2023-07-12 20:00:39 ET
Summary
- ZIM Integrated Shipping Services Ltd. cut 2023 forecasts due to an ongoing tough container shipping market.
- Container shipping indexes continue to show lower rates on a weekly basis.
- The stock has likely hit bottom now with the warning not leading to new lows, but ZIM Integrated Shipping faces a brutal period ahead.
In no huge surprise, ZIM Integrated Shipping Services Ltd. ( ZIM ) just warned that yearly results wouldn't hit prior aggressive targets. The container shipping market remains under pressure due to supply/demand dynamics after Covid volatility caused mismatches. My investment thesis is more Neutral on the stock with ZIM holding the recent lows despite the very negative earnings update.
Source: Finviz
Not What The Bulls Wanted
ZIM surprised the market with a guide down for full-year results. The container shipping company now forecasts adjusted EBITDA of $1.2 billion to $1.6 billion for 2023, down from a prior estimate by a massive $600 million.
The company even flipped from an adjusted EBIT profit of $100 to $500 million to now expecting a large loss of anywhere from $500 to $100 million. In essence, the $600 million dip in adjusted EBITDA profits will drop directly to the bottom line, with the major difference in the profit metrics being non-cash charges for depreciation at ~$1.6 billion annually now.
Previously, management had guided to a rebound in shipping rates, and the updated guidance suggests a shift towards the market as follows:
Near-term container shipping market conditions continue to be challenging, with demand expected to remain muted for the remainder of the year. While our second quarter results are broadly in-line with our expectations, we no longer anticipate an improvement in freight rates in the second half of 2023, consistent with seasonality, as previously assumed.
The analyst community never bought into the positive forecasts of management. Heading into the 2023 update, analysts were forecasting ZIM went through 3 years of reporting losses, with the worst not until an over-$3 per share loss in 2024.
After losing $0.22 in the prior quarter with much higher shipping rates, analysts now forecast a massive loss of $0.92 in Q2. Investors should expect losses to remain at this level for several quarters ahead.
Another concerning aspect of the ZIM press release is the focus on newbuild LNG vessels with lower costs. In such a time period of excess ships, the new ships are a necessary evil to set the company up for future success, but management should've known this only contributes to ultimately lower shipping rates in the near term.
Container Index Under Pressure
As long predicted, the global container shipping rates were likely to remain under pressure all year. The industry faces huge new supply coming onto the market while shipping demand isn't growing very fast with global governments hiking interest rates to slow growth to fight inflation.
The updated Drewry Index as of July 6 has the 40-ft container price dipping another 1.3% weekly to $1,474. My last research in May reported a shipping rate of $1,720.
In the course of nearly 2 months, the index has fallen another $246 per 40-ft container or 14%. ZIM long projected shipping rates would rebound from early 2023 levels, yet the Drewry Index continues to hit new lows for this cycle.
The stock has initially fallen 4% on the guidance cut, with the last few bulls pushed overboard. The lack of a dramatic dip and with ZIM not hitting new lows for the year, the stock appears poised to settle into this new range of lower-for-longer versus any collapse to new lows below $10.
The shipping company has a strong balance sheet , with a cash balance of $4.2 billion and a market cap of only $1.5 billion now. The minimal EBIT losses will limit any drastic reduction in the cash balances providing a floor for the stock in this current range.
Investors won't see a rally anytime soon due to the lack of dividend payments and limited prognosis for future payments for up to 3 years. ZIM has already stated a preference of only paying dividends as a portion of profits, which don't exist now.
Takeaway
The key investor takeaway is that ZIM management finally came clean on the weak results likely to hit the company for an extended period. Despite the strong balance sheet, the stock wasn't likely to hit bottom until the company faced the reality of the severe downturn in container shipping rates.
While ZIM Integrated Shipping Services Ltd. stock doesn't appear to have any upside in the near term, the dramatic selling should be over now after a nearly 20% dip in the last 2 months. We are more Neutral on ZIM stock going forward and looking towards a period where shipping rates stabilize and ultimately head higher.
For further details see:
ZIM Integrated: Reality Bites Hard (Rating Upgrade)