2023-12-18 10:46:42 ET
Summary
- ZIM set its public sails in January 2021. Since then, it was everything but an ordinary course with a 93% collapse following a 491% surge in its share price.
- The latest boom and bust cycle in the container shipping industry has taken its toll on ZIM, leading management team to halt dividends and investors to question ZIM's solvency.
- Although ZIM's debt increased almost threefold in the last three years, its composition has been dramatically changed in a way that can benefit ZIM in any future recovery.
- Until such recovery occurs, investors should examine how much time ZIM can withstand the current downturn before it goes belly up. My bearish scenario implies no dark clouds before 2025.
Investment Thesis
ZIM Integrated Shipping Services Ltd. ( ZIM ), the Israeli container shipping company, has been through a tough roller coaster since its IPO back in January 2021. Debuting at $15.00 a share, then reaching an all time high of $88.62 only 14 months later, only to plummet ~93% to an all time low of $6.59 in late November 2023. The latest boom and bust cycle in the container shipping industry has taken ZIM to the cleaners, raising a lot of questions regarding the ability of one the most oldest shipping liners to withstand current headwinds, with the obscene word of "bankruptcy" being whispered among investors.
In this article, I will explore few scenarios, with the most bearish one implying a potential default in 2025. However, I will explain why ZIM's current debt situation is very different from the one in 2014 (which led to equity wipeout), and why current debt may actually play a very dramatic role in any future recovery. For now, I rate ZIM as a "Hold".
However, and in case you are not quite familiar with the story of ZIM and its recent developments, let's start with a quick recap of the company and the latest turn of events.
Company Overview
Although ZIM is a "young" public company, it is one of the oldest shipping liners in the world, funded in 1945 by various Jewish social movements three years before the establishment of the state of Israel. In the 1950s and 1960s, ZIM tried its luck with passenger ships, but due to rising airline competition the passenger services were gradually phased out at the end of the 1960s and ZIM refocused on cargo shipping, its core business to this day. In its early days, ZIM was a state-owned company, but eventually in 2004 it was fully privatized to the hands of Israel Corporation Ltd. ("Israel Corp") at a $235 million valuation . The state of Israel kept a Special State Share, which it still holds to this day. In January 2021, ZIM completed its IPO on the New-York Stock Exchange at an implied valuation of $1.7 billion, raising net proceeds of $204 million, marking a significant turnaround from its beleaguered position only few years back which ended in a restructuring.
ZIM boasts being an asset-light container shipping company with focus on niche trade routes where it believes it has a distinct competitive advantage that allows it to maximize market position and profitability. By "asset-light", ZIM means that is charters the majority of the vessels in its fleet (~94%) and the majority of its containers (~63%). Moreover, ZIM's main trade routes are the Transpacific and Intra-Asia, comprising together more than 60% of ZIM's trailing-twelve-months revenues from containerized cargo.
To The Moon And Then Down Below Water
ZIM's timing for its IPO in 2021 was just too perfect. Following a perfect storm in the global shipping industry, freight rates began to surge in 2021, helping ZIM to generate $10.7 billion in revenues and $4.6 billion in net income, implying a 169% and 787% year-over-year growth, respectively. Fiscal year of 2022 marked the peak of the boom cycle, with revenues hitting a record $12.5 billion.
Source: Author Analysis based on ZIM's Financial Statements
For equity investors, an investment in ZIM turned out to be a multi-bagger; a rare mix of high dividend yields and staggering capital gains. ZIM paid more than $4.6 billion in dividends since its IPO, with an average dividend yield of 11.62% (based on ex-date closing prices). In addition, in its all time high price of $88.62, the implied return on the IPO price was 491%. Whatever the strategy investors chose (dividend income/capital appreciation), fortunes have been made.
