ZIM Integrated: The Dividend Could Return In 2024

seekingalpha05-02

ZIM Integrated Shipping stock has seen a large negative total return due to a dividend cut.I see positive signs emerging for ZIM now, including recovery in both volume and rates.I expect a net profit ...

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(NYSE:ZIM) since 2022 when the stock was still trading at a share price of around $23 and boasting a dividend yield of around 100%. My bearish argument was not so much about the sustainability of the yield (no one probably ever thought the dividend could be sustained). My key argument was that the dividend cut could come sooner and deeper than many bulls expected, thus leading to a large negative total return, which was indeed what happened in the next year or so. Fast-forward to October 2023, I wrote again on the stock to upgrade my rating from Sell to Hold (see the chart below). The key considerations for this upgrade are:   At the same time, ZIM's compressed valuation has largely priced in all of the negatives. At that time, there are positive signs afoot for ZIM. The inventory levels have recovered strongly in the recent six months across all major shipping categories (manufacturing, retail trade, and wholesalers). In the meantime, global shipping volume this year has also recovered substantially from the bottom level compared to 2020.   Against this background, the goal of this article is to further upgrade my rating on the stock from Hold to Buy. The above considerations are still valid to a large degree. Furthermore, I see several catalysts undergoing that could lead to a net profit in 2024 (to be detailed in the third section). ZIM's dividend policy is a 30% payout ratio on a quarterly basis. As such, I see a realistic chance for the dividend to return in 2024. And if this happens, I expect a drastic sentiment improvement in the shares and a large valuation expansion. Seeking Alpha ZIM stock's earnings outlook The chart below shows consensus EPS estimates for ZIM stock in the next three years. As seen, the outlook is pretty gloomy. To wit, analysts' expectations for ZIM stock's EPS are all negative for the next three years. For FY 2024, the consensus estimate is a loss of $3.42 per share. And the loss is expected to further widen to $5.71 in FY 2025. Seeking Alpha I think these projections are too pessimistic and find the guidance provided by ZIM in its last earnings call more sensible. The chart below summarizes the 2024 earnings guidance for ZIM stock. As seen, the guidance points to an adjusted EBITDA to be between $850 million and $1.45 billion and an adjusted EBIT to range from a loss of $300 million to a profit of $300 million. Admittedly, the EBIT range is very wide, and the company could still report a loss (and thus no dividend payouts). However, note that the company based their guidance on the following assumptions:  Freight rates: ZIM expects freight rates to be slightly higher in 2024. Volume: They expect cargo volume to be higher in 2024. Bunker costs: Bunker costs refer to the cost of fuel for ships. ZIM expects bunker costs to be lower in 2024.  Next, I will explain why I expect most (if not all) of these assumptions to work out in ZIM's favor and thus see a good chance for a positive EBIT profit. ZIM earnings report ZIM's earning catalysts First, I expect a sizable volume growth ahead. Management expects double-digit volume growth in 2024 given that a large number of newly-built vessels were delivered recently or to be delivered soon (see the next chart below). However, note that ZIM could return some chartered vessels (my estimate is around ~30 of them this year) and could partially offset the new deliveries. I also expect the new vessels to be more modern, efficient, and optimized. All told, I see a double-digit volume increase as a very plausible projection. Second, for the reasons mentioned above (more modern and efficient fleet), I also expect substantial cost reduction. ZIM earnings report Finally, the current freight rates are at the lower end of their historical spectrum and I see more upside potential here than downside. The following chart (based on Drewry's shipping rates) displays rates in the past few years. As seen, Drewry's World Container Index currently hovers around $2,706 per 40ft container as of this writing. It's far below its recent peak of around $4,000 (and let alone the peak rates of close to $10,000 in 2021~2022). Drewry shipping rates Other risks and final thoughts In terms of downside risks, many risks are common to both ZIM stock and its shipping peers. The shipping industry is highly cyclical as you can tell from the large swing in shipping rates just mentioned. A slowdown in the global economy, which is a likely scenario given the ongoing uncertainties in China, can lead to decreased demand for shipping. Fuel is a major expense for shipping companies. If fuel prices remain elevated at their current levels or rise further unexpectedly, it can eat into ZIM's profits. Finally, geopolitical events like wars and trade disputes, which are all ongoing issues, can disrupt shipping routes and cause delays, impacting shipping costs and reliability. A risk that's more specific to ZIM involves its debt. While ZIM boasts a good amount of net cash, it also has significant liabilities, as seen in the chart below. Its total liabilities, combining debt and capital lease obligations, currently sit at nearly $1.7B, close to double the figure at the end of 2021. At the same time, the debt/equity ratio is close to the highest level since 2021. Seeking Alpha  To sum up, ZIM is a high-risk high-reward stock under current conditions, and I would not suggest it for everyone. For more risk-tolerant investors, I see an asymmetric reward/risk profile here. I consider the market's expectations to be too pessimistic. Admittedly, there's a large variance in management's 2024 guidance with projected EBIT ranging from negative to positive $300M. However, I anticipate the assumptions baked into the guidance to play out in a more favorable direction, and thus see a good chance for positive EBIT earnings. These factors include volume growth due to new vessel deliveries, cost reduction due to a more efficient fleet, and also shipping rate tailwinds. Finally, I see a potential return of the dividend in 2024 based on a 30% payout ratio and the said earnings outlook. If this does materialize, it could lead to a significant turnaround in sentiment and valuation growth, leading to outsized total returns.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432688734"}