Woodbois (LSE: WBI) produces sustainably sourced African timber. It’s an attractive proposition. According to the company, one ton of wood sequesters 1.7 tons of CO2. That makes it attractive as a sustainable building material compared to concrete and steel, whose production emits 159kg and 1.2 tons of CO2 for every ton produced.
The company owns concessions—the right to manage and harvest forests—in Gabon and Mozambique. Some 166,000 hectares are owned in Gabon–where Woodbois has been operating for 20 years–and 328,000+ in Mozambique. Trees are harvested and processed into owned sawmills in both countries for sale. In Gabon there is 2,800 cubic meters per month of sawmill capacity and in Mozambique 1,000 cubic meters per month.
There are kilns in Gabon, capable of handling 2,000 cubic meters per month of material, and a veneer factory, which produces higher-value wood products, with 2,300 cubic meters per month capacity. Gabon also has a veneer factory, which produces higher-value products.
Woodbois has trading operations. It trades its product but also those of other producers. The trading hubs are located in the UK and Denmark, the later also hosts the company’s corporate operations. Then there is the new carbon solutions business, which is located in the UK.
Woodbois has managed to grow its revenues at a five-year CAGR of 94.3%. It has green credentials. It has just posted a profit after years of losses. What’s not to like?
Does money grow on trees?
Woodbois’s $90m profit for FY2021 came from a gain on bargain purchase of $88m, hitting the income statement. What happened was that the company bought 71,000 hectares of forest concessions valued at $90m from a Gabonese outfit for $1.5m. The Gabon-registered company was said to not be in distress or acting under compulsion; rather, it was a difference between IFRS and Gabonese accounting frameworks that meant it was willing to accept a couple of per cent of the fair value of its concessions.
A gain on a bargain purchase is a non-cash item. The same goes for gains on the fair value of biological assets. These appear on the income statement as well. In 2018 they were £1.6m in 2020, £9.5m, and £4.3m in 2021. This line item represents Woodbois revaluing its biological assets, which are the trees in its forestry concessions, upwards. The carrying value of the biological assets on the income statement increases and a gain is shown on the income statement.
Woodbois’s biological assets are the largest component on its balance sheet. The company makes a good fist at representing them at fair value using a five-year discounted cash flow model. The inputs to the model are the sales price of timber, the real cost of production, the volume of the allowed annual harvest, and a suitable discount rate. When the result of this calculation changes on a per-period basis, the assets are revalued, and a gain is shown on the income statement. No devaluations have been reported recently, which presumably would mean a loss hits the income statement.
On the whole, I like timberland as an asset. If Woodbois decides prices are low, it can forgo cutting some portion of its trees. They will grow, and when prices are better, there is more wood to harvest. But, caution should be exercised when looking at the company’s income statements. These non-cash gains might never be realised. A better indication of the viability of this business is the cash flow statement. As yet, Woodbois has not reported a positive cash flow from operations number. However, it is getting closer. The cash loss from operations was $0.08m in the half-year to June 2022. That’s the best result in the last five half-yearly periods
Regulators
The cubic meter volume of trees Woodbois is allowed to harvest across its concessions in Gabon and Mozambique annually is regulated. An annual management plan is set at the federal and provincial levels across the two countries and determines the annual permitted cut (APC). The APC has ranged between 55,780 and 237,983 cubic meters. Some of the range might be explained by Woodboois increasing the size of its forestry concessions, but some are not.
The range of APC is large. It makes forecasting difficult. It makes the model-derived value of the biological assets somewhat tenuous. Ultimately, the result of regulated cuts, whilst important, puts a variable cap on Woodbois’s expansion plans. Woodbois invests in sawmill and veneer factory capacity, and one year they cannot harvest enough trees to feed them. It’s a potential pitfall that any investor in the company should consider. Of course, many of these fears could be alleviated if there was a clear and well-defined policy for the APC, which allowed a greater degree of certainty in predicting it. Woodbois’s reports don’t hint there is. There could well be, but determining if there is or not is no easy feat. It would require navigating the rules book of state and provincial governments in Gabon and Mozambique.
Woodbois carbon solutions
Woodbois does not yet sell carbon credits.These are like permission slips for emissions. Companies buy credit and gain permission to emit one ton of carbon dioxide.The number of credits issued per year depends on admission policies, usually set at the governmental level, frequently under a “cap and trade” system. That allows for companies with excess credits to sell them for quick and easy revenue.
If Woodbois was given credits, it could surely sell them, given the nature of its operations. But what looks more likely is that it can make money from carbon offsetting. A company that removes a unit of carbon dioxide from the atmosphere creates a carbon offset that other companies can buy to reduce their own carbon footprint. The typical types of projects that result in carbon offsets being generated are removal and sequestration projects like reforestation and direct carbon capture and avoidance and reduction efforts like renewable energy and methane capture. Offsets are traded in a voluntary market compared to the regulated markets of carbon credits.
Woodbois could generate a lot of carbon offsets. It has a number of certification procedures to get through first. But, if, according to Woodbois calculations, one ton of wood sequesters almost two tons of carbon dioxide, some calculations could be made to estimate the potential value of a carbon offsetting scheme.
Given its business model, Woodbois also has the expertise that could be sold to other companies looking to clean up their operations or create offsetting projects. It has plans to consult on aforestation projects conducted by third parties.
DISCLAIMER: James J. McCombie does not own shares in Woodbois. The Storied Investor has no beneficial ownership position in any of the shares mentioned
The Storied Investor 