2023-05-22 12:59:51 ET
Summary
- ZIM Integrated Shipping Services Ltd. reported its Q1 results.
- The company generated a net loss and cut its dividend to zero.
- There could be a small recovery in H2, but ZIM Integrated investors shouldn't expect too much.
Article Thesis
ZIM Integrated Shipping Services Ltd. ( ZIM ) is a major container ship liner that has generated massive profits in the last two years. This, in turn, has resulted in huge dividend payouts. 2023 will be a much weaker year, however -- the company lost money during the first quarter and cut its dividend to zero.
What Happened?
ZIM Integrated Shipping Services Ltd. reported its first-quarter earnings results on Monday morning. The company's headline results can be seen in the following screencap:
ZIM's revenues fell off a cliff, declining by almost two-thirds over the last year. While analysts had forecasted a big drop in ZIM's revenues, the company surprised to the downside, reporting sales that were even worse than expected. The huge revenue decline was largely driven by lower container shipping rates, while a small volume reduction further accelerated the sales drop.
ZIM Integrated Shipping Services recorded a net loss for the quarter which was around twice as large as what the analyst community had forecasted.
With ZIM not being profitable during the first quarter, the company has decided to cut its dividend to zero. Its dividend policy of returning up to 50% of net profits to investors via dividends remains intact, but when there are no profits, there is nothing to pay out. While the steep decline in ZIM's operational results wasn't really surprising (although larger than expected), and while the dividend cut wasn't surprising, either, ZIM's shares reacted very negatively to the announcement -- at the time of writing, ZIM is down 15%.
The Operating Environment Has Gotten Much Worse
ZIM Integrated Shipping Services, like its container liner peers, benefitted massively from supply chain issues during the pandemic. The shift of consumer spending from purchasing experiences towards purchasing goods, which was largely driven by lockdowns and consumers staying at home, made for increased transportation volumes. At the same time, issues at different ports across the globe resulted in "traffic jams" that disrupted smooth operations and that made container shipping rates explode upwards. ZIM and its peers generated huge profits in both 2021 and 2022, but it was pretty clear that these excellent times wouldn't last. There are several reasons for that:
- - First, the massive fiscal and monetary stimulus has ended, and consumers' spending power has declined. At the same time, companies are looking to reduce their expenses due to an uncertain economic environment and a potential recession later this year.
- - Second, with the pandemic coming to an end, consumers are shifting some of their consumer spending towards experiences again. Instead of buying new apparel, furniture, electronics, and so on -- goods that have to be moved -- they are spending money on vacations, concert tickets, going out to bars and restaurants, and so on. That makes for reduced container shipping demand, all else equal.
- - Third, the high demand for container shipping services during the pandemic has resulted in a supply response, as new container ships were ordered at a massive pace.
These factors have increased supply and/or reduced demand, which impacted the supply-demand situation substantially. Container shipping rates declined a lot, and since ZIM does not operate with long-running contracts primarily, but has massive spot market exposure, its revenues pulled back a lot.
At the same time, expenses did decline, but a lot less than revenues. Operating expenses dropped by 16% year over year, with factors such as lower oil prices playing a role. Since revenues dropped way more than expenses, however, ZIM's bottom line result dropped from a hefty $1.7 billion profit to a $60 million loss. Higher finance costs also played a role here, as net finance expenses more than doubled year-over-year. Higher interest rates are having an impact here, it seems.
EBIT was somewhat better, but far from great, as the company generated an EBIT loss of $14 million for the quarter.
Looking Forward: Light And Shadow
While ZIM's Q1 was pretty bad, and while it is extremely unlikely that the good times seen in 2021 and 2022 will be coming back any time soon, it does not look like ZIM is anywhere near bankruptcy. The company still has massive resources, and it looks like results will improve at least slightly throughout the remainder of the year. This is indicated by statements from ZIM's management team as well as by the company's guidance that has been reiterated during the earnings call . ZIM's CEO Eli Glickman stated in the release [emphasis by author]:
We continue to anticipate positive EBIT in 2023 despite macro and industry headwinds. Our expectation is for recovery in demand with inventory restocking to begin in the second half of this year, resulting in an improvement in freight rates. As such, for 2023, we have re-affirmed the guidance we shared earlier in the year of Adjusted EBITDA of between $1.8 billion and $2.2 billion and Adjusted EBIT of between $100 million and $500 million.
While we don't yet know whether the expected recovery will actually materialize during the second half of the current year, the reasoning for a recovery seems reasonable to me. Retailers are reducing their above-average inventories now and have done so in Q1, and that has hurt transportation demand. Eventually, inventories will stop shrinking, and at that point, demand for the services offered by ZIM and its peers should improve -- although shipping rates will almost certainly remain well below the peaks seen during the pandemic.
ZIM's guidance for an EBIT of $100 million to $500 million this year, or $300 million at the midpoint, implies quarterly EBIT of around $105 million during Q2 to Q4 on average. This will likely be weighted toward the second half. We can use this forecast to guesstimate the net profit for the remainder of the year. Based on the fact that a $14 million EBIT loss resulted in a net loss of around $60 million in Q1, the Q2-Q4 average EBIT could be $90 million. This could result in a quarterly net profit of around $30 million after accounting for net finance expenses of around $50 million per quarter and after accounting for income taxes.
While this does not mean that Q2 will be profitable already, it looks like the cumulative remainder of the year will be profitable -- at least when ZIM is able to hit the guidance midpoint. A $30 million quarterly net profit would result in quarterly earnings per share of around $0.25 -- not great, but better than the loss seen in Q1. For the remainder of the year, ZIM might earn around $0.75 per share, bringing the total net profit for the current year to around $0.25 per share -- based on a $15 share price, that makes for an earnings multiple of roughly 60. Of course, profits could be higher (and the valuation lower) when ZIM's results come in at the higher end of its guidance. But on the other hand, ZIM's results might come in at the lower end of the guidance range, which would result in even lower profits and an even higher valuation.
There is no dividend for the first quarter, but based on the fact that ZIM might report a small net profit for the year, there could be dividend payments during the remainder of the year. If ZIM were to hit net profits of $0.25 per share this year, in line with the above scenario, then dividends could total around $0.12 per share this year with a payout ratio of around 50%. While that is better than nothing, it makes for a dividend yield of less than 1% -- a far cry from the massive dividends seen over the last two years.
ZIM had a cash position of $4.3 billion at the end of the first quarter, almost as much as its total debt including lease obligations ($4.6 billion). There thus is very little reason to worry about bankruptcy -- ZIM's balance sheet is very strong, and the company even generated a positive free cash flow result during the first quarter.
Takeaway
The excellent times have ended for good, and ZIM Integrated Shipping Services Ltd. is not profitable right now. Things could improve during the second half of the year, but profits will be rather meager this year, no matter what. Dividend payments will be small in a best-case scenario, and at least for now, there are no dividends at all.
At the same time, ZIM has a massive cash balance and there is little risk that the company will run into major financial problems, I believe. In the end, this makes ZIM Integrated Shipping Services Ltd. a rather speculative holding -- depending on where container rates are headed in 2024 and beyond, ZIM could either be a good long-term investment, or it might turn out that ZIM isn't a great holding. At least in the near term, investors shouldn't expect much from ZIM. I prefer instead to hold container ship leasing companies that have locked in strong profits and cash flows for the foreseeable future.
For further details see:
ZIM Integrated Shipping: Net Losses And A Dividend Elimination