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Buying luxury wooden furnishings for a home or workplace can be expensive. That sounds like it could mean lucrative opportunities for a timber specialist. Yet Woodbois (LSE: WBI) shares trade for pennies, as they have done for over a decade.
Does that make them a bargain I should consider adding to my portfolio?
Value, not price
First, I think it is important to clarify the difference between price and value. Although Woodbois shares sell for pennies, that does not necessarily make them cheap. It is simply a statement of price.
To know whether something is cheap involves a judgment about value. To make it, as well as knowing the price of a share, I also need to have some idea of what I think it is worth. I can then compare the current share price to what I think is its underlying worth. That allows me to decide whether the shares look like they may offer me good value if I buy them for my portfolio.
The value of Woodbois shares
Turning specifically to the company, then, what does that mean?
One way of judging what I think the shares are worth could be to look at Woodbois’ business performance, if I think it is a useful indicator of what might happen in future. For Woodbois, though, I do not think it is. The company’s revenues have been growing and I expect that to continue. Timber takes decades to mature, so it is hard to know the ultimate value of Woodbois’ assets.
On top of that, the company has been consistently lossmaking at the operating level. It did recently report a small operating profit. If it can continue to grow revenues while keeping costs under control, profits could grow over time. However, I do not think that Woodbois’ current business performance is very helpful to me in assessing what it is likely to do in future.
Another approach to valuing Woodbois shares would be to try and assess the likely scale of its future opportunities. I think the market for quality timber is likely to stay strong and there is limited demand. The growth cycle of forests means that increasing supply could take decades. With its own forestry concessions, sawmill and factory, Woodbois could be in a good position to exploit this demand.
So, could I use a discounted cash flow model to value Woodbois shares?
I could try. But a lot of the inputs would be estimates and perhaps not even very reliable ones. It is difficult to know what the economics of the business will be in future. For example, timber prices may move around. The firm’s operations are mostly concentrated in one country. If inflation or regulatory changes in that country change significantly, the impact on cash flows could be substantial.
In short, I do not currently feel comfortable valuing Woodbois shares. If I am unable to assess their value, I cannot tell whether a share price in pennies offers me an attractive buying opportunity or not.
So I will not be adding them to my portfolio.
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