Over the past few months, shares in Woodbois (LSE: WBI) have performed well. Woodbois shares are up more than 50% since the start of 2022. Over the past 12 months the gain has been a more modest 19%, but I would still be happy with that sort of performance in my portfolio!
So, are Woodbois shares a possible beauty to tuck away in my portfolio? Or, having fallen 65% in the past five years despite the recent increase, are they the sort of beastly investment I should avoid?
The bull case
The sort of investment beauty many shareholders dream of owning is a company with a clear growth path ahead of it, big market opportunities, and potentially high cash generation potential.
Woodbois benefits from a large addressable market that I expect will grow over time. Homeowners and tenants in many countries will continue to want to decorate their homes with fine wooden veneers. Over time, new builds should provide ongoing opportunities. Redecoration and refurbishments of existing properties could also help.
A big market does not always translate to large profits. Competing in a commodity market can push prices down in a race to the bottom, hurting profitability in an industry as a whole. But Woodbois has been building a distinctive position for itself that could help set it apart from competitors. From access to unusual exotic woods to its focus on its environmental footprint, Woodbois’ business model could give it pricing power for the long term. That may help profits.
The bear case
However, while the future potential may sound rosy, there are quite a few things that could stand in the way.
One is Woodbois’ geographic concentration. Timber is sourced, milled, and finished in the African country of Gabon. As the UK government notes about Gabon as a whole, “rampant graft prevents the country’s significant natural resource revenues from benefiting most citizens”. It also says the Gabonese government touts combating corruption as a priority. But clearly there are sizeable political risks for companies trying to do business in Gabon. That could be a risk to profits at Woodbois.
I also think the barriers to entry in this market are fairly low. Although some timbers are rare, setting up a veneer factory is fairly straightforward and a lot of customers may not be fussy about getting a specific type of wood as long as the look of the veneer matches what they want. That could increase competition for Woodbois.
My next move on Woodbois shares
The business model at Woodbois has involved sizeable upfront investment, for things such as a sawmill and veneer factory. That has meant that the business had not made a profit before last year, when the accounts included a one-off benefit from a land transaction. So I think Woodbois’ ability to make consistent profits from its core business remains to be proven.
Meanwhile, there are significant risks I think could hurt future profits. Despite trading as a penny share, Woodbois has a market capitalisation of £130m. I do see potential in the business model and think it could yet turn out to be a beauty – but so far it has not. The risks are too high for my taste, so I will not be investing in Woodbois shares.
