Is this a good opportunity to buy some shares in the AIM-listed wood and carbon services company for my portfolio? Or is Woodbois stock a risky proposition from here? Let’s take a look.

Is now the time to buy the shares?

Woodbois released a trading update for the third quarter of 2022 last month, and there were definitely some positive takeaways from it.

For the period, the group generated record quarterly revenue of $5.8m, up 29% year on year. This took revenues for the first nine months of the year to a record $17.1m, up 35%. Meanwhile, gross profit margin for the first nine months of the year improved to 24% from 23% in the first half of 2022.

Looking ahead, management was optimistic about the future. “Almost regardless of market conditions we look forward with confidence to further growth in 2023 and beyond,” said CEO Paul Dolan. This kind of confidence from management is encouraging.

Where are the profits?

However, there were also a few issues of concern in the update.

For a start, there was no mention of operating profit, which suggests that the company generated a loss during the quarter. This could explain why the share price fell after the update was posted. In the current economic environment, where there’s a lot of uncertainty, investors want to see profits.

Secondly, the company’s cash balance at the end of September was only $1.4m. That’s low. Cash is the lifeblood of any business. Without it, firms tend to experience operational challenges. Given this small cash balance, Woodbois may need to raise capital. If it did this via an equity raise, its share price would probably fall.

Finally, debt at the end of the quarter was $12.3m. That’s quite high given that Woodbois isn’t generating consistent profits. Especially now that interest rates are rising and debt is becoming more expensive to pay off.

Overall, the update highlighted a number of key risks for me to consider.

This stock could be volatile

Looking beyond the latest trading update, there are some other risks that concern me here.

One is that Woodbois is a very small — micro-cap — company. Currently, its market capitalisation is around £60m. The share prices of companies this size tend to be very volatile. Meanwhile, there can be quite a large trading spread with micro-cap stocks, which increases buying and selling costs.

Another issue is that ex-Chairman Miles Pelham currently owns around 20% of the company’s shares. If he decided to offload the stock, it would most likely put downward pressure on the share price.

My move now

Given the risks here, I’m happy to leave Woodbois shares on my watchlist for now. In my view, there are other growth stocks that offer a better risk/reward proposition at the moment.

The Woodbois stock gyration makes it look like it’s a new growth stock in its early phase, with profits hopefully just around the corner. But that’s not exactly the truth.

Woodbois in its current guise came into existence in 2019. But that was the result of a restructuring, a new fund raise, and a renaming from its previous identity as Obtala Limited.

In that past life, the shares have been through ups and downs that were a lot bigger than the latest. As Obtala, the price reached 22.5p in 2017 before falling back to earth.

And a few years before that, in 2011, the shares peaked at nearly 54p. That was 18 times today’s 3p Woodbois share price.

Groundhog day?

And looking at the company’s last set of half-year results before its rebirth, I see something scarily familiar. The company was reporting an increase in revenue, but an operating loss of $4.8m. At the time, Obtala told us that “year on year revenues are on track to deliver further growth in 2018“.

When that year’s final results were released by the renamed Woodbois in May 2019, we saw a loss of $5.6m. That was in what the board described as a “transformative year”.

Now the share price is back down in the dumps, where might it go next and what might drive it? In the short term, I think a lot will depend on what the company says next.

Cash burn

Woodbois reported positive operating profit in the first half. But that didn’t bring it close to positive cash flow. In fact, the period saw a cash outflow of $2.8m from operations and investments in assets. And there was just $2.1m cash left on the books.

If the next update shows any significant moves towards sustainable and growing profit, or gives us any hint of when we might see net cash inflow, I think the Woodbois share price could start climbing again.

But if it looks like the company will be seeking extra financing before that happens, I suspect investors could turn away. And the shares could dip again.

Verdict

So would I invest in Woodbois shares today? I do see promise in the company’s business proposition. I like the idea of sustainable hardwood production. And I can see growing worldwide demand for it in the coming decades, as we move away from plastics.

