Timber company Woodbois (LSE: WBI) has been on some investors’ radars lately. Despite the potentially promising nature of the company’s business, Woodbois shares trade just for pennies. Does that make them a good purchase for my portfolio?
Price and value
The first thing to say is that simply because a share trades for pennies, on its own that does not make it a good purchase for my portfolio.
Price is only one of the factors I consider as an investor. There is a difference between price and value. As investing legend Warren Buffett says, price is what you pay and value is what you get. So just because a share trades at a low price, in itself that does not mean it offers me good value. The value depends on how attractive the business is. Buying a good business at a low price may offer me good value. Buying a weak business even for pennies could still offer me terrible value, despite the low share price.
Woodbois business prospects
The thing I like about the Woodbois business is that I think it is anticipating future customer demand. The market for premium timber, such as fine decorative veneers, is likely to grow over time, as the global population grows and income increases. But surging environmental concerns mean that many consumers are increasingly focused on the source of such products.
Woodbois is catering to this market. For example, the company announced a partnership this month with World Forest ID. That will help Woodbois reassure customers that the wood has come from its own forest concessions, helping it stand out in a marketplace rife with illegal logging. It will also help Woodbois verify the species of wood it is selling. I think this approach can help sustain premium pricing, so I think it could be good for profits.
But although I like the business model, I do see sizeable risks that could hurt Woodbois shares. One is the upfront costs. Securing concessions, building a sawmill and operating a factory have all required sizeable expenditure, while the financial benefits could take years to show.
The company is also heavily concentrated in one country, Gabon. That brings political risk, for example if the Gabonese government changes the tax regime for timber sales. It also means that sales could be hard hit if one of the company’s facilities is taken out of service. A fire at the sawmill, for example, could see a lot of its business prospects go up in smoke.
Are Woodbois shares good value?
So although I like the broad direction of Woodbois, I am not keen on its current business model. The risks are too high for my own tolerance. On top of that, the company is yet to prove that it can consistently make a profit. That makes some sense, as it takes years (if not decades) to build up any sizeable timber operation. Trees grow slowly.
However, the lack of a proven business model so far makes Woodbois unattractive to me. I therefore do not see the shares as a good addition to my portfolio at the moment and will not be buying.