2023-05-22 11:33:57 ET
Summary
- ZIM Integrated Shipping Services reported a loss in Q1 2023 on the back of falling freight rates.
- ZIM Integrated Shipping will not distribute dividends from its Q1 2023 results, and ZIM stock price may dip further as a result of dividend clientele effect.
- Still, the financial condition of ZIM Integrated is pretty healthy and the company should be able to sail through the rough seas.
ZIM Integrated Shipping Services Ltd. ( ZIM ) has reported its Q1 2023 earnings , which came in below market expectations, triggering a selloff in the market. Management intends to stick to its dividend policy, which is based upon quarterly net income, so no distribution will be made from the Q1 ’23 result, given the loss. This marks the end of six consecutive quarters of generous dividend payments.
Overall, the seas ahead of ZIM appears to be rough, with the difficult situation being exacerbated by recession fears. On the positive side, ZIM’s financial condition is solid and I expect that the company will be able to weather the storm. Still, initiating a position in ZIM is quite risky, and I’ll wait for more clarity around the macro environment and freight rates before considering ZIM stock a Buy again.
ZIM Integrated Q1 2023 Earnings Results
Q1'23 financial highlights (ZIM)
As expected, ZIM’s Q1 '23 suffered a serious hit by rapidly falling freight rates and slowdown in the economic activity. A fall was recorded in both volumes, which came at 769k TEU (-10.5% YoY) and the average realized freight rate, which tumbled to US$1,390/TEU (-63.9% YoY). As a result, freight revenues from containerized cargo slipped to below US$1.1B (-67.7% YoY). Other revenues also took a hit, although smaller and came at US$305.3M (-25.9% YoY), bringing total revenue to a bit below US$1.4B (-63.0% YoY). Lower volumes led to lower OPEX, which dropped 16.0% YoY to US$937.7M, while depreciation charges surged 33.8% YoY to US$380.5M, reflecting a larger fixed asset base. This resulted in barely positive gross profit of US$54.1M, compared to US$2.3B a year ago. When adding the effects of G&A and financial expenses, net income was negative at US$58.1M, compared to a profit of US$1.7B in Q1’22.
The dividend is gone, but management maintained 2023 guidance unchanged
As a result of the reported loss in Q1’23 and in accordance with its dividend policy, which derives the potential amount to be distributed from the quarterly performance, no dividend will be paid. This puts an end to multiple consecutive quarters with generous dividends, which was one of the reason why this stock has been so popular amongst investors. Obviously, the current market environment doesn’t support paying dividends, which may leave some market participants disappointed. I expect even some manifestation of the dividend clientele effect , with some income-oriented investors selling their shares.
On the bright side, management maintains its original 2023 guidance, betting on improving market conditions into H2’23. If the guidance is met, investors may be rewarded with some dividend payments into 2024, but the distribution, if any, will likely be very modest, especially compared to the ones in 2022.
ZIM Integrated Shipping's financial condition is solid
Financial condition (ZIM)
What’s positive is that ZIM is entering the rough seas in a pretty good financial condition. While net debt increased by US$660M to US$381M since the beginning of the year, a large chunk of that (US$300.7M) was outflow from income taxes paid from the 2022 result. However, it has to be noted that the net debt figure doesn’t reflect the US$769M of cash outflow from the Q4 ’22 dividend, which was paid in April. So the actual net debt is more like US$1,150M, which implied Adj. EBITDA coverage ratio of 0.6 using the 2023 Adj. EBITDA guidance.
Freight rates outlook
The freight rate market is showing some signs of bottoming , following the sharp fall from the record levels in 2021. One of the factors that could acts as a tailwind – slower steaming in order to reduce carbon emission has reportedly reduced the global effective freight capacity by 6%. On the other hand, scrapping remains low, despite the considerable YoY growth, due to low base. However, a recent outlook by BIMCO outlines the possibility of higher than expected scrapping, which could support higher freight rates in the mid to long term.
On the downside, the biggest risk remains a recession. Significant slowdown in global economic activity could have devastating consequences for shipping, as global trade will be reduced, hence lower demand for cargo. Still, the strongest companies in the sector should be able to emerge even after a recession.
Conclusion
The tough market environment has weighed in on ZIM Integrated Shipping Services Ltd., as the company reported a loss for Q1’23. As a result, no dividend will be paid, putting a halt to multiple consecutive quarters of generous distributions to shareholders. While management maintains its guidance for 2023, the risk of a potential recession hitting demand should not be underestimated.
That being said, ZIM Integrated Shipping Services Ltd. is in a comfortable financial position with manageable levels of debt. However, due to the market uncertainty, I’ll avoid considering ZIM Integrated Shipping Services Ltd. stock a Buy for now, as I’d like to see how the next few months play out.
For further details see:
ZIM Integrated Q1 Earnings: Rough Seas Ahead (Rating Downgrade)