2023-05-19 08:00:00 ET
Summary
- ZIM Integrated Shipping investors endured a painful April as it fell toward its December 2022 lows. However, dip buyers have returned to help stanch a further decline.
- The US economy has weathered its recent headwinds well. China could also emerge stronger in the second half, auguring well for a more robust recovery.
- Income investors have likely bailed out, as ZIM's forward dividend yields have been slashed to 2.4%. Therefore, the hangover from these investors could be over for now.
- Investors anticipating a more robust recovery in the second half of FY2023 should find the current levels enticing.
Container shipping company ZIM Integrated Shipping ( ZIM ) is slated to report its first-quarter earnings release on May 22. Investors will likely assess the impact on ZIM's forward dividends as Wall Street estimates have already marked down ZIM's forward yield to just 2.4%.
After a highly remarkable year in 2022, as ZIM posted a high of nearly 50% in dividend yields, investors are reminded that good times often don't last (forever) in cyclical industries like container shipping.
However, ZIM's plump yields significantly mitigated the impact of the collapse in ZIM's price action since our March update. However, income investors will likely not bolster ZIM in the near term, given its much lower expected forward yield.
Therefore, investors looking to buy ZIM's recent dips must be confident of a second-half recovery in the company's operating performance. In addition, I assessed signs of optimism in the US economy, suggesting that we could avoid a debilitating severe recession.
While a recession should not be ruled out, I believe ZIM's significant collapse from its highs in 2022 should have reflected the worst of the down cycle in container shipping.
Analyst estimates for the S&P 500 ( SPX ) ( SPY ) showed that they underestimated the earnings resilience of companies that had reported. " Blended estimates for Q1 earnings show a decline of 3.3% compared to the initial estimate of a 7.9% decline." Moreover, forward earnings estimates suggest a growth inflection in Q3 and Q4, suggesting that Wall Street isn't expecting the thesis of a severe recession to play out.
Moreover, Edward Yardeni also provided several economic data points (May 17 update) that highlight why his thesis of a "soft landing" is looking increasingly likely. Therefore, the US economy doesn't look like falling further into a severe downturn, which should provide support for consumer spending, which has remained surprisingly robust .
Notwithstanding, China's economic recovery has hit some recent speed bumps in April, as the momentum from the first quarter wore off. Despite that, China's recovery remains predicated on a more robust second-half growth story, indicating that investors should avoid relying on a single month or quarter's data point to draw a conclusion. Moreover, supply chain data suggests that China's smartphone vendors expect a sequential recovery in the second quarter. As such, it could indicate that the inventory digestion and weak consumer demand could have bottomed out in Q1, helping bolster the thesis of an H2CY2023 growth inflection.
With that in mind, what about the outlook for the container shipping industry so far? Admittedly, I gleaned that signs remain weak, as several recent data points indicate that the downturn in container shipping might not be over.
Freightos global container freight index resumed its downward slide over the past four weeks after a momentary recovery in April. Industry sources suggest the recovery was based on general rate increases or GRI. However, a potential " rate war " could emerge, hurt by the double whammy of "overcapacity, [and] weak demand."
However, some analysts regard the recent slide as not a new phenomenon but an expected normalization. Moreover, rates remain in line with pre-pandemic levels.
Recent commentary from container shipping peers is still optimistic. Maersk expects the downstream inventory adjustments to " conclude by the end of the second quarter." However, "trade volumes are still contracting." The leading container shipping company also warned that "the move towards [inventory] normalization is not consistent."
However, Hapag-Lloyd seems to be more optimistic. The company " expects a stronger consumption and an uptick in demand." However, the recovery is expected to lean "towards the end of the second quarter or early in the third quarter."
Therefore, I assessed that investors must decide whether they think ZIM could participate in a second-half recovery. It's likely too early to determine the data points, which remain dynamic and dependent on the progress of the economic recovery.
Moreover, Wall Street estimates are not optimistic about ZIM. The company is projected to deliver significant revenue declines through Q4'23 before bottoming out. As such, it's expected to affect ZIM's adjusted EPS markedly for FY23, suggesting why analysts have slashed their forward dividend estimates for the company.
Accordingly, the company is expected to post an adjusted EPS of -$2.54 for FY23. Also, ZIM is not likely to report positive adjusted earnings through the forecast period to FY25. In contrast, Maersk is expected to remain profitable through FY25 despite the steep earnings decline and therefore is expected to weather the downturn more favorably.
As such, I assessed that Wall Street has likely penciled in highly pessimistic estimates for ZIM and lowered the bar for the company. Therefore, it probably augurs well for the company if it executes better than expected.
However, the critical question is whether buyers have returned to help stanch the downside after its previous dividend payout?
As seen above, dip buyers returned over the past three weeks as income investors likely exited.
With the hangover on forward dividends likely priced in, the risk/reward profile looks enticing, further corroborated by buying sentiments that supported its consolidation against ZIM's previous lows in December 2022.
If buyers can hang on to the current levels, it augurs well for a subsequent recovery, suggesting investors anticipate a more robust recovery in the second half.
Hence, while investors must pay close attention to management's commentary on ZIM's upcoming earnings update, significant pessimism has likely already been priced in.
Furthermore, ZIM's valuation is still highly attractive relative to peers, rated by Seeking Alpha Quant with an "A+" grade (the best possible).
Rating: Buy (Reiterated).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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ZIM Integrated: The Gift Is Back Again