Period | Q2'21 | Q4'21 | Q1'22 | Q2'22 | Q3'22 | Q4'22 | Q2'23 |
Dividend Per Share | $2.00 | $2.50 | $17.00 | $2.85 | $4.75 | $2.95 | $6.40 |
Ex-Date Price | $48.37 | $48.20 | $88.01 | $69.53 | $48.26 | $25.67 | $23.47 |
Yield | 4.13% | 5.19% | 19.32% | 4.10% | 9.84% | 11.49% | 27.27% |
However, all that changed in 2023. Freight rates started to reverse back to their historical averages, and the container shipping industry found itself with an oversupply and an extended de-stocking cycle, leading altogether into a bust. ZIM wasn't spared, and it finished Q1-2023 with $1.4 billion in revenues, representing a 63% YoY decline . More importantly, and concerning, was the $58 million of net loss ZIM recorded, its first net loss since Q1-2020. Moreover, because of that net loss, the company's management team halted dividends (the dividend that was paid in Q2-2023 has been announced before the end of Q1-2023, based on Q4-2022 results).
In Q2-2023, things only deteriorated, as ZIM recorded a gross loss of $79 million, its only gross loss any of its public P&Ls show (going back to Q1-2019). The final blow, for now, came in Q3-2023, when ZIM recorded an impairment of assets in the value of more than $2 billion, most of it related to vessels and containers. In its latest filings , ZIM's management team added the following context:
Freight rates [are] expected to be further affected by industry’s supply and demand dynamics, as well as by macroeconomic trends and uncertainties. Freight rates of Containers shipping services are expected to remain at depressed levels in the coming quarters
Source: ZIM's Q3-2023 Financial Statement
The turn of events in 2023 led to a massive 52% YTD decline in ZIM's stock, with an all time low closing price of $6.59 in late November 2023. On top of that, and in relation to the ongoing war in Gaza, ZIM announced that it is temporarily re-routing some of its vessels, amid threats from the Houthi rebels in Yemen to attack Israeli-linked vessels sailing across the Arabian and Red Seas. ZIM warned that such re-routing will result in longer transit times in relevant services.
Recent developments led ZIM to cut its guidance for FY-2023, to what seems to be its worst year public records show (going back to 2015). While initially guiding for adjusted EBIT range of $100-500 million for FY-2023, ZIM currently anticipates a negative adjusted EBIT range of $400-600 million. In addition, adjusted EBITDA guidance has been slashed in half from $1.8-2.2 billion to $0.9-1.0 billion.
Now comes the question of what next. ZIM currently has a mounting gross debt of $4.7 billion, up 159% from its pre-IPO debt balance. Current market cap of $1.16 billion (following Friday's 18% jump), reflecting a 0.45x book value, implies that investors are discounting more assets write-downs and earnings contraction. But more concerning, some investors are wondering if ZIM is going to recap its 2014 restructuring event which completely wiped out equity holders. To that end, we will both delve into ZIM's debt position and then perform a solvency test with few possible scenarios.
Current Debt May be Key In Future Recovery
Although it may sound surprising, ZIM's current debt may actually play a crucial part in any future recovery. New accounting standard called IFRS-16: Leases makes it easier for us to understand the situation. The new standard led to the recognition of a "right-of-use" asset and a related lease liability at commencement of the lease. ZIM adopted that new standard in January 1, 2019, and since then the company's contractual commitments towards ship owners and containers owners became on-balance-sheet, and are considered part of the debt. When you breakdown the composition of ZIM's debt as of September 2023, it is 97% of lease liabilities and only 3% of "traditional" debt (i.e. loans), versus a 55% lease liabilities and 45% traditional debt composition back in Q1-2019. This point underpins that ZIM's current debt burden is nothing like the 2014 debt situation which led to a restructuring and a complete wipeout of equity holders.
