Do you ever look back on a big growth share winner and kick yourself for not getting in when you had the chance? Right now, the Woodbois (LSE: WBI) share price stands at just 4.4p. And I’m wondering if this is one of those no-brainer entry points that I’ve missed many times before.
Woodbois shares looked like they might be starting on one of those growth share runs when they climbed during the summer. But the price has fallen back. So this might just be a second chance to get in cheap. Let’s start with a quick recap.
Woodbois is in the renewable forestry business in Africa. Sales are up, with 2022 first-half revenue increasing by 38%. Much of the company’s forest resources have yet to contribute to production, so I see potential for significant future sales growth there.
Woodbois is also getting into the carbon credit business. But that’s very much in its infancy. And it’ll be a few years before anything comes of it.
Potential vs profit
I do think I’m looking at a company with solid long-term potential here, even if there’s no bottom-line profit yet. My worry, though, is over who will actually own it by the time the cash starts flowing. Let me explain what I mean.
At the halfway point, Woodbois reported its first operating profit. But it was just $15,000, which didn’t come close to even covering finance costs. The bottom line showed a pre-tax loss of $489,000.
Whatever the long-term future might hold, the short term is all about liquidity and cash. For the first six months this year, Woodbois saw operating cash outflow of $78,000.
Costs of growing
The company also recorded $2.7m cash outflow from its investing activities, the bulk of which went on property, plant and equipment. That’s a necessity at this stage in any company’s development, and it’s surely likely to continue.
But who will pay for it? At 30 June, Woodbois had $2.1m in cash on its books. At the rate of cash burn we saw in the half, that wouldn’t last long. So it looks like the firm is going to need more cash. And that’s where the question of who will eventually own the bulk of the company comes from.
Between the start of 2020 and June 2022, the number of Woodbois shares in existence multiplied 5.3 fold. That’s largely through equity issues to raise fresh capital.
Cash flow
I don’t know how long it will be before Woodbois is cash flow positive (and I mean total cash flow, not just operating cash flow). And it’s anybody’s guess how many more new shares might be issued between now and then.
So if I buy Woodbois shares today, I have no idea how far my holding might be diluted in the coming years. And that’s one of the biggest risks perennially faced by early investors in ‘profits tomorrow’ stocks.
I might well reflect in a few years and think I missed a no-brainer opportunity here. But the risk of dilution is too much for me right now.