2023-05-23 13:41:13 ET
Summary
- ZIM has been known for its monstrous dividends, but now the situation has changed for the worse.
- It was known that 2023 and 2024 will be challenging years and that supply is likely to outpace demand, pushing container freight rates lower.
- However, business diversification, healthy balance sheet and political reasons make ZIM a worthy long term investment, if ones is able to get compensated for the opportunity cost.
- Investors that are already invested in ZIM could hold their shares and utilize some options strategy to enhance their returns with some income.
Alright guys. Let's just all take a deep breath and exhale slowly. Relax your muscles. Let's imagine for a second that we're floating in a swimming pool waiting for the waiter to get us our cocktail. That floating mass you see at the other end of the pool is just the portable cooler of another family. No, it's not a container with ZIM's ( ZIM ) logo on it. ZIM hasn't gone bankrupt yet. And they're not expected to go bankrupt anytime soon. So, what's all the drama for? Let's try to use a logical approach to see if things make any sense.
What we did know
How many articles have been written in the past year, on the subject of interest rate increases and their impact on economic growth? Too many, I presume. I remember, when I wrote my last article on ZIM, it was amidst some very serious bearish articles pointing to a rapid decrease of profitability due to container rates collapse. They were right, but they missed the timing. However, the important thing is that we knew that rapidly decreasing freight rates would seriously harm ZIM's profitability, and thus, its most important investor appealing factor: its dividends. So, in an efficient market, it would be safe to assume that this information would be reflected into the price in my view.
We also knew, from the FY 2022 earnings call , that the company expected larger volumes throughout 2023 and container rates to somewhat stabilize. It was also stated that some support would be provided from slow steaming, scrapping and slippage.
Where we stand
First and foremost, let's take a look at how container rates have evolved in the last few months. As we can see in the graph, after the rapid decrease in 2022, since the beginning of 2023, rate easing has slowed down. Despite the fact that any stronger real rate improvements are expected to show up in the second half of this year, it is important to note that current rate levels were the industry's standard since 2016 and up until the post-COVID boom. In other words, there's a good chance that we've seen the worst, regarding container freight rates, which is also supported by the graph listed below.
Shanghai Containerized Freight Index (Hapag Lloyd Q1 2023 Investor Presentation)
This could partially explain why ZIM reaffirmed its FY 2023 guidance for adjusted EBITDA between $1.8 and $2.2 billion, and EBIT between $100 and $500 million. At this point it is important to remember that ZIM's management also delivered within its FY 2022 guidance, despite critics spreading fears of profitability reductions since the middle of 2022. In other words, the company expects to generate a total of $1.5 billion and $114 million in adjusted EBITDA and EBIT respectively, in the remaining three quarters of the year. To illustrate the probability of such numbers getting reaffirmed, let us know that for the Q4 2022, the company reported average revenue/TEU of 2,122 and adjusted EBITDA of $973 million. Today, the company reported revenue per TEU of $1,390 and adjusted EBITDA of $373 million.
From a TEU volume perspective, the management's expectations were not reaffirmed. For the Q1 2023, the company carried 10% less TEUs than the respective period of 2022. This has also contributed to the worse than expected Q1 2023 earnings.
From a geographical standpoint, the largest decline in revenues was found in the intra - Asian segment, where ZIM reported revenues of $161 million, while in the first quarter of 2022 this figure had almost reached $600 million. Another major blow to the company's revenue streams was given in the Pacific segment, where from $1.7 billion in Q1 2022, ZIM reported revenues of $428 million in Q1 2023. However, since April, the Pacific segment, and specifically the East Asia to U.S. West Coast segment, has seen a significant rate rebound of more than 50%, compared to its March lows.
Additional considerations
It is well known that shipping is a cyclical business and that, after COVID supply chain disruptions, and the subsequent rate boom, we're going through a time of rate normalization. Most analysts expect the company to provide losses, on a per share basis, in 2023 and in the following two years. In addition to the anticipated economic slowdown, new carrying capacity will enter the market at a bad point, putting more pressure on rates.
However, long term investors should not be worried, for the following reasons:
- During the time of the container rate boom, the company invested heavily into newbuild vessels, some of them using LNG as their main propulsion fuel. In addition, the company has penned LNG supply deals, and has also differentiated its fleet into the automotive transportation segment.
- ZIM has proved that its main policy is to provide its shareholders with large dividends, should they report a profit. Despite their $4.2 billion in liquidity, they didn't offer some kind of dividend for Q1 2023, since they reported losses. This fact implies a serious and trustworthy management team.
- ZIM was not always sailing on calm waters. Through financial restructuring deals, the company has granted a golden share in the State of Israel, which prevents Kenon Holdings, ZIM's largest strategic entity to sell their stake in third parties under a specific threshold. While I usually tend to dislike companies in which the State has some sort of stake, in this case I will make an exemption. In my book, this is an asset. The rationale for this, is the following: After a quite large debt restructuring deal less than 10 years ago, and the privatization of Israel Corp. (ZIM's predecessor), why did the State of Israel hold its stake in the company? They surely have their reasons.
My take
ZIM is a holding for the long term. It's really up to an investor's objectives here: Some may opt out and make better use of their cash. Others, like me, will continue to slowly increase their position in the company, getting ready for the next cycle. In the meantime, I'm selling calls against my shares and getting some notable income, to compensate me for the dividend cut. This is buying me time and offsetting the opportunity risk of staying in the company throughout these not so good times. Others may choose to see it as an average cost basis reduction technique. The bottom line is that with a 0.1x net leverage ratio, the company isn't going anywhere anytime soon. So, at this point, I would continue to enjoy my Pina Colada by the pool, not having the slightest fear about where this company is heading. If I was out, however, I wouldn't initiate a new position until we get some clearer view on freight rates going into H2 2023.
For further details see:
Keep Your Cool As Everybody Seems To Be Dumping ZIM Stock