Case Studies

Embonor at the Onset of the Pandemic

Embonor produces and distributes Coca-Cola products.  Approximately half of the business serves parts of Chile outside of metro Santiago.  As previously highlighted, Embonor’s business in Chile grew strongly through the double shock of protests and COVID-19 shutdowns in the fourth quarter of last year and in the first quarter of this year.  Second quarter results will be weaker as the loss of jobs affects consumers’ purchasing power in Chile and Bolivia, but Embonor will still produce positive free cash flow in 2020.

Embonor sells for ten times the net income it earned over the last twelve months, which has been a challenging period economically.  Embonor will almost certainly be a bigger business in ten years through an increase in per capita consumption of its current portfolio with the growth of the middle class in Chile and (particularly) Bolivia, product innovations such as its Guallarauco fruit juice joint venture that grew 400% in the first quarter, and alcohol distribution deals like the recent contracts with Diageo and Capel.  The Vicuña Family, which owns a controlling stake in Embonor, seems to agree; family members bought additional shares in March above the current share price.

As further potential upside in the investment, we believe a merger between Embonor and the larger bottler Coca-Cola Andina will be compelling at some point for the controlling shareholders of both companies.  The companies already work closely on joint ventures, and a combined business would benefit from substantial costs savings, particularly in their adjacent regions in central Chile.  If such a combination were to happen around the historic valuations of similar mergers, Embonor shareholders would enjoy a 60%+ premium to its current price at the current earnings level.