Source: ZIM's Financial Statements
During the heydays of 2021 and 2022, ZIM managed to repay all of its debentures (tranches C, D and E), all remains of the beleaguered 2014 debt restructuring. On the other side, ZIM expanded its chartered-in vessels fleet from 69 vessels in Q3-2020 to 130 vessels in Q4-2022 (88% growth). The result has been an inflated lease liabilities balance and overall debt. Nevertheless, as mentioned before, the flip side of this lease liabilities debt is that it's a mirroring of the right-of-use assets for vessels and containers, which in turn allows ZIM to capture much more market share in periods of strong demand. While now the industry is experiencing a downturn being characterized by excess supply of global container ship capacity which depresses freight rates, any recovery, which will eventually come, will dramatically move the pendulum in favor of ZIM. In other words, the vast majority of ZIM's outstanding debt stems from the chartered-in vessels and chartered-in containers, which not only limits its CapEx requirements (versus other liners who owns most of their fleet), but also provides ZIM with a better capacity for the next business cycle.
The main and legitimate question an equity investor would ask is how much time ZIM can withstand the current downturn before it can enjoy the benefits of economies of scale. Paraphrasing John Maynard Keynes, the container shipping industry can stay weak longer than ZIM can stay solvent.
Solvency Test
Solvency tests are usually more relevant for creditors, mainly bondholders, but in ZIM's case, it's important for the common equity investors to understand if there is any equity play here at all or is this firm going to be a creditor restructuring play and irrelevant to equity investors who usually get completely wiped out in a restructuring.
Because the cyclical nature of the container shipping industry, there is no certainty regarding the revenues side of the equation. However, there is much more certainty regarding few aspects of the expenses side. During the last two years or so, ZIM entered into few important charter agreements:
Counterparty | Type | Vessels | Years | Annualized Costs Per Vessel () | Delivery Status |
Seaspan | Charter | 10 | 10 | $17.0 | 6/10 |
Seaspan | Charter | 15 | 12 | $13.0 | 0/15 |
Affiliate of Kenon | Charter | 3 | 8 | $16.7 | 0/3 |
Navios | Charter | 5 | 5 | $14.0 | 5/5 |
Navios | Charter | 8 | 5 | $14.0 | 0/8 |
-Various- | Purchase | 8 | - | $355.0 | 8/8 |
MPC | Charter | 6 | 7 | $14.3 | 5/6 (*) |
Source: Author Processing of ZIM's Financial Statements
(*) There is no available information regarding the delivery status of that deal, but it is known that the delivery period has been scheduled to occur between May 2023 and February 2024, hence it would be fair to assume that the vast majority of the vessels has already been delivered.
Next, we will add the undelivered vessels costs to the forecast years in any solvency test, assuming the delivered vessels costs are already embedded in ZIM past financial results so we only need to extrapolate them.
In addition, we will have few constant assumptions that are the same for all scenarios:
- The financial results for the first nine months of 2023 are normalized to reflect a full year results.
- Debt repayments grows only by the addition of new charter agreements. Because ZIM's outstanding debt balance is mainly comprised of leases liabilities to ship owners, it is fair to assume a straight line payments of the debt. I also took a much more conservative approach by not assuming any redeliveries when charter periods expire, while actually it is something to expect in case there will be no recovery in the industry soon.
- No new debt issuance other than the new lease liabilities.
- Interest payments are correlated to the leases liabilities under IFRS-16, hence assuming they stay the same as the original debt repayments (while new leases are embedded under the same line, both "principal" and "interest").
- No dividends for the foreseeable future.
- Full liquidation of the short-term and long-term investments.
- Foreign exchange effect is negligible.
Scenario #1: Stagnant CFFO; Default in 2026
Key assumptions:
- Cash flow from operations remains stagnant throughout 2027, reflecting a continuation of the current downturn in the container shipping industry, with no benefit from economies of scale.
- CapEx remains stagnant as well, as there are no needs for growth CapEx, but only for maintenance CapEx.
As can be seen, ZIM's opening liquidity position for 2023 has been quite strong, with $4.6 billion in cash, cash equivalents and short-term and long-term investments. These investments are mainly comprised of investment grade sovereign bonds and corporate bonds. On top of that, the 139 container vessels fleet (which is only expected to grow) should allow ZIM to continue and generate more than $1 billion in CFFO per annum, even in this market environment. For comparison, in 2020, which was highly affected by Covid-19, ZIM managed to generate $881 million in CFFO with a fleet 37% smaller. In other words, with ZIM's fleet only expected to grow, the $1 billion landmark should be maintained, helping ZIM to get through 2024 and 2025, while defaulting in 2026 assuming no recovery in the industry.
