ZIM Integrated Shipping: H2 Will Beat Analysts' Estimates, But It May Not Be Enough (Rating Downgrade)

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ZIM Integrated Shipping: H2 Will Beat Analysts' Estimates, But It May Not Be Enough (Rating Downgrade)

seekingalpha11-05

Analysts' estimates have been trending higher but remain too low.I expect Q3 EPS between $9 and $10, with Q4 rates suggesting better-than-expected performance, but a significant rate decline post-...

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(NYSE:ZIM) previously. Investors should view this as an update to the previous articles on the company, where I provided an extensive business overview and explained the investment thesis in detail. ZIM is set to present Q3 results on November 20th, which will probably be a volatile session. However, given the recent stock strength, the movement is more uncertain. ZIM has been moving up in response to peers' results and guidance updates, especially from Maersk. This could suggest that a beat on estimates and a guidance update may already be priced in. At the same time, while still low, analysts’ estimates have been moving higher and currently stand at $7.05.   Yahoo Finance When I wrote the last article, Q3 analysts' EPS estimates were $5.78, while I was expecting $10. With the most recent Taiwanese data, I now expect EPS between $9 and $10. In the case my estimations are correct, the beat will be much lower than before. However, rates have declined much less than I anticipated and are currently trending slightly higher. This suggests that Q4 will be much better than both analysts and I were projecting, with some positive effects going into Q1 as well. On a longer-term horizon, I still expect a significant decline in rates after the Chinese New Year, which this year falls at the end of January. With a steep decline in rates, I do not expect the stock to perform well. Stock Valuation I have followed the same methodology as in the other articles. Using my rate estimates, I calculate the quarterly net income, EPS, and cash flow. I have reduced my Q3 rate estimate to $2,400/TEU from $2,500/TEU in the previous article. Regarding Q4 rates, I expect a realized rate of around $1,950/TEU, which would imply an EPS of $5.5, similar to scenario 2 from the previous article but with more certainty than before. With these numbers, cash at year-end (before dividends) will be above $33 per share:   Author If my assumptions are correct, management should significantly increase the 2024 guidance. This increase, along with beating estimates and a substantial dividend of almost $3, should propel the stock higher. Additionally, the Q4 dividend will be around $5 per share. However, the stock price has increased by 30% over the last month, and the results could be partially priced in. This price increase, combined with the persistent resistance around the $24–$25 range, is the main reason I am downgrading the stock to Hold and have reduced my exposure.   SA I believe the stock should trade higher after the results; however, I was positively surprised by Q2 earnings, and the stock, after opening about 20% higher, ended up lower than before earnings in the following days. This could happen again this quarter. Under normal circumstances, a company generating around $19 EPS in a year, with $23.7 in cash at year-end after paying $9.4 in dividends, should trade much higher than its cash; however, the market is concerned about the future outlook. Even with the Red Sea closed during 2025, I expect a sharp rate decline that year, which could last several years given the weekly increases in the orderbook. By then, ZIM’s costs will be much lower than they are now, but the market doesn’t have this in consideration, and I don’t expect that to change until rates stabilize. This is the main reason I have a discounted fair value and believe it is fairly valued at around $27.5. I wouldn’t be surprised to see it trading near $30 after earnings, which I consider a perfect opportunity to close positions. On the positive side, there is the possibility of a new ILA strike. ILA and USMX reached a tentative agreement regarding salaries and are negotiating automation. In the event that they don’t reach an agreement by January 15th, ILA workers will strike again. This could keep rates elevated for a few more weeks. Risks Every analyst and most investors expect rates to decline, which means that the stock shouldn’t fall significantly with a drop in rates. However, in the past, we have seen that most times rates decline, the stock follows. Moreover, at these valuations, the stock remains cheap but not as cheap as before. An important risk is that beating estimates may already be priced in. In that scenario, it will be difficult for the stock to go much higher. Another potential risk is a ceasefire with Israel. I don’t expect the Red Sea to reopen soon; however, a ceasefire between Israel and Lebanon could be possible before year-end and might affect sentiment. Finally, liner companies continue to order ships, which will prolong the downturn. Conclusion ZIM remains cheap; however, given the grim outlook and recent price appreciation, prudence is needed. The stock is trading around $25 per share while will finish the year with more than $23 in cash and paying $8 in dividends over the next two quarters. I wouldn’t be surprised if the stock trades near $30 after earnings, but I don’t see much more potential given the expected rate declines. I have reduced my position but remain long, as analysts' expectations are too low, and the dividends over the next two quarters could attract some investors. Moreover, there is the possibility of an ILA strike, which could keep rates higher during Q1.  I expect the stock to decline when rates begin to fall in 2025. By then, ZIM will have very competitive breakevens and could present a very interesting opportunity once rates stabilize.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}