Woodbois (LSE: WBI) shares have been as high as 9.4p in 2022, and as low as 2.3p. As I write, they’re changing hands at 2.6p. Does that make Woodbois a buy now?
I’m looking at three things that could persuade me to buy Woodbois shares. But each of them is a bit double-edged.
Revenue growth
Woodbois is in its early operational stages in Gabon, but revenues are rising. For the first half of the year, revenue grew by 38%, to $11.3m.
Production of sawn timber and veneer products both increased, by 37% and 50%, respectively. And we saw the highest volumes shipped since the pandemic.
But how does that old investors’ saying go? “Turnover is vanity, profit is sanity, cash is reality.”
Revenue growth is needed, and what we’ve seen does look good. And Woodbois did record its first ever operating profit in the half. But it was tiny at just $15,000, and didn’t come close to the period’s cash outflow.
Seeing revenue rising like this is encouraging. But the big risk lies in the time it might take to reach sustainable positive cash flow, and what further funding that might need.
Valuation
The thing I most look at when I consider buying a stock is its valuation. I like to see quantifiable fundamental metrics, like price-to-earnings ratio, dividend yield, and things like that. With Woodbois now, that’s largely impossible.
The best I can come up with is a price-to-sales ratio (PSR). If I assume first-half revenue will double for the full year, to $22.6m, that gives me a PSR of three. I think that’s attractive, particularly for a company at an early stage in its progress.
If trends continue, we should see further revenue growth in the second half. And that would bring the PSR down below my current estimate. But there’s little else I can meaningfully measure.
Woodbois is a very difficult company to value right now, even with one estimated measure that looks positive.
Losing money
This one might seem a little facetious, but it’s a serious point. To buy Woodbois, or any other ‘jam tomorrow’ growth shares, I’d have to be prepared to lose my money. And I mean all of it.
If I picture a worst-case scenario, it would be Woodbois running out of cash and going bust. I don’t think that’s likely to happen, but it would mean a 100% loss, and I’d have to be prepared for it.
A less bad outcome might see Woodbois reaching sustainable profits, but needing huge new funding to get there. I might face massive dilution of my holding, and lose a large amount of my money. In fact, the number of shares in issue has already multiplied more than fivefold between 2019 and 2022.
To put it another way, to compensate for the risk of losing my investment I’d need to see a high probability of Woodbois turning into a multi-bagger. Right now, I’m not sufficiently confident of that. For me, the risk-to-reward ratio is too high. I’ll just keep watching.
