A lot of people these days are looking to decorate their homes attractively – but want to ensure the wood they use comes from well-managed sources. That is where Woodbois (LSE: WBI) sees a market opportunity. The company has forest concessions in Gabon that feed a sawmill and factory there. It hopes this will turn out to be a lucrative business opportunity. With Woodbois shares trading in pennies, is this a company I should consider buying now for my portfolio?
Price and value
First things first. I do not think it is ever worth buying any shares just because they trade in pennies. The price is just that – a price. It does not necessarily indicate the value of a share.
So whenever assessing any company I could add to my share portfolio, I always start by looking at its business prospects. Only if I reckon that it has an attractive business model that could help support future profits do I then start to consider valuation.
The Woodbois business model
There are several things I like about the Woodbois business model. I expect long-term demand for the sorts of decorative veneers it produces. I also think that many deep pocketed customers could be willing to pay premium prices for the types of woods they want, produced in a way they feel comfortable with.
Woodbois emphasises its environmental credentials. It has also been buying forest concessions, meaning it can secure access to certain types of timber that competitors may not be able to source very easily.
But I see several challenges to this model, too. In its early stages such a business is capital intensive. Woodbois has had to spend money securing timber and building facilities. But the true test of customer demand and its pricing power is likely to come years down the road, when the business scales up.
The company’s concentration of operations in Gabon increases political risks in my view. That could hurt profits: if Woodbois becomes very profitable, the Gabonese government may want a piece of the action in the form of higher taxes, for example.
Should I buy Woodbois shares?
So far the company has no consistent track record of profitability. Although it did record a profit last year that was primarily due to an accounting procedure rather than the performance of its core operating business.
I am optimistic about the outlook for the market and think Woodbois has a potentially attractive position in it. The brand seems well-matched to consumer trends. But the business has a long way to prove that it can be consistently profitable and sell at scale. Meanwhile, I think the risks are sizeable. If they lead to more investment being needed down the line, that could dilute existing shareholders.
For those reasons, regardless of the price, I do not see the company as a good fit for my investment objectives. Just because they trade for pennies does not mean that Woodbois shares are right for my portfolio – and I will not be buying.
