2023-05-10 11:33:13 ET
Summary
- In today's analysis, I come to the conclusion that ZIM is likely to exceed market expectations at the end of May - further share price development will depend on management's guidance.
- I calculate that ZIM's net loss should be much closer to break-even compared to what's currently priced-in by the market.
- The fact that only 2 opinions make up the consensus on ZIM profits puzzles me greatly - and note the divergence of those opinions.
- In my view, ZIM can play to its advantage thanks to the inefficiently priced consensus and the general pessimism around the stock.
- My assumption results in a conditional price target for ZIM stock at the level of 25-30% above the current price over the medium term.
Instead Of An Investment Thesis
One of my readers asked me under an article on Star Bulk Carriers ( SBLK ) to give an opinion on the upcoming report on ZIM Integrated Shipping Services ( ZIM ) - perhaps the most popular shipping stock here on Seeking Alpha. I was happy to agree, as it's in my interest as well.
I was bullish on the stock for many months, initially as a speculative idea. Then I moved to the view that it's better to focus on the long term and systematically increase the allocation on strong drawdowns. The pendulum doesn't stop at the peak on either side of its movement - that is the physical law of any cycle. That's why companies like ZIM - with strong management, innovative investments, and reasonable shareholder policies - should once again be among the most sought-after companies in the stock market when the current down cycle ends and the global economy picks up again.
Today's article, however, will look at a shorter time frame - since I wanted to evaluate the company's upcoming report, I'll only look at the first three months of 2023 and how analysts today view the company's first-quarter earnings potential.
Predicting financial results is a thankless task, in my opinion, because it's impossible to be exactly right even with the most rigorous analysis. However, according to some indirect evidence, my impression is that Wall Street is underestimating ZIM's earnings potential in the first quarter of fiscal 2023. The company will likely exceed market expectations at the end of May - further share price development will depend on management's guidance.
My Reasoning
Coincidentally, ZIM reports relatively late to its main peers. A.P. Møller - Mærsk A/S ( AMKBY ) and Matson, Inc. ( MATX ), for example, have already reported on the first three months of 2023 in early May, while ZIM isn't scheduled to report until May 22 (pre-market). Although the companies don't always operate on the same trade routes, my logic is that their actual operating results should also be consistent with each other's dynamics, as freight rates are correlated. Therefore, the revenue volumes should change +/- in the same way. Past data shows this very well:
However, net of operating costs, Maersk and Matson give conflicting signals for ZIM's Q1 EBIT:
The discrepancy in the dynamics of EBIT margins was most likely due to differences in the utilization of the companies' trade routes. Judging by Matson's data , the company transports a significant portion of its total volume through the China Services segment, where volumes declined by 35.4% year-on-year in the first quarter of FY2023. Maersk's fleet is 58% owned (based on TEUs), which I believe are more broadly distributed across trade lanes - hence the difference. Both companies were able to keep their operating profit positive in the first quarter despite a massive year-on-year decline in freight rates.
A.P. Moller - Maersk, which carries about one-fifth of the world's containers, gave a downgrade to its forecast for the current year. That's a sharp reversal from 2021 and 2022 when the freight transportation industry posted record profits due to a surge in demand for consumer goods during the Covid-19 pandemic and supply chain issues that constrained ship deliveries. Matson was also quite pessimistic in its near-term outlook:
Looking ahead, for the second quarter we expect our CLX and CLX+ services to reflect freight demand levels below normalized conditions with lower year-over-year volumes and lower freight rate environment.
Source: Matson's Q1 FY2021 earnings call
However, during the same Matson conference, management assumes that if the global economy doesn't enter a recession in 2023, the second half of 2023 should be much better.
Coming back to ZIM, I think everything here depends on the operating costs. In my opinion, the company might be able to maintain a positive EBIT margin in Q1 due to falling energy prices. At Maersk, bunker fuel costs fell 8.7% in Q1 to $1.5 billion as fuel consumption fell 11%. For ZIM, this category of expenses is very important:
Fuel and energy expenses, in particular bunker expenses, represent a significant portion of our operating expenses, accounting for 30.1% , 18.9%, and 12.8% of our operating expenses and cost of services for the years ended December 31, 2022 , 2021, and 2020, respectively. Bunker price moves in close interdependence with crude oil prices, which have historically exhibited significant volatility.
