It has been a dramatic few months for shareholders in timber company Woodbois (LSE: WBI). Over the past year, its shares have fallen 20%.
But in a few weeks across April and May, the price doubled. This week, the shares have fallen back to where they stood before that price rise started. So could it now be time for me to scoop some up for my portfolio?
Improving business performance
Arguably, the business outlook now looks stronger than it did in April. Last month, Woodbois released its half-year results. They showed revenues increasing 38% compared to the same period last year, while gross profit rose 59%.
As the name suggests, gross profit in a company’s profit and loss account does not reflect various deductions that might need to be made. But even at the operating profit level, Woodbois reported a positive figure for the first time ever.
Admittedly, it was only $15,000, but compared to an operating loss of $0.7m in the same period last year, I think that shows progress. Woodbois is upbeat about the outlook for the period ahead too, saying that at the full year level it is “on track to deliver strong revenue and profitability growth”.
Improving business performance at the firm could be good news for the valuation of Woodbois shares, in my view.
Work to be done
But I continue to have reservations about the Woodbois business model. It has taken a lot of time and money even to get to modest operating profits. On a statutory basis, the company remains loss-making even now. That reflects ongoing non-operating costs, like finance expenses.
It is heavily concentrated in one country, Gabon, which in my opinion, increases its risks. If there is a fire at the sawmill, or a change in the tax regime for timber export, that could significantly alter the economics of the business.
Timber is a commodity business. Woodbois has tried to address this aspect of its business model by selecting prestigious timbers to produce and then processing them. That can add value that helps set it apart from competitors.
In the long term, I think that could help give Woodbois pricing power. But it also introduces complexities to the business model. For example, Woodbois needs to pay close attention to style trends for decorative timber to maximise its sales opportunities.
For now, I see these as sizeable risks.
Should I buy Woodbois shares?
Even after the recent fall in the price of Woodbois shares, the company commands a market capitalisation close to £80m.
I see some promise in the business model and think Woodbois’ recent commercial performance is moving in the right direction. But it has not proven it can be consistently profitable, even at the operating level. It also continues to face a number of risks I think could significantly affect its future worth as an enterprise.
So, for now, I will continue to keep an eye on the firm’s business performance, but will not be adding any Woodbois shares to my portfolio.
