There was a flurry of interest from some investors regarding Woodbois (LSE: WBI) earlier this year. Woodbois shares reached a price of 8p each in May. They have since halved, although over the past 12 months, the share price decline has been a more modest 12%.
So given that I could now pick up twice as many Woodbois shares for the same amount of money as a few months ago, should I add them to my portfolio?
Is cheaper better?
First I think it is worth noting that just because something is half the price it used to be does not make it a bargain. If you offered me a chocolate teapot for a pound, I would not buy it. Offer it to me for 50p and I do not think it is any more of a bargain, despite the lower price.
That is because price is only one element of how to value shares, or indeed anything else. The other one is the quality of what is being sold. So when it comes to shares, if I like the company in the first place, I may consider whether the price looks like good value for me.
But if I am not compelled by the business to start with, simply having the chance to buy the shares cheaper than before does not in itself make them any more attractive to me. That is as true for Woodbois shares as for any other ones.
The Woodbois business model
I do think there are some attractive elements to the Woodbois business model. Demand for high-end furniture and home furnishings is likely to remain strong, I reckon. That could mean there is a decent customer pool Woodbois can target. Its control of forest land and ability to saw and manufacture in its own plants makes the company less reliant on third parties. That could help it differentiate itself from competitors, which could be good for profit margins.
But I see some disadvantages in the way Woodbois is set up too. For example, it is heavily reliant on a single African country – Gabon — for production. That means there are considerable political risks to the company. I may not be in a strong position to judge such risks.
On top of that, vertical integration can also have downsides. It brings higher capital costs compared to using third party manufacturers. It also means Woodbois needs to manage its supply chain carefully or risk not utilising its manufacturing capacity efficiently.
Overall, although I think Woodbois is in a potentially lucrative business, I feel nervous about how it has concentrated its operations quite narrowly. If something goes wrong in Gabon generally, such as a strike by port workers, Woodbois could see a big hit to its revenues. Even though it has operations in Mozambique, any widespread problem in Gabon would be bad news for Woodbois.
My move on Woodbois shares
The balance of risk and potential reward offered by Woodbois shares therefore does not appeal to me. I feel uncomfortable assessing some of the risks faced by the business as I feel they fall outside my circle of competence as an investor.
So despite the share price halving in recent months, I will not be adding Woodbois to my portfolio.