To The Moon

Investment Thesis

As the relatively new kid on the block, ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) has proven to be a force to be reckoned with, given its stellar execution and excellent dividend yields. Therefore, we are not surprised by the stockprice appreciation of 232.16% since its IPO. Given its more-than-healthy order book and elevated long-term contract rates, ZIM would report an excellent FY2022 indeed. In addition, we may expect to see an upwards rerating moving forward, once the Ukraine and Chinese ports reopen sometime in FY2023.

Nonetheless, given the bearish market condition and weakening stock price action in the past few months, we may expect to see a further retracement for ZIM, as its fundamentals are decoupled from its valuations. Such an event has already been observed post ( excellent ) FQ1'22 earnings call when the stock fell 5% on 18 May 2022 and then remain sideways, prior to the market-wide correction in March 2022.

ZIM Is Growing To Be A Force To Be Reckoned With

It is evident that ZIM has done exceptionally well in the past few quarters, given the impressive increase in its top and bottom lines. The company reported revenues of $12.7B and gross margins of 67.4% in the last twelve months (LTM), representing a tremendous increase of 384.8% and 52.6 percentage points from FY2019 levels. In addition, ZIM also recorded an excellent net income of $5.76B and net income margins of 45.4% in the LTM, representing massive growth from net incomes of -$0.02B and net income margin of -0.6% in FY20109 levels.

These have directly contributed to ZIM's robust generation in Free Cash Flow (FCF) of $5.8B with FCF margins of 45.7% in the LTM, representing an exceptional increase of 1657.1% and 35 percentage points from FY2019 levels. As a result, it is evident that the company's war chest of cash and equivalents has also grown to an outstanding sum of $2.73B in the LTM, representing tremendous growth of 1516.6% from FY2019 levels.

ZIM Long-Term Debt, Interest Expense, Net PPE, and Capex (S&P Capital IQ)

It is also evident that ZIM had taken up more total debt in the LTM at $4.31B, with an interest expense of $0.17B in the LTM and $45.3M by FQ1'22. The company also decided to expand its net PPE assets to $5.44B and increase its capital expenditure to $1.05B in the LTM, representing an increase of 449.5% and 5250% from FY2019 levels. Nonetheless, we expect these to be top