Summary
As a result of dropped freight rates and the container market outlook, I don’t expect ZIM’s 2023 adjusted EBITDA and free cash flow to even get close to their levels.
The company cannot pay high dividends in 2023. However, you don’t need to buy a stock just because it pays high dividends.
The stock’s price is now down 70% YoY and is 80% lower than its all-time record high in March 2022.
ZIM’s container capacity increased in 1Q 2023 and the company’s chartering strategy makes it able to benefit from a better market condition that is expected in 2H 2023 and 1H 2024.
At prices below $20, the stock is a strong buy.
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Container freight rates are not expected to even get close to their levels in the second half of 2021. In its 2020 financial results, ZIM Integrated Shipping Services $ZIM Integrated Shipping Services Ltd.(ZIM)$ expected its full-year 2021 adjusted EBITDA to be between $1.4 to $1.6 billion. However, as container freight rates hiked surprisingly, the company reported an adjusted EBITDA of $6.6 billion, 340% higher than expected. As container freight rates remained significantly high in the first nine months of 2022, the company reported a strong adjusted EBITDA of $7.5 billion in 2022. As a result of high inflation rates, high energy prices, and lowered consumer purchasing power, combined with lower port congestion, container freight rates dropped. However, the company still expects its adjusted EBITDA to be higher than its forecasted adjusted EBITDA for 2021. Also, due to lower inflation rates, in the second half of 2023, container trade volumes may start increasing, supporting the demand for containerships and container freight rates. Despite the impairing container market condition in the past two quarters, ZIM increased its container capacity.
On 12 June 2022 and 16 November 2022, ZIM’s total capacity was 475000 TEUs (94.0% chartered) and 538000 TEUs (94.7% chartered). As of 7 April 2023, ZIM’s capacity was 567000 TEUs (94.9% chartered). ZIM’s chartering strategy works very well for the company. Increasing its container capacity with higher chartered ships in the time of a weak market means that even in unfavorable container market conditions, ZIM can charter vessels with profitable rates, expand its operations and trade routes, and get ready for a more favorable market condition that I expect to emerge in the second half of 2023. ZIM stock price dropped 25% in the past week as its dividend distribution took place on April 3. This is right that ZIM’s high dividends cannot be expected in 2023 and even 2024. However, you don’t have to buy a stock just for its high dividends, especially when it is too cheap. According to ZIM’s slashed stock price, its forward EV/EBITDA, and the company’s niche strategy, ZIM stock is a strong buy.
Financial results
In its fourth quarter and full-year 2022 financial results, ZIM reported revenue of 12.6 billion, compared with 2021 revenue of $10.8 billion, driven by higher average freight rates, partially offset by lower carried volume. The company reported an adjusted EBITDA of $7.5 billion in 2022, up 14.3% YoY. Also, ZIM’s net cash generated by operating activities and free cash flow increased to $6.1 billion (up 2.3% YoY) and $5.8 billion (up 18.8% YoY), respectively. ZIM paid its shareholders dividends of $2.04 billion, representing 44% of its total 2022 net income.
“2022 was an exceptional year for ZIM, as we capitalized on both our differentiated strategy and the attractive market, driving record full-year Adjusted EBITDA and EBIT results. Returning cash to shareholders remains a priority for our company,” the CEO commented. “While macroeconomic uncertainties, the precipitous decline in freight rates over the past few months and the supply-demand imbalance continue to drive a challenging near-term outlook for container shipping, we are confident in ZIM’s strategy and believe we will generate positive EBIT in 2023,” he continued.
Performance
After the downturn of 2020, ZIM put itself together and made good recoveries during 2021 and 2022. The company’s cash balance surged considerably and reached $3.6 billion and $3.2 billion in 2021 and 2022, respectively. Similarly, its equity level improved astonishingly to $5.9 billion in 2022 versus its previous level of $4.6 billion at the end of 2021. Meanwhile, ZIM’s debt level increased as well. Its total debt jumped from $1.8 billion at the end of 2020 to $4.3 billion in 2022. Thereby, after a deep drop in the company’s net debt to $(365) in 2021, it increased back to over $1 billion at the end of 2022. Thankfully, its net debt level is well beneath its cash generation and equity level, which can tailor a scope of capacity to bring benefits for its shareholders and assimilate upcoming risks. ZIM Integrated’s capital structure prospects a healthy position (see Figure 1).
Figure 1 – ZIM’s capital structure (in millions)
Author (based on SA data)
Investigating ZIM’s cash structure indicates that its cash from operation increased slightly to $6.1 billion in 2022 compared with $5.9 billion at the end of 2021. On the other hand, its capital expenditure declined to $346 million in 2022 as compared to its amount of $1 billion in 2021. When all was said and done, the company generated a massive free cash flow of $5.7 billion in 2022 in comparison with its amount of $4.9 billion at the end of 2021. Thus, the company was able to declare a cash dividend of approximately $769 million, or $6.4 per share, which was approximately 44% of the year’s net income (see Figure 2).
