemed pretty cheap to me at the time – and it seems the company’s accountants agree.
According to Woodbois, the fair value for this asset under international accounting standards was almost $90m. As a result, Woodbois recorded an $88.3m “gain on bargain purchase” in its accounts.
Woodbois didn’t actually make a cash profit last year. Indeed, when I exclude various non-cash valuation gains, my sums show that the company generated an operating loss of $2m in 2021.
Is there a problem?
I’m not suggesting anything is wrong here. But based on the figures provided by the company, it seems that the price paid for this Gabon forest was less than 2% of its fair value.
Even though the seller was reported to be in financial difficulties, this seems like a very big discount to me.
To be fair, Woodbois’ accounting notes warn that the valuation involved “significant management judgement and estimate”. My concern is that the eventual value of this forestry concession could be much lower than expected.
Are Woodbois shares cheap?
At 6p, Woodbois trades at a discount of around 25% to its book value, which I estimate at 8p per share. A discount to book value is a classic value indicator used by investors hunting for bargain stocks.
If Woodbois can convert some of its $258m book value into profitable sales, then the shares could be cheap. The company’s newly established carbon offsetting business may also add to profits in the future.
However, I’m concerned that Woodbois’s financial situation isn’t very strong. The company’s accounts show an operating cash loss of $2.5m last year and year-end net debt of $8.3m.
During the first quarter of 2022, my sums indicate that this net debt figure rose to $9.5m, suggesting further cash outflows.
Shipments of veneer and timber are being held back by container shortages. When these ease, perhaps Woodbois’s profits will surge ahead and it will start to generate cash.
For now, I’m cautious. With the shares trading on 45 times 2023 forecast earnings, I’m not convinced Woodbois shares are cheap. It’s not a stock I’ll be buying.