I can also picture a profitable future for the firm’s nascent carbon credits business. That would be, essentially, money simply for owning forestry rights. But it’s some years away yet.

The trouble is, I’m not sure how many years of transformations I’d be prepared to sit through while waiting for a growth stock like this to start generating sustainable profits. So I’ll sit it out, and wait until I see the colour of the cash.

I could look back further. At one point in May 2017, Woodbois shares were worth 22p. Looking even further back to February 2011, Woodbois was still a penny stock but traded closer to a pound one than at any other time in its history at 53p per share. Could it get there again?

AIM-listed penny stock

Woodbois is still an AIM-listed penny stock, but it is a very different company now than it was back in 2017, let alone 2011. Woodbois was formally known as Obtala when it was a diversified African resources company. In 2011, it held exploration licenses for diamonds, iron ore, and tin in Sierra Leone and Tanzania. These activities appear to have captured investors’ minds over a decade ago. Its forest concessions probably did not get as much attention.

In 2017, the company had assets in Tanzania, Gabon, and Mozambique. But the diamonds had gone. The company was involved in agriculture, food processing, and forestry. By 2019, the company was entirely focused on wood after disposing of a fruits and vegetable business in Tanzania. It changed its name to Woodbois in March of that year.

Woodbois had $66m in net assets in 2011. Today it reports closer to $260m, yet its share price today is a fraction of what it was back then. How can that be? Well, I imagine that the possibility of striking a rich vein of diamonds or tin can inflate a stock’s price well beyond its identifiable asset base much more than owning a lot of forestry concessions can.

Carbon offsets

I think Woodbois is a better business now than it was back then. It owns 485,373 hectares of forest concessions across Gabon and Mozambique. Trees are harvested from these concessions and processed into lumber and veneer products for sale through its trading arm. Woodbois has been steadily increasing its revenues from these operations over the last five years and is getting closer to reporting a profit without the assistance of substantial non-cash gains.

I certainly don’t think it is the type of business that can support a quick run-up in price to 2011 levels. There was a lot of expectation baked into that 2011 number. It has a new business line that could see it get involved in the market for carbon offsets and afforestation projects. There are viability and regulatory hoops for this carbon solutions business to get through, but it could get the share price moving again if it does. The company’s existing operations could also grind its share price higher if they continue the way they have been going.

But ultimately, I don’t own Woodbois in my Stocks and Shares ISA and I don’t think now is a good time to add this speculative penny stock. But I am keeping a close eye on the company to see if it can change my mind.

Q3 results maybe weren’t that great

On Monday, we got the Q3 trading update that was flush with proud statements from the management team. It spoke of both a record quarter for revenue and also a record nine months (year-to-date) of revenue. Production levels for sawmill and veneer were also up significantly on the quarterly average from last year. For example, sawmill production was up 78%.

These are all points that should help to drive the business forward. As a growth stock, the company wants to capitalise on this top-line growth as much as possible, with the aim of it filtering down to the bottom-line (net profit).

However, that brings me to the first reason why I think the Woodbois share price reacted negatively last week. The business didn’t report the size of the profit/loss for the period. This leads me to conclude that it wasn’t a good quarter when it came to the loss after tax. In the half-year results, the loss for the period was $533k. In H1 2021, the loss was $934k. So, unless something magical happened in Q3, I’m guessing it lost money again.

Further, I think some investors were looking for more evidence of how total borrowings might be reduced. The figure is $12.3m, virtually unchanged from $12.4m last quarter. It’s quite high, especially when total revenue year to date is $17.1m and the cash balance is only $1.4m. When I consider it in relation to those other numbers, I’d like to see some active strategy for bringing it down.

Erratic moves in the share price

Yet even with fundamental concerns about the report, I don’t think a 17% fall in a week is completely justified. But then again, there weren’t that many company-specific catalysts that led to the share price doubling back in the spring.

