The Woodbois (LSE: WBI) share price has been on a rollercoaster ride in 2022. The penny stock is up 35% this year to date, although it has surrendered over a quarter of its gains since touching a 52-week high of 8p last month.
Hovering just below 6p today, let’s explore where Woodbois shares could head next.
A business for the net zero economy
Woodbois describes its business in the following terms: “we sustainably manage natural forest assets in Africa, produce and trade responsibly sourced hardwood products, and restore tree cover for climate and biodiversity”.
This stock will pique the curiosity of ESG-conscious investors. The company’s forestry division owns production facilities in Gabon and Mozambique, managing a total of around 470,000 hectares of natural forest concessions. Each hectare can support the growth of between 500 to 1,000 trees.
In order to ensure the business is sustainable, Woodbois takes five to six trees from one hectare and will not return to the same spot for 20 years. After two decades, the company commits to renew its licence or hand back the forest in the same shape it received it.
Woodbois became profitable for the first time in 2021, generating a pre-tax profit of $90.7m compared to a $4.2m loss the year before. The company also recorded positive EBITDA for the first time of $1m. While it doesn’t currently pay dividends, executives have suggested it could do so in the future.
Risks
Its shares face headwinds in the form of disruptions in global shipping networks. Following delays in delivering machine parts by sea freight, the installation of a second veneer line at its factory in Mouila, Gabon has been delayed. Consequently, the company has had to draw fully on two debt facilities, totalling $4.3m.
The business also faces political risks given the instability of the jurisdictions in which it operates. Gabon witnessed a failed coup d’état in 2019 by a small contingent of the Gabonese Armed Forces. In addition, Mozambique has implemented frequent policy changes with regard to forestry exports. Plus, there are often delays in the issuing of annual licenses, which adds uncertainty to the outlook for Woodbois shares.
The company is also exposed to risks associated with climate change. The severity of forest fires around the world has increased in recent years. Any major fires in the forests Woodbois manages could be devastating for the business.
Would I buy?
I find the business model to be intriguing and commendable in equal measure. However, I wouldn’t buy this penny stock at present. It’s a high risk/reward play and I’m looking to allocate my spare cash into more established shares at present.
I’m concerned by the volatile whipsaw trading action and the lack of a reliable track record of profitability. Recent meteoric gains in the Woodbois share price could quickly vanish in a bout of heavy selling if investors rush to take profits.
Accordingly, the risks are simply too great in my view for Woodbois shares to be a suitable addition to my portfolio today. However, I’ll follow the company’s future performance with keen interest.