2023-09-07 14:08:07 ET
Summary
- ZIM Integrated Shipping's stock price has plummeted due to the decrease in container shipping rates caused by lagging demand.
- Things are not expected to get better any time soon, as tonnage supply will outgrow demand at least throughout the first half of 2024.
- ZIM has taken early steps towards operating a modern and cost efficient fleet, which will help them slow down their already enormous cash burn.
- ZIM is not expected to pay dividends for at least a few quarters ahead, while their debt metrics are expected to deteriorate.
- Holding the stock at this price point seems like a reasonable option. Selling covered calls against the long position can provide some of the income that investors lost due to the dividend cut.
You've got to love ZIM Integrated Shipping ( ZIM ). The company entered the U.S. stock exchange two years ago, at a timing that many companies would envy. After the COVID-19 pandemic, container shipping rates had reached enormous levels, leading the share price to touch $100, as investors were cashing some really fat dividend checks.
Today, however, is a completely different story. As you should already have noticed by now, container shipping rates have plummeted, as a result of lagging demand relative to the increasing supply of tonnage. It is in this context that I’m writing today’s article about ZIM.
Recent earnings snapshot
On August 16th, ZIM reported their earnings for the second quarter of 2023, showing an EBIT loss of $147 million. The company reported a total net loss figure of $213 million, resulting to a negative EPS figure of $1.79. For the same period in 2022, ZIM had reported earnings of $11.07 per share. On the revenues front, the company reported revenues of $1.31 billion, down by 62% from Q2 2022. Regarding these two metrics, overall consensus was negative EPS of $0.90 and revenues of $1.31 billion.
In addition, container volume remained rather stagnant for the second quarter of 2023, while for the first six months of the year the company realized a slight decrease in carried container volume. At the same time, freight rates moved significantly lower, reaching $1193 per TEU, a drop of 67% compared to the same period in 2022.
For the full year 2023, the company anticipates an EBIT loss of $100 to $500 million and adjusted EBITDA of $1.2 to $1.6 million. For perspective, for Q1 2023, EBIT loss was $14 million, which added to the $147 million of Q2 2023, brings us to the upper half of the EBIT loss guidance. However, clearly the outlier figure is the $14 million EBIT loss recorded in Q1 2023, as the next quarters will likely be much worse, despite the fact that, traditionally, they are the strongest ones. So, this brings us rather to the lower end of the EBIT loss guidance spectrum (closer to $500 million).
Fleet structure and economics
During the company's Q2 2023 earnings call , I was very glad to hear that from a total of 148 vessels, the company operates 16 car carriers. The reason is that this particular segment offers some very appealing economics, due to the shortage of carriers and the abundance of shipping demand. Already, some car carrier operating companies are planning to increase their fees charged to their customers, due to the high charter prices of these vessels, reaching $110k per day (for 6.5k CEU vessels).
Regarding the traditional container shipping business, due to the freight rate collapse, the company is moving into larger and more modern vessels, in an attempt to exploit economies of scale and cut down on operating costs. In ZIM, they are expecting to get their hands on 38 newbuilt vessels in the next 18 months, while 47 of their current vessels will reach their charter contract expiration, during the same period. So in 1.5 years' time, the company will be operating a much more modern and cost efficient fleet, also containing LNG powered vessels.
However, container supply and demand fundamentals are ruthless at this point. On a global basis, container tonnage is expected to grow during the next year as well, while GDP growth prospects aren't exactly stellar.
As we can see in the table listed below, the global economy is going for a slowdown, to say the least, while expected container volume growth is anticipated to be negative. This situation is going to continue to put pressure on ZIM, as with the exception of new vessels, their average charter time remaining is 24.6 months.
High cash burn rate
If it wasn't for their strong cash position, I believe ZIM would be in serious trouble right now. However, the company ended the second quarter of 2023 with total cash ( which includes cash and cash equivalents and investments in bank deposits and other investment instruments) of $3.2 billion. The problem is that during this quarter, the company burnt just above $1 billion. At the end of Q1 2023 , ZIM had $4.25 billion in total cash and cash equivalents etc. The cash burn between Q4 2022 and Q1 2023 was $353 million. As you read before, tonnage supply will outgrow shipping demand at least until the first half of 2024. So, one can realize that if the next few quarters are going to be just as bad, ZIM could potentially face a liquidity problem.
It is no coincidence that their net leverage ratio increased five-fold, from 0.1x to 0.5x in just one quarter. Moreover, if this metric is calculated on a TTM basis, as newer and lower EBITDA figures are inserted into the calculation, we can expect a significant rise in net leverage ratio. For example, assuming that the company's net debt remains steady at $1.6 billion and adjusted EBITDA for 2023 lands at $1.4 billion (guidance middle point), we get a net leverage ratio of 1.1x. But net debt will not remain the same in my view. I believe it will rise, as the company burns cash. So the net leverage ratio is expected to be even higher.
Bottom line
I don't know if you have realized it already, but if you haven't, I'll put it plain and simple: ZIM is not going to pay a dividend in the third quarter of 2023. Neither will it pay one in the fourth quarter of 2024 in my view. I sincerely doubt that they will pay a dividend during the first half of 2024 either. However, at this low price point I wouldn't sell my shares. Instead I would generate income by writing covered calls against these shares, while at the same time keeping an eye on the next few quarters. I have every reason to believe that the market has discounted the worst case scenario for the company, so that's why I consider ZIM as a "Hold".
For further details see:
ZIM Integrated: Getting Risky But Holding The Stock Is Still Justified