Source: ZIM's 20-F , author's emphasis added
As we can see from the dynamics of Brent crude, ZIM's costs are likely to be much lower in absolute terms than last year.
It also seems to me that ZIM is more like Maersk in terms of diversification of directions served - the same "fairly diversified" global presence that may adapt quite quickly:
Let's just simulate the situation. Let's assume that in the first quarter of fiscal 2023, ZIM's sales will indeed fall by 58% YoY; the firm's costs of revenue ((COGS)) should fall in this case as well - I'm conservatively assuming a reduction of 10% QoQ. I expect the management to optimize OPEX a little (by 5%). How much will ZIM earn in net income then?
Metric/Date | Q4 2022 | Q1 2023 | Change |
Sales | 2,188.9 | 1,561 | -58% YoY |
COGS | 1,134.3 | 1,021 | -10% QoQ |
OPEX | 510.0 | 484.5 | -5% QoQ |
Net Interest | 59.0 | 59.0 | same Q |
Taxes (23%) | 141.4 | NA | 23% rate |
Net income to the company | 416.5 | -3.5 |
Source: Author's calculations, based on Seeking Alpha data
Without taxes, the loss is only $3.5 million, which is very close to breaking even. Of course, it must be taken into account that I'm making a fairly large number of assumptions that individually don't seem very significant, but when combined into a single system, they actually produce a fairly sensitive result.
How does my output compare with the consensus forecast?
Two Wall Street analysts expect ZIM to report earnings per share of -$0.22, which, when multiplied by the number of shares for the fourth quarter of fiscal 2022, equates to an absolute net loss of -$26.5 million.
The fact that only two opinions make up the consensus on ZIM profits puzzles me greatly - and note the divergence of those opinions. The difference between $-0.04 per share (which is closer to my prediction) and the "low" of -$0.39 is too great to ignore.
And this is despite the fact that the current forecast has increased significantly over the past 3 months:
Your Takeaway
Certainly, the problems for lessors like ZIM are far from over. As TheLoadStar.com recently wrote , spot rates for containers from Asia to the U.S. have come under pressure, causing the mid-April GRIs (General Rate Increases) imposed by carriers before the annual contracts were signed to lose steam. The Xeneta's XSI Asia-US West Coast component and the Freightos Baltic Exchange FBX average spot rate for Asia to US East and Gulf Coast ports fell 9% and 4%, respectively, this week (beginning of May 2023). There are still risks associated with a large amount of newbuilding tonnage to be delivered in 2023 and 2024. Carriers are pushing BCOs (Beneficial Cargo Owners) to finalize annual contracts just above current spot levels, but deals with shippers that have larger volumes are set lower, The Load Star's source adds. Transatlantic spot rates are beginning to normalize, and carriers are flooding the market with additional capacity.
In many ways, however, the risks of the large vessels backlog and a slowdown in trading activity are already priced in for ZIM - this is reflected in the very pessimistic EPS and sales forecasts as well as in the stock's price action:
Note: The chart's prices are logarithmically adjusted
Currently, ZIM stock is at the bottom of its local support formed after the end of the previous strong downtrend (throughout 2022). Roughly speaking, from a technical perspective, ZIM is now trading flat, waiting for fresh news - positive or negative - to continue or break the trend. Considering how Q1's earnings per share are currently estimated, and also taking into account my own calculations of the company's net income for the past quarter, I suspect that ZIM can easily beat the consensus estimate for Q1, providing additional tailwinds for another attempt to conquer the upper range of the price channel. This assumption results in a conditional price target for ZIM stock at the level of 25-30% above the current price over the medium term.
For further details see:
ZIM Integrated: Why It May Beat The Q1 Consensus