Since the start of January, the Woodbois (LSE: WBI) share price has crashed by 33%, and is now below 3p. The stock was changing hands for 8p in May but, since then, the share price has been steadily in decline. Has the time come for me to buy shares in the sustainable wood producer?
Size
Woodbois is not a very big company. Its first-half results showed revenue of $11.3m and an operating profit of $15,000. However, all of its key financial metrics are heading in the right direction.
Woodbois now has the capacity to produce 30,000 cubic metres of sawn timber each year. To put this in perspective, West Fraser, which Canadian Forest Industries claims is the largest lumber producer in the world, sold 11.2m cubic metres of timber in 2021.
Valuation
I accept that the Woodbois business model is different to that of its larger competitors. The company prides itself on producing sustainable timber. However, I am intrigued how a company that is barely profitable can have a stock market valuation in excess of £50m. The answer is international accounting standards and how biological assets (trees) must be accounted for.
At the end of 2021, the company’s forestry assets were valued at $337m. To come up with this valuation, Woodbois was required to forecast discounted expected future cash flows. This involves making certain assumptions concerning the number of trees harvested each year, the selling price for logs, and the cost of extraction.
A bargain purchase
The company’s last acquisition was in August 2021, when it purchased 71,000 hectares of trees in Gabon for $1.5m. This asset was then immediately re-valued and included on the Woodbois balance sheet at a carrying value of $128m. After tax, the transaction resulted in an accounting gain of $88m.
Such a bargain usually indicates a forced sale with the seller being in financial distress. Why else would someone dispose of a forest for $1.5m, when the buyer is able to put the same asset on its balance sheet at a value 60 times higher?
In a note to its accounts, Woodbois acknowledges that the seller was not in financial trouble. Instead, it says that the vendor was unable to obtain financing to operate the forest, and was under threat of losing it due to non-operation.
Something similar happened in 2017, when Woodbois paid $6.8m to buy a company in Denmark. Immediately post-acquisition, the acquired forestry was included on its balance sheet at $53m.
Woodbois is doing nothing wrong. But, the accounting treatment of its forestry assets does help to explain why the company’s market cap is apparently divorced from its current level of earnings.
What am I going to do?
I am not going to invest in Woodbois. To be honest, I fail to see the attraction.
By acquiring additional forests, and immediately re-valuing them, the disparity between earnings and assets is likely to continue to get bigger.
