Time for a punt on Woodbois ?
“…Might now be the right time to look at an ambitious company with a low price/earnings ratio reporting strong sales? Currently trading at 1.5p, WBI, at a £30m market cap, does look rather enticing. Prospective investors should also note that a couple of major stakeholders have been offloading shares in the past few weeks…”
Africa-focused forestry company Woodbois (AIM: WBI) continues to report increasing production and revenues, expanding into a market in which the Ukrainian crisis has forced up prices for timber. But after rallying last year, WBI’s stock has fallen back amid uncertainty within the wider commodities market, and selling by some large stakeholders. Might now be the right time to look at an ambitious company with a low price/earnings (P/E) ratio reporting strong sales?
WBI produces and trades hardwood, softwood and related products for use in house-building, railway construction, interior design and carpentry, and also lightweight African veneer and blockboard. More recently the company moved into the carbon credits market, offering reforestation services. WBI manages some 470,000 hectares of natural forest, and has production facilities on both sides of the African coast: a sawmill site and veneer factory in Gabon on the west coast, the location of the company’s core operations; and a sawmill site in Mozambique, where it funds limited operations on a care and maintenance basis, retaining the option for expansion. WBI’s sawmill functionality has been upgraded in recent years to ensure all operations and processes can be completed on-site.
Mindful of the gathering global concern regarding the destruction of the world’s woodlands, which prompted a major commitment by the COP26 to halt deforestation by 2030, WBI emphasises the company’s commitment to sustainability. It seeks to align its activities to the United Nations Sustainable Development Goals by harvesting fewer trees than its timber concessions allow, respecting the Continuous Cover Forestry preference for structurally, visually and biologically diverse forests, and following a 23-year rotation plan ensuring the regrowth of harvested forest. The company is also working towards Forest Stewardship Council (FSC) certification, the internationally recognised standard for timber produced from responsibly managed forests. WBI’s operations in Gabon are now more than 60pc compliant with the FSC code, with the prospect of achieving 100pc compliance by the end of the year. The company ranks eighth in the annual Sustainability Policy Transparency Toolkit ESG policy transparency assessments for the worldwide timber and pulp industries conducted by the Zoological Society of London. A new Carbon Services division, founded in March 2021, aims to generate voluntary carbon credits for corporate partners through the delivery of large-scale reforestation projects.
WBI ramps up production
WBI recorded strong results last year, the company’s half-year results for H1 2022 reporting record production levels, significant revenue growth and a maiden operating profit. Total output at its sawmill and veneer factory in Gabon increased by 37pc and 50pc respectively on a year over year basis for the period, helping secure a 38pc increase in year-on-year revenues. WBI recorded a 59pc increase in gross profit compared with H1 2021 and its first ever operating profit in H1 2022 of $15,000 in contrast to a $0.7m operating loss for the previous year. Positive operating cash inflows of $0.2m were also reported for the first time, compared to a loss of $2.2m for H1 2021. EBITDAS improved by 141pc to $1.104m as against $0.46m. The company drew on loan facilities to fund increased production: a $2m unsecured facility agreed with Rhino Ventures was fully drawn down in February 2022 to fund the increase in working capital required due to higher volumes of production, and $1m of a $2m conditional facility agreed with institutional supporter Lombard Odier was also utilised in June 2022 as a short-term measure. By the end of the reported period WBI’s working capital was $9.8m (December 2021: $7.7m), including cash of $2.1m (December 2021: $0.9m), excluding loans of $12.4m (December 2021: $8.3m).
The company’s Q4 update confirmed the positive trajectory, reporting $23.1m total revenue for the full year, a 32pc increase on the $17.5m recorded in 2021. Gross profit for 2022 was up 69pc to $5.9m, up from $3.5m. The company’s cash balance was $2.3m at year end. WBI’s investment in its plant and machinery had allowed for higher sawn timber production of approximately 18,600 metres cubed (m3), a 42pc increase year-on-year, and increased veneer production of approximately 5,200 m3, a 38pc increase. The company affirmed its ‘primary focus on becoming cash flow generative on a consistent and sustainable basis and thence to become dividend paying.’
Progress was reported on its first large-scale reforestation project. A comprehensive feasibility study and proposal has been submitted to Gabon regulators, with approval so far granted for a pilot planting project this year, either in WBI’s concession area or in an area under discussion with the relevant ministry. It will be scaled up if a grant of land has been confirmed and the pilot proves successful. The company is also exploring potential for reforestation in Mozambique.
Rising timber prices
WBI’s progress comes amidst a sharp rise in timber prices, impacted by the Ukraine crisis. Heavily forested Ukraine, Russia and Belarus accounted for one-quarter of the worldwide timber trade in 2021, and for some 35pc of the world’s forests certified by the FSC, important given the pattern of consumer demand towards sustainable timber products. Ukraine’s production capacity has been severely affected, and sanctions imposed on the aggressor have blocked timber supplies from Russia, the world’s largest exporter of softwood timber, and hit supplies from Russia’s ally Belarus. The Global Sawlog Price Index, representing 20 regions worldwide, soared 34pc from $68 per cubic metre in the second half of 2020 to $92 in the second half of 2022, much higher than its ten-year average of $78, and a record high since it was established in 1995. Timber prices were high even before the invasion, the pandemic’s impact on international shipping putting pressure on supply. President Biden’s construction stimulus package has applied further pressure on prices.
The near term outlook for timber prices depends on the course of the conflict and global demand, particularly the strength of the Chinese economy, now the second largest timber-consuming country after the US, demand surging by 69pc between 2005 and 2015. But in the longer term, as with so many other commodities, the vector points towards ever higher prices. The World Bank estimates that worldwide demand could surge fourfold by 2050, and Gresham House, the London-based specialist alternative asset manager, forecasts demand will increase by 3.1pc over the next 30 years, up from 1.1pc over the past 20 years. Timber is another key transition commodity, likely to be used increasingly in construction in place of carbon-heavy aluminium and steel, and to power heat and electricity grids. A projected dramatic increase in demand for housing will apply further pressure, as the world’s population continues to move to urban areas. Africa and the rest of the developing world now consume more industrial roundwood than the rest of the world, demand rising by a third between 2005 and 2015.
Right now it isn’t clear how that demand will be satisfied. Unlike fossil fuels, there are no new reserves of timber waiting to be discovered. Existing woodland can take 30 to 100 years to replace. With native, natural forests vital for preservation of the world’s ecosystems – and already under pressure from illegal logging, which accounts for up to 90pc of all forestry activities in key producer tropical forests – new supplies will depend on fresh plantations. But competition for the land they would have to occupy is fierce – the world also needs to ramp up agricultural production. It all points towards ever higher prices, as the cost of producing sustainable, certifiable plantations rises.
The omens are good for WBI, then, if the company can sustain its current growth. Time will tell. Though timber prices have been rising, so has the cost of producing it. WBI says the company is somewhat protected from inflationary pressures by virtue of its ownership of the whole supply chain from forest to buyer. But it is not immune to higher energy costs and fuel shortages, rising diesel costs impacting production last year.
With – at the time of writing – a low P/E ratio of 0.49, and currently trading at 1.5p, WBI, a £34.6m market cap, does however look rather enticing. A year ago the company’s stock gathered momentum along with its timber production, rising from 3p in late 2021 to a high of around 8p last May, before falling back with so much of the rest of the commodities market. Prospective investors should also note that a couple of major stakeholders have been offloading shares in the past few weeks, one moving from a 9.09pc holding to less than 3pc, another from 14.95pc to less than 9.8pc. Should that downward pressure ease, WBI, a company with strengthening sales in a dynamic market, might look rather cheap.W