Figure 2 – ZIM’s cash structure (in millions)
Author (based on SA data)
Furthermore, I looked at ZIM Integrated’s profitability ratios in this section to assess how well the company can turn a profit and use its assets to make money for its investors. I have examined the profitability ratios for margin ratios to provide useful insights into the financial health of the company. I calculated the ratios in comparison to recent years to be more helpful.
In general, margin ratios evaluate the ability of the company to turn revenues into profits in several ways. It is indicatable that ZIM company had much better margin ratios in 2021 and 2022 as compared with 2020 and before. In minutiae, the total revenue of ZIM Integrated increased by 17% from $10.7 billion in 2021 to $12.5 billion in 2022. Also, the company’s profit and EBITDA levels improved and led to slightly lower margin ratios as compared with 2021.
ZIM’s gross profit margin was 62% in 2022, which was slightly lower than its amount of 63.5% at the end of 2021. Also, the company’s EBITDA margin was 49.5% in 2022, which was 521 bps lower than the previous year’s 54.6%. As a result, ZIM Integrated could improve its revenue and profits in 2022. Albeit its margin ratios are roughly lower than in 2021, they are sufficient to indicate the company’s ability to bring benefits in the future (see Figure 3).
Figure 3 – ZIM’s margin ratios
Author (based on SA data)
The market outlook
According to Figure 4, Drewry’s composite World Container Index (WCI) is now down 79% YoY. Also, compared with the peak of $10377 per 40-foot container in September 2021, WCI is now down 84%. The average composite index for the year-to-date is $1923 per 40-foot container, which is 36% lower than the 10-year average. Container freight rates dropped in 2022 and in the first three months of 2023, due to global economic challenges, high inflation, and high interest rates that resulted in lower consumer purchasing power. In the United States and European countries, inflation is the main reason for lower demand for goods and a higher inventory-to-sale ratio in 2023. The annual inflation rate in the United States decreased to 6% in February 2023, the lowest since September 2021. Also, the consumer inflation expectations for the year ahead in the United States decreased to 4.2% in February 2022, the lowest since May 2021. Furthermore, import prices in the United States decreased further in February 2023 (see Figure 5). As a result of the continuing tight monetary policies of central banks, inflation in 2024 may decrease further, fueling the demand for seaborne container trade.
In 2023, the world container trade volumes can be higher than in 2022, driven by higher demand in the second half of the year. According to WTO, the world merchandise trade volume is projected to grow by 1.7% in 2023 and 3.2% in 2024 (Figure 6). According to Danaos Shipping (DAC), which is one of the largest owners of containerships, the world container trade volume is estimated to increase from 213 million TEUs in 2022 to 218 million TEUs in 2023, up 2.2% YoY. It is worth noting that DAC has a charter backlog of $126 million with ZIM through 2028. However, according to Navios Maritime Partners (NMM), which is another large owner of containerships, the world seaborne container trade that decreased by 3.8% in 2022, is estimated to decrease by 1.6% in 2023, before increasing by 3.3% in 2024. It is worth noting that NNM has an $865 million contracted revenue with ZIM. Based on the current market and economic conditions, I expect the demand for seaborne trade in 2H 2023 to be better than in 1H 2023, and improve further in 1H 2024. Thus, container freight rates may increase.
Figure 4 - Drewry’s composite World Container Index
www.drewry.co.uk
Figure 5 – Inflation rate, consumer inflation expectation, and import prices in the United States
tradingeconomics.com
Figure 6 – World merchandise trade volume and GDP growth
WTO
Risks
As a result of the tight monetary policies of central banks in the United States and European, high inflation rates are decreasing, However, high interest rates and uncontrolled tight monetary policies may cause instability in the financial system that can affect the consumer purchasing power negatively. Thus, we should keep an eye on the side effects of the high interest rate. Also, the net fleet growth is estimated to be 6.7% in 2023 and 5.5% in 2024 (according to NMM’s container industry overview). Also, the remaining port congestion could be fully resolved during 2023. If the supply of containerships increases more than the demand for containerships, the market outlook may become unfavorable for ZIM.
Summary
The company gained profit and EBITDA margin ratios of 62% and 49%, respectively, in 2022. Also, its free cash flow increased significantly, making the management able to declare high dividends. Now, the market condition has changed and the company’s free cash flow in 2023 is expected to be much lower than in 2022. Thus, forget about ZIM’s high dividends. However, there is another thing that should come to your attention: ZIM’s low stock price. According to the company’s increasing capacity, lowering inflation rates, and increasing seaborne trade, ZIM will remain profitable in 2023 and can get ready for a stronger market condition in 2024. At prices below $20 per share, ZIM is a strong buy.
Source: Seeking Alpha
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