I think some of this move in October relates to something I flagged up earlier this year. The stock is small, with a market capitalisation of £66m. This means that it only takes a relatively small amount of buying or selling activity in order to move the price.

When the share price was flying, I put it down to speculative investors who were buying in the hope of making a quick profit. For those who didn’t sell as the price came crashing back down, the results last week (or the fact that we’re coming to the end of the year) might have triggered some to throw in the towel and sell.

The volume associated with selling could easily have magnified the share price fall. Given the fact that I think this small-cap stock will continue to be volatile, I think I can find better investment options elsewhere.

This week the sustainable timber company provided a positive trading update. Should I buy shares on the back of this news?

Buy because of business progress

Between July and September, Woodbois notched up record quarterly revenue of $5.8m. That’s up 29% over last year. This helped boost its nine-month revenues to $17.1m, a 35% increase over the equivalent period in 2021.

Sawmill production soared 78% from the 2021 quarterly average, hitting 6,032 cubic metres. Meanwhile, veneer output was up 45% on a comparable basis.

All this helped gross profit margins rise to 24% for the first nine months of 2022. This was partly due to a strong US dollar, which helped the company as it reports in US dollars while its costs are incurred in local currencies.

Woodbois is progressing towards achieving FSC certification for its forestry concessions and factories. FSC-certified wood means it is sourced from forests that are responsibly managed in the most environmentally sustainable way possible. This certification would the company’s increase markets, margins, and profitability. This process is now 62% complete.

Buy because of carbon offsets progress

Trees absorb carbon dioxide from the atmosphere. It’s a complicated business calculating exactly how much CO2 they capture, but forest concessions in Africa are very large. So there’s the potential to take out much more carbon than the company emits through its operations. This could allow the company to generate extra money by selling its carbon offsets in the voluntary market.

However, the firm is yet to receive certification and approval for its first project. Management noted: “Upon receiving any grant of land from the government we will immediately look to scale the pilot scheme, preferably with the financial support of one or more external funding partners”.

This reveals the company is yet to be granted land from the government of Gabon, while external funding will be needed to get the project off the ground.

So, I’m not expecting any revenue from this side of the business anytime soon. I do, however, think this part of the business will come to fruition (eventually), and that funding will be secured (from somewhere). Any progress here would likely send shares skyrocketing.

Sell because of the company’s poor track record

Woodbois is not a new company. Its shares have been listed on the stock market (in one form or another) for over a dozen years. In that time, they’re down 87%. Net debt now stands at $10.9m, while consistent profits are yet to materialise.

More worryingly for me, the number of Woodbois shares in existence has increased fivefold in the last three years. This has been necessary to raise fresh capital to fund operations, but it’s diluted the value of shares and made them less valuable.

I’m interested in the potential of the company’s carbon solutions division, but I’m still on the sidelines for now.

If Woodbois was a buy at 5p, then surely it’s a better buy now, isn’t it? Well, that’s the big question. So let’s have a look at what the latest quarterly update says.

In the quarter ended 30 September, Woodbois hit a record quarterly revenue. At $5.8m, it came in 29% ahead of the $4.5m achieved in the same quarter of 2021. And for the nine months, there’s a 35% increase to $17.1m, from $12.7m in the same period last year. That’s another record.

So why the share price fall? It’s interesting to compare these latest revenue growth rates at the nine-month stage with half-year figures.

Revenue growth slowing?

In the first six months of 2022, revenue increased 38% compared to the same period of 2021. The 29% increase in the third quarter is quite a bit below that. And that suggests revenue growth might be slowing. At a time when revenue growth is all-important in the quest for first profits, that could well be a reason for some investors selling out.

The company did improve its gross margin to 24%, but that’s only from 23% in the first half. Statistically, it’s essentially static.

Liquidity

For a company at this stage in its development, having the liquidity to make it all the way to achieving profit and sustainable cash flow is key. At 30 September, Woodbois had a cash balance of $1.4m. That’s down from $2.1m at the end of the first half, at 30 June. If that rate of decline continues, there’ll be none left in another six months.

