2023-06-06 10:51:24 ET
Summary
- ZIM Integrated Shipping Services experienced a decline in share price due to downward pressure on freight rates and losses in Q1 FY23.
- The company is implementing measures to reduce costs and improve performance, with a focus on sustainability and innovative technologies.
- The current EPS revisions look off and contradict the guidance of positive EBIT for FY23 reaffirmed recently.
- Despite short-term risks, I maintain a long-term "Buy" rating for ZIM, as the company's investments and cost optimization efforts are expected to bear fruit in the coming years.
I've written about ZIM Integrated Shipping Services Ltd. ( ZIM ) before here on Seeking Alpha, and despite the sharp decline in the share price, I've consistently reiterated my buy recommendation. Why? Because buying shares of companies like ZIM should be an exceptionally long-term decision. I believe investors' tactical actions should focus on picking points for averaging down as long as the management remains true to its chosen course for the company's development.
Last time, my quantitative calculations , which led to the conclusion that the company should exceed the consensus EPS and revenue figures, turned out to be absolutely wrong - ZIM's actual results were significantly below my forecasts. The company's EBIT margin dropped to almost -1% [GAAP basis], which is well below the historical pattern compared to other peers:
You've probably read other articles on SA about what exactly happened to the company's financial statements in the 1st quarter of fiscal 2023. I'll just briefly repeat the main points here.
In Q1, ZIM experienced ongoing downward pressure on freight rates, resulting in an adjusted EBITDA of $373 million and an adjusted EBIT loss of $14 million. The company maintained a strong cash position of $4.2 billion, with cash flow from operations amounting to $174 million. Despite the challenging industry dynamics, ZIM's management remained optimistic about achieving positive EBIT in FY2023 and reaffirms its full-year guidance.
To navigate the operational environment, ZIM implemented proactive measures in vessel chartering and cost structure, securing charter agreements for state-of-the-art LNG dual-fuel vessels that support sustainability objectives. By replacing smaller vessels with larger ones, ZIM anticipates a decline in cost per TEU , leading to cost benefits and improved performance. The company is committed to decarbonization, aiming to achieve net-zero emissions by FY2050, and completed its first LNG bunkering in Jamaica as part of its long-term supply agreement with Shell. The CEO said during the earnings call that the firm focuses on agility and excellence in its commercial strategy, expanding services like car carriers and temperature-controlled cargo transport. With increased contract volume and investments in innovative technologies, including Spinframe and weigh electronic bill of lading, ZIM demonstrates its dedication to growth and adaptation in the shipping and supply chain ecosystem.
The recovery in U.S. retail inventories, which continues to this day, puts pressure on the demand for purchases of goods from abroad:
Assumingly for this reason, Drewry's composite world container index fell 0.2% last week to $1,682.10 per 40-foot container. Likely, we won't see a sharp decline in inventories in the coming months as the demand side struggles. This comes from proxy department store traffic trends, which have slowed steadily throughout the Q1 FY23:
I assume that it's these trends that are putting pressure on freight rates and thus on ZIM's share price, as the company suffers losses and therefore cuts dividend payments, scaring away most non-long-term income-seeking investors.
Of course, all that can't stop EPS forecasts from coming under pressure. And here I noticed very interesting things that made me update my thesis and title this article exactly as it's titled.
If you go to the company's main page here on Seeking Alpha and take a look at the Factor Grades, you'll see that the Revision score has improved compared to the rating 3 months ago:
What caused this improvement? If we click on revisions, we can see that in the last 3 months, the annual EPS and sales figures have increased in 50% and 20% of the cases, respectively:
What strikes me as ridiculous is how the forecast quarterly EPS numbers have changed against this backdrop:
The market has revised its 2H FY24 EPS forecast by ~94% . That is, if we saw a forecast for 2H FY23 equal to $4.95 EPS on April 24, 2023, the consensus now expects only $0.3 EPS.
In my opinion, the consensus is now too pessimistic for the ZIM. Of course, one cannot avoid mentioning the obvious problems that will continue to weigh on the EPS. First, there are the interest payments on the debt, which immediately increased by $307 million in Q1, mainly due to the incoming vessels characterized by longer-term charter duration. The company has committed to making prepayments of $150 million and $340 million in 2023 and 2024, respectively, on newbuildings that will be chartered primarily by Seaspan. However, management itself still expects a positive EBIT, and judging by the forecasts, the market doesn't believe ZIM's guidance , as Wall Street's forecast assumes a "deepening" of the loss per share in the next 2 quarters.
On May 22, 2023, the company made it clear that it wouldn't pay dividends due to the current loss:
More than 2 weeks have passed since then, and I assume that most of those who were waiting for the "party to continue" have already left the shareholders' club. Momentum in ZIM stock is currently so depressed because of this and because of the EPS revisions that the number of shorted shares is now ~18% of the float [possibly more as this is a lagging indicator]:
And here I'd like to remind you what the management said during the earnings call - the company is trying to optimize and reduce its costs per TEU. The investments made during the bull market in various projects such as services like car carriers and temperature-controlled cargo transportation won't bear fruit immediately. However, the market still seems to ignore the impact of these fruits on EPS in 2-3 years .
Your Takeaway
It's very hard to stay in the position right now as the stock continues to fall - no envy for those who bought ZIM stock on margin [I never called for this]. My position is in the red, and I know what I'm doing - on the principle of consistency, I simply buy more ZIM stock into my portfolio each month, regardless of the share price at the time. Looking at the financial statements on a regular basis, I understand what cycle we're in, and I'm not afraid of it. My investment horizon is much longer than 1-2 years.
However, if you're looking for immediate gains, I'd caution you against investing in ZIM stock - there are too many risks in the short term. The situation in the retail sector described above, declining traffic at the largest offline/online stores, and the resulting uncertain outlook for the Drewry Index recovery make ZIM very risky. It's likely that the share will fall by a further 20-30% before starting to grow.
Everyone already knows that ZIM's P/E ratio will go from very low to negative quite fast in the next few quarters. If you're very cautious, you can wait until that time before buying, because like any other cyclical company, ZIM should become most attractive at negative valuation multiples. This may seem counterintuitive because traditionally investors prefer to buy stocks with low PE ratios because they're considered undervalued. But this is a peculiarity of the industry, as the market may have already priced in the negative news and potential risks, making it a potentially favorable time to invest just before a potential bottom.
But I'm not going to time the market this time. I continue to hold on to ZIM and remain optimistic for the long term despite the current headwinds - hence the "Buy" rating.
For further details see:
ZIM Integrated: Earnings Revisions Turned Ridiculously Negative