2023-08-12 11:30:00 ET
Summary
- ZIM Integrated Shipping investors helped support a significant near-term outperformance against the S&P 500 since my previous update.
- Despite facing a substantial downgrade in ZIM's earnings estimates, buyers returned to ZIM, unfazed by the gloomy report. I assessed the worst is likely over.
- The global container freight index may have bottomed out in mid-July, supporting the positive buying sentiments in ZIM.
- I make the case why ZIM buyers looking to buy more shares should capitalize on the improved buying sentiments and look past the negative earnings headwinds.
- With the global economy not expected to head into a hard landing, ZIM buyers are betting that the worst in its performance is likely behind us. Let me know whether you agree with my upgrade.
ZIM Integrated Shipping Services Ltd. ( ZIM ) investors have taught me an invaluable lesson over the past two months. I turned more cautious (not bearish) in my previous article in early July, as I anticipated that ZIM might not outperform the market moving ahead despite its massive battering since topping out in March 2022.
As such, I downgraded ZIM to a Hold rating (Neutral/Market Perform). While the rating wasn't bearish, my conviction in ZIM outperforming the market weakened considerably.
However, ZIM's significant outperformance against the S&P 500 ( SPX ) ( SPY ) over the past month has reminded me to return my focus on buying sentiments/investor psychology instead of solely focusing on its negative forwarded adjusted earnings.
I turned more cautious about Zim Integrated Shipping as I anticipated buyers might not be keen to return, as analysts' estimates suggest a negative earnings spiral through FY25. Coupled with its decision to axe its dividend, I didn't expect value or income investors to return and support its recovery.
Notwithstanding my caution, ZIM's hammered stock and valuation (rated "A+" by Seeking Alpha Quant) should have given me the vibes as a price-action investor that ZIM could have bottomed as the market is forward-looking. The critical question facing ZIM buyers is whether the worst is likely over for the container shipping company? I think it is, and here's why.
1. ZIM Rose Despite Downgrading Its Full-Year Outlook
Investors should recall that management updated in mid-July that it sees significant near-term risks to its full-year guidance, necessitating the company to downgrade its forecasts.
As such, ZIM Integrated Shipping lowered its adjusted EBITDA outlook range to between $1.2B to $1.6B. In addition, it also updated an adjusted EBIT range of between -$500M to $100M. Both estimates are markedly below its previous outlook.
Management added more color to the downgrade, stressing that the company experienced "continued weakness in freight rates across all trades." As such, a near-term growth inflection is increasingly unlikely, with freight rates headwinds in the Transpacific expected to "persist throughout the second half of 2023."
Hence, I believe it's clear such a revision should have spooked more ZIM holders toward the exit, leading to lower lows in ZIM's price structure. However, that didn't happen as ZIM's late June lows held robustly, suggesting those who wanted/needed to flee have already bailed out.
Furthermore, more buyers returned over the next few weeks as ZIM continued to hover above its late June lows. This constructive development suggests that market operators have likely priced in the worst in ZIM Integrated Shipping's operating performance.
2. Global Container Freight Index Bottomed Out In Mid-July
Global Container Freight Index (Freightos)
According to Freightos' most recent freight rates update, the global container freight index could have bottomed out in mid-July, corresponding to the release timing of Zim Integrated's full-year update.
Notably, the index has continued to post weekly freight rates recovery through this week, in line with ZIM's bottom in late June. In addition, market leader Maersk " upgraded its financial forecast" despite anticipating weaker trade volumes (in line with Zim Integrated Shipping's outlook). As such, market operators are likely confident that the global economy could dodge a hard landing, even as the downstream de-stocking process could continue through the second half of 2023.
As such, it's my thesis that increasingly constructive macro conditions and improving global freight rates support recent buying sentiments in ZIM. While I don't expect ZIM to return to the highs in March 2022, given the massive boom and bust in container shipping, the worst is likely over.
I assessed that ZIM faced resistance recently at the $15.5 level, as some dip buyers likely took profit. Despite that, holders weren't forced to sell in a hurry, suggesting buyers have been willing to defend a further slide in ZIM.
Given the significant pummeling ZIM received from sellers, I anticipate a mean-reversion opportunity to normalize its relative underperformance against the market could follow. As such, ZIM buyers looking to add more shares should consider capitalizing on the recent retracement to return to ZIM, as the worst is likely behind us.
Rating: Upgraded to Speculative Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
See the additional disclosure section below for important notes accompanying the Speculative Buy rating presented.
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ZIM Integrated: The Worst Is Likely Over As Buyers Returned (Rating Upgrade)