Woodbois reported working capital of $9.3m at the end of the half, which looks healthy. But two thirds of that is inventory. Bank loans and other borrowings amount to $12.3m, fractionally down from the halfway level of $12.4m.

Cost saving

I also read one statement that caused me some concern. The latest update said: “The group has reduced senior management head-count and costs, which will benefit Q4“.

I don’t know what’s behind that. But culling management to save costs is not what I’m used to seeing at dynamic growth companies.

And Woodbois did add: “Recently, given the rising likelihood of some pricing pressure however, it was felt prudent to reduce exposure to third party trading for Q4 2022 and focus on own-products”. The outlook is, as companies often describe it, uncertain.

Verdict

What’s my verdict? I still think this is a company that has a promising future. The sustainable hardwood proposition looks attractive. And if the carbon credits business takes off, I think there could be decent profits from it.

I just don’t see how it can happen without a lot more cash. And how much dilution current shareholders might face by the time Woodbois becomes profitable is a huge unknown. I expect further volatility.

Wait and see what the full year brings, I think.

But news of record revenues in the last quarter have boosted my positivity around the stock. Is the market missing a trick here? And should I buy the timber company’s shares for my portfolio?

Record sales

Between July and September, Woodbois’ sales rocketed 29% year on year to $5.8m, it said today. This represented a record quarter for the business, and helped it post record nine-month revenues of $17.1m. This was up 35% from the same 2021 period.

Record production

Woodbois also posted record production in the last quarter, it said. Sawmill production hit 6,032 cubic metres in the July-September period, up 78% from the 2021 quarterly average. Veneer output meanwhile leapt 45% on a comparable basis, to 1,418 cubic metres.

Margins increase

Higher production volumes and cost initiatives meant that Woodbois’ margins continue to rise sharply, too. Further progress in Q3 meant gross profit margins rose to 24% for the first nine months of 2022. This was up from 23% during the first half of 2021 and 20% for the whole of 2020.

The business said that it expects further margin improvement in the final quarter too. It said it is “focused on higher margin own-product sales” for the remainder of 2022.

The firm added it is being helped by the stronger US dollar. Revenues are reported in the North American currency while costs are incurred at local currencies.

A dip buying opportunity?

The Woodbois share price has tanked since it struck its highs for 2022 in May and a number of positive London Stock Exchange updates have failed to pull the stock out of its tailspin.

Investors remain reluctant to dip their toes after the frantic buying and then selling that followed a research report tipping a 1,000% rise in the company’s shares.

Worries over wood demand in the short-to-medium term are also sapping market appetite for the stock. Today, Woodbois chief executive Paul Dolan drew attention to the “current worldwide uncertainties” that might affect its business.

This is something that I, as a potential investor, need to take seriously. But as someone who invests for the long term, I’m seriously considering buying the penny stock today.

3 reasons I’d buy Woodbois shares

Firstly, I like the ongoing operational progress Woodbois is making. Steps to ramp up production and margins remain impressive, as today’s update shows.

Secondly, I think the business could be an effective way to capitalise on the growing green economy. Demand for timber in construction is rising rapidly as builders increasingly seek out eco-friendly materials. The business is also looking to become a player in the carbon credits industry.

And finally, I think Woodbois’ share price could soar over the long term as the growing global population drives construction rates. Analysts at Gresham House have predicted that timber consumption will soar to 5.8bn cubic metres by 2050, from 2.2bn in 2020.

So, does that mean that they are undervalued and I ought to consider adding them to my portfolio? Here are three points I would consider when thinking about that question.

Value is not the same as price

Value and price are not the same thing. As billionaire investor Warren Buffett says, price is what you pay and value is what you get.

So, even though Woodbois shares change hands for just a few pennies each, on their own that does not make them good value. Despite the low share price, Woodbois has a market capitalisation of around £80m. I think that is substantial for a company that after well over a dozen years on the stock market has yet to prove that it has a consistently profitable business model. That in itself means I do not plan to buy the shares.