Scenario #2: Downturn Gets Worse; Default in 2025
Key assumptions:
- Cash flow from operations declines 80% in 2024 because of worsening conditions, whether because of higher bunker fuel prices, lower freight rates and extended oversupply in the shipping industry.
- CapEx decline 80% in 2024 as well, as part of cost-cutting measures.
Under this scenario, we stress the CFFO back to 2017 levels, when the Shanghai Containerized Freight Index ("SCFI") was 25-30% lower than current levels (see below). We also ignore any benefit from the growing fleet, which is much bigger than the 2017 fleet. However, despite $2.2 billion of cash burn in 2024, we can see that ZIM's liquidity position can still help the company make it to 2025, yet without a significant recovery in 2025, default will occur.
Shanghai Containerized Freight Index: Trading Economics
Scenario #3: Gradual Recovery; No Default
Key assumptions:
- Cash flow from operations increases 10% in 2024 and then increases in 30% per annum until 2027, reflecting a gradual recovery in the container shipping industry and a growing fleet.
- CapEx increases the same as CFFO.
In this scenario we call a bottom in 2023, then starting a recovery in 2024 which only gets stronger in 2025 onwards. However, this recovery is still conservative and doesn't assume any similarity to the boom of 2021-2022, when ZIM generated $6 billion in CFFO per annum. Here we assume much ordinary recovery in the shipping industry on top of economies of scale from ZIM's growing fleet. As can be seen, in this conservative recovery ZIM easily avoids any default risk.
The Verdict
There is no doubt that an investment in ZIM is not a typical "buy and hold" investment. It requires both deep understanding of the cyclicality of the container shipping industry and more importantly the special features of ZIM, which makes it a highly volatile investment in relation to the industry. Sophisticated investors who knew how to take advantage of the latest cycle made both capital gains and dividend income, while others who joined the party late, are now having concerns regarding the mounting debt and wondering whether ZIM can stay solvent until the industry recovers. While ZIM's debt is at its highest point from what public filings can show ($4.7 billion as of September 30, 2023), the vast majority of this debt is a mirroring of the right-of-use assets for vessels and containers, that at first sign of industry recovery will help ZIM capture market share and significantly improve its top and bottom line.
Until such recovery occurs, if any, ZIM will have to push its current strong liquidity position to its limits ($3.1 billion as of September 30, 2023). Although there is a high probability that ZIM will be safe in 2024 under almost every scenario, unless a recovery occurs in the next 24 months or so, investors should start consider abandon the ship. For now, I rate ZIM as a "Hold" but will closely monitor its situation in the next quarters.
Traders Alert for a Potential Short Squeeze
ZIM's current short interest stands at 24.67%. From number of shares perspective, there are currently 23.5 million shares in short positions, the highest ever recorded in ZIM's public history. When you add that to the recent alarming developments in the Red Sea, leading major shipping liners to re-route their vessels around the Cape of Good Hope in Africa, you can get a sudden shipping rates uptick that may be the catalyst to a short squeeze in the near term. The average daily volume of 3.3 million shares, resulting in more than a week to fully cover short positions in an ordinary fashion, may actually just worsen such a squeeze. The stock movement on last Friday - 17.99% surge with more than 13 million shares exchanging hands - may be a first indication that a short squeeze is already in the making. While it is unknown how the Houthi's situation will evolve, short-term investors should keep an eye on sudden stock movements in the next couple of days or so.
Float | 95.33 million share |
Short Interest | 23.52 million shares |
Short Interest (%) | 24.67% |
Avg. Daily Volume | 3.27 million shares |
Days To Cover (**) | 7.2 Days |
(**) An approximation of the time required, expressed in days, to close out short positions.
ZIM Tianjin
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For further details see:
ZIM Integrated Shipping Services: Solvency Is Key For Now