Initial Ops Improvements
We built a stake in Corporación Lindley, the bottler of Inca Kola and Coke products for all of Peru, during late 2015 and early 2016. We had been following the business for some time and had visited the company and its Peruvian markets on several occasions in recent years, but our research indicated that Lindley was being run suboptimally despite attractive demographic and economic tailwinds in Peru. Our ultimate decision to invest in the business coincided with a change-in-control transaction in which Arca Continental purchased a majority stake and began implementing a series of operational improvements that promised to increase the sales and profitability of the business. We had the opportunity to meet again with management in Peru on separate occasions in the past twelve months, and our observations underscored the progress that was already becoming evident in the financial results. Market visits to both formal and the much-larger informal channels confirm the distribution and pricing advantages Lindley has over its competitors. On Dowe’s visit last month to the company’s new state-of-the-art production facility located 50 kilometers south of Lima in Pucasana, he was able to see the efficiency and profitability benefits of the ongoing production consolidation into this plant, which is further complemented by an investment in a distribution center network around Lima. Most of these large investments are complete, and they should immediately enhance free cash flow.
Lindley securities are thinly traded and the company’s ownership is concentrated, so the Fund position is relatively illiquid. We believe the lack of trading activity also means that the prevailing stock price, which was down in 2016 and is lower than where we bought much of the Fund stake, meaningfully undervalues the position. In fact, we believe it is the most undervalued security in our portfolio and that its operational results will only continue to improve.