Woodbois (LSE: WBI) shares spiked up last month before losing some of the gain, as the company’s fledgling carbon credit business prompted some excitement.
The price is up only a modest 9% over the past 12 months. But from a 52-week low in January, Woodbois has gained more than 80%. Could we be in for a further doubling?
Maybe I lack optimism. There is one punter out there touting a 1,000% gain. But there’s a lesson I take from that: ignore massive claims, especially when there’s no fundamental analysis to support them.
I must sound another caution. The carbon credit business might be behind today’s bullish sentiment. But the company is still working on gaining the required permits, and it’s going to be some time before that gets off the ground.
The hardwood business
In the meantime, I base my judgment on the sustainable hardwood business. You know, what Woodbois is actually doing today.
The profit reported for 2021 was dominated by one-off sums that were down to asset valuation changes. So we don’t have a handle on sustainable profit from operations yet, and no meaningful valuation metrics there.
What about sales? Comparing the company’s market cap with its 2021 turnover produces a price-to-sales (P/S) ratio of about eight. That’s high for a mature company, but I don’t think it’s too stretching for a firm like Woodbois whose production is not fully on stream yet.
A doubling in sales over the next few years, with the P/S remaining at today’s level, would imply a doubling of the Woodbois share price. Is a sales doubling feasible?
New concessions
The company acquired 71,000 hectares of new forestry concession in Gabon in 2021. No harvesting has taken place yet. And Woodbois is ramping up the capacity at its sawmill and veneer factory. So yes, I think there’s a decent prospect of sales growing substantially in the next few years.
But that might not necessarily translate to a share price doubling. I have one key concern, and that is dilution. Over the past few years, the number of shares in issue has been ramping up through a combination of new issues and bond conversions.
Issued Woodbois shares
At the beginning of 2020, there were approximately 465m Woodbois shares in issue. By the end of 2021, that number had soared to 2.5bn. That’s a fivefold dilution in two years.
Funding for all this expansion has to come from somewhere, and the company has yet to post positive cash flow.
Woodbois had cash of $2.6m at 31 March 2022. But 2021 had brought cash outflows of $8.4m, including operating cash flow and expenditure on facilities development.
A balance
So whether Woodbois shares can double in price will depend, it seems to me, on the balance of two things. One is increasing sales, and eventual profits and positive cash flow. The other is the potential drag of new shares being issued to generate fresh funding, with future profits being spread ever more thinly.
So yes, I do see a doubling possibility. But I also see significant risk. It’s a penny share I’d avoid, myself, just now.