ZIM Integrated: Probably No Dividend In 2025 H1

seekingalpha11-05 05:38

I expect an earning loss from ZIM Integrated Shipping Services Ltd. stock for 2025 H1, and thus do not expect a dividend payout.The expectation is based primarily on considerations of fuel costs and ...

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Daniel Wright/iStock Editorial via Getty Images  ZIM stock: Previous thesis and dividend outlook My last work on ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) was titled “ZIM Integrated: The Search For A 1x P/E Stock” and was published on September 20, 2024, as illustrated by the screenshot below. As the title suggests, the focus of that article is to explain why ZIM stock reminded me of one of Mohnish Pabrai's investment commandments, to look for 1x P/E stocks. More specifically, I argued for a BUY thesis based on the following considerations:  ZIM stock is approaching a 1x FWD P/E ratio under current prices. My projected full-year EPS of $12.5 implies a 1.6x FWD P/E at current prices. I also project an annualized dividend yield of almost 20% for 2024, offering further downside protection. Seeking Alpha  Several key developments have occurred since then, and they provide some material catalysts for investors to take a new look at the stock. For me, as the remainder of this article will explain, these developments have led me to downgrade the stock to HOLD from my earlier buy rating. Among these developments, the most obvious one is the price appreciation of the stock. Since the time of my last publication, ZIM's stock price had appreciated by more than 21%, substantially weakening my earlier consideration of it as a 1x P/E stock. The second most important development on my list is its 2025 dividend outlook. In the next two sections, I will explain why ZIM probably won’t be able to pay a dividend in 2025 (at least not in the first half of 2025) based on its latest financials. The dividend payouts were a considerable downside protection as analyzed in my previous work; thus, this outlook also weakens my earlier bullish view. ZIM stock: 2025 dividend outlook ZIM’s historical payouts have followed its policy of a quarterly payout of 30%. The chart below shows the consensus EPS estimates for ZIM stock, and it points to a net loss as seen. More specifically, for fiscal year 2024, the consensus EPS estimate is $12.33. However, this is followed by a significant decline to -$1.01 for FY 2025. The EPS estimate is expected to further deteriorate to -$2.64 for FY 2026. Seeking Alpha I won’t suggest investors pay too much attention to the FY 2025 estimates given the large uncertainties facing both ZIM and the shipping sector, and I will touch on some of these uncertainties in the rest of this article. However, I do see a few immediate factors – as discussed immediately below — that can cause the degree of profit to decline in FY 2025 as the consensus estimates imply above. ZIM stock and fuel prices The top factor on my list is the fuel prices. My view is that relatively low fuel prices have been a tailwind for ZIM in the past few months, and I don’t anticipate such tailwinds to continue into 2025. More specifically, the chart below depicts the recent price trends of Brent Crude Oil and US Natural Gas Liquids. Brent Crude Oil prices (CO1:COM) have been under pressure in the recent 1~2 years. In the past 6 months alone, the price has decreased by almost 10%, and it hovers around the lowest levels in the past 3 years. US Natural Gas Liquid prices (NG1:COM) have exhibited a similar trend. The price of natural gas liquids currently stands at $6.63, which is only about ½ of the peak it reached in mid-2022. Seeking Alpha Lower fuel prices provide a general tailwind for shipping operators, and ZIM probably benefited more than average, in my view, given the makeup of its fleet. The slide below (taken from its latest earnings presentation) provides an overview of ZIM's fleet composition and its expansion plans. My take is that ZIM's fleet expansion strategy focuses on modernizing its fleet with energy-efficient LNG-fueled vessels, which should have created immediate positive impacts with the low liquid natural gas prices discussed above. Looking ahead, I don’t expect the current level of compressed oil and natural gas prices to last, for reasons detailed in my earlier writings. These reasons include inflation, geopolitical instability, structural supply demand imbalance, etc. For these reasons, I expect significantly higher fuel prices in the near future, which should translate into profit headwinds for ZIM. ZIM Q2 earnings report Other risks and final thoughts Besides the above potential profit headwinds, ZIM also has other substantial cash flow obligations, as you can see from its cash flow statement below. Notably, ZIM has significant ongoing obligations in interest payments and capital expenditures. As seen, ZIM's cash interest payments have been steadily increasing over recent years. In 2021, the company paid $160 million in interest. This figure has risen sharply to $419.6 million as of TTM. This increase is attributed to both higher debt levels and increased borrowing rates, and both are likely to persist in the next 1~2 years in my view. Additionally, the company also has sizable net capital expenditure as seen. In 2022, the company’s net capital expenditure was almost $300 million. In subsequent years, it has declined drastically but still stands at $132 million as of TTM, a sizable figure relative to its operating cash flow (about $1B in 2023). Seeking Alpha Finally, the various ongoing geopolitical conflicts and instabilities can also impact shipping rates and subsequently compound the uncertainties for ZIM’s earnings. The ongoing situation for the Red Sea routes is especially notable as it is material enough to impact the overall supply demand dynamics as commented by ZIM recently (see its Q2 ER slide below). As another illustration of such uncertainty, it has changed the shipping rates sufficiently to cause shipping leader A.P. Moller-Maersk (OTCPK:AMKBY) to raise its annual earnings guidance (see the details quoted below). SA news: Shipping giant A.P. Moller-Maersk hikes guidance for fourth time in six months as Red Sea attacks lift rates. The company said it upgraded its outlook \"on the back of strong third quarter results combined with strong container market demand and the continuation of the Red Sea situation,\" and expects global container demand growth will rise 6% this year, up from a 4%-6% range seen previously. To conclude, the goal of this article is to A) reexamine ZIM stock considering the new catalysts that have developed since my last writing, and B) explain why such a reexamination has resulted in a rating downgrade to HOLD. To recap, the large stock price appreciation since then has materially expanded its P/E and weakened my consideration of it as a 1x P/E stock. Furthermore, I do not expect a dividend from ZIM in 2025 (at least not in 2025 H1) based on considerations of fuel costs, ZIM’s cash flow obligations, and shipping rates uncertainties. Dividends are a substantial consideration in my earlier bullish consideration, and the lack of it removes a key downside protection for the stock. ZIM Q2 earnings report  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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