2023-09-20 10:00:00 ET
Summary
- ZIM Integrated Shipping Services has limited upside despite a J.P. Morgan upgrade.
- Container shipping rates are collapsing again, and ZIM is a big part of the problem with a long list of newbuilds still yet to enter the market.
- ZIM faces large net losses for up to 3 years due to vessel oversupply, potentially leading to a change in the dividend policy of sector companies.
Despite a J.P. Morgan upgrade , ZIM Integrated Shipping Services Ltd. (ZIM) has limited upside. The container shipping market remains under pressure due to supply/demand dynamics, and the company positioned for a container shipping rate rebound in the 2H. My investment thesis remains Neutral on the stock scrapping along at the bottom.
Shipping Rates Aren't Rebounding
While container shipping rates appeared on the rebound the last couple of months, the World Container Index is back in collapse mode. For the week ending September 14, the rates were down 7.1% to $1,581 per 40ft container.
ZIM is a big part of the problem. The shipping company still has a long list of newbuilds on the way, just as the market has collapsed.
Per the CEO back on the Q2'23 earnings call :
During this period, we secured through a series of charter agreement, a highly competitive fleet and one that is optimally suited for our commercial strategy. This fleet is made up of 46 newbuild vessels, including 28 LNG-powered container ship. Of the 46 newbuilds, eight are already part of our fleet today, four 12,000 TEU vessels and four LNG-powered 15,000 TEU vessels.
In essence, ZIM hasn't even really stated receiving newbuilds with only 8 of the 46 vessels already part of their fleet. The company has 47 ships rolling off charter, but the problem is that these vessels rolling off charter will generally just compete with the newbuilds entering the fleet. Not to mention, some of the newbuilds have far larger capacity, increasing capacity even further beyond the additional vessels.
Alphaliner continues to forecast the market remaining in a major oversupply scenario for years. The research firm forecasts annual supply growth rates in the 8%+ plus range compared to container shipping demand growing ~2% in both 2023 and 2024. The end result is huge pressure on shipping rates that has only started.
ZIM now has contracts 70% tied to spot rates. The company is far more impacted by lower spot rates going lower.
Dividend Problems
ZIM continues to forecast EBIT losses in the $100 to $500 million range for the year. As highlighted in previous research, the consensus analyst forecast is for the company to report large net losses all the way into 2025 while the management team for ZIM thought a rebound in shipping rates this year was possible.
Jefferies analyst Omar Nokta forecasts ZIM to post a net loss of $500 million for 2023, a $426 million net loss for 2024, and a $277 million net loss in 2025. The total forecasted losses are an incredible $1.2 billion and highlight why a company paying out up to 50% of profits doesn't protect the business during a cyclical downturn.
Remember, the EBIT losses forecast by ZIM don't include finance expenses contributing to higher net losses. The shipping company had net finance expenses of $104 million in Q2 alone.
Worth noting is how an analyst firm like Jefferies forecast losses in 2025 topping the levels still offered up to shareholders by management for 2023. In Q2 alone, ZIM reported an EBIT loss of $147 million, suggesting any forecast for only a $100 EBIT loss this year is way off base with container shipping rates falling again.
The container shipping companies paid such large dividends during the Covid-era earnings boost that the blowback could be lower dividend payouts in the future. Both Hapag-Lloyd and Maersk paid out nearly $20 billion in dividends through 2022 while Zim nearly hit $5 billion in total dividends.
ZIM has a policy to pay 30% to 50% of net income via dividend payouts with 30% paid upfront quarterly and the rest paid via an annual true up of up to 20% of net income. Under this scenario, investors may now go at least 3 years without a dividend and might end up finding out the payout ratios are cut heading into the next profitable year, possibly in 2026.
The company has a strong balance sheet, but the large ongoing losses could definitely stress the balance sheet come 2025. J.P. Morgan forecast a price target of $15.40 for ZIM, but the stock isn't going anywhere until the losses show a sign of disappearing.
ZIM has $3.2 billion in cash, but the company lists $4.9 billion in total debt now due to lease liabilities. The once pristine balance sheet is being depleted, and some analysts forecast sizable losses topping $1 billion by the end of 2025.
Takeaway
The key investor takeaway is that ZIM probably doesn't head much lower here, but the upside is very limited. A change to the dividend policy in the future could impact the excitement for investors to own the stock even once the container shipping company returns to profits in the future.
For further details see:
ZIM Integrated: Slump Could Last 3 Years