Consider probability as well as potential

On paper though, I think Woodbois has some promising growth options for its business.

To date it has focused on processing timber and selling it in forms such as veneer. On its own, that has the potential to be a lucrative business, although its track record of turning sales into profits has been weak.

But the firm is also eyeing other opportunities, such as benefiting from its timber holdings by getting involved in the market for carbon credits.

In principle, that could also be an attractive opportunity. But looking only at potential can be a misleading way to value a new business activity. I think it is also important to consider probability. For example, how likely is it that Woodbois will end up developing this business at scale? What is the probability that the market for carbon credits will stay as economically attractive as it currently is?

It may be difficult to answer such questions – and that in itself should give me pause for thought as an investor. If the range of probable outcomes for the Woodbois business a few years from now is hard for me to judge even roughly, how can I hope to value the shares accurately?

The P/E ratio of Woodbois shares

Although Woodbois has a limited track record of profitability at the operating level (before things like finance charges are included), its price-to-earnings (P/E) ratio is barely above one.

Normally the lower a company’s P/E ratio, the better value its shares look. But that is not always the case. For example, a company can have a low P/E ratio but be saddled with high debt. In the case of Woodbois, my concern about relying on the current P/E ratio as a valuation metric is that it reflects a one-off accounting treatment relating to some of the company’s forestry assets. So I do not think it helps me understand what the future P/E ratio is likely to be.

Relying on a P/E ratio in isolation without looking at other factors is always a flawed way to value a company in my opinion. That certainly applies to Woodbois shares.

The African timber provider is down 15% since the start of the year. At 3.75p per share it’s also more than halved in value from the year’s heights of 9.39p struck in May.

Woodbois volatility shows the perils of investing in penny stocks. Low volumes and cheap prices leaves these small caps in constant danger of wild fluctuations. It doesn’t always take a barrel of bad news to cause them to collapse either.

I wouldn’t be shocked to see the Woodbois share price sink again. But as a long-term investor, should I consider buying the wood producer?

Shark tank

Penny stocks are a popular hunting ground for retail investors seeking white-hot growth shares. These can experience bouts of manic buying for even the slightest reason.

In the case of Woodbois, the shares exploded back in May as ‘forecasters’ tipped stratospheric price gains. A paid-for research piece claimed that the timber titan could soar 1,000% in value.

On that the starting pistol for the feeding frenzy began. And it ended almost as quickly as it started, leaving many investors out of pocket.

Good news!

Could it happen again? Of course. Woodbois shares soared and slumped almost exactly a year before in April 2021.

The release of highly impressive financials helped fuel the wild share price swings in May. And trading at the business has remained encouraging since then.

Revenues soared 38% in the six months to June, as sawn timber and veneer production leapt 37% and 50% respectively. This caused pre-tax losses to more than halve year on year, to $489m.

A continuation of this trend could see another share-price-shocking buying frenzy occur.

Should I buy Woodbois shares?

As I mentioned above, I’m an investor who buys shares once I’ve taken a long term view. The prospect of temporary volatility — whether extreme or not — doesn’t put me off.

When it comes to considering Woodbois shares, there’s a lot that I like.

I believe demand for its hardwood and hardwood products could soar in the years ahead. This isn’t just because construction activity looks set to grow (and particularly in emerging markets on account of increased urbanisation).

It’s also because builders are increasingly moving away from energy-intensive and environmentally destructive materials and choosing wood products instead. It’s a trend that’s tipped to intensify too as steps to tackle the climate crisis accelerate.

The Woodbois carbon credits business opens up another possible avenue for splendid earnings growth.

The danger for investors is that Woodbois only operates in Gabon and Mozambique. These territories have been subject to extreme political turmoil in recent years. Fresh flashpoints could present a big problem for the company’s operations.

So should I buy the shares? I’m seriously considering it. From a long term perspective I think the potential rewards might outweigh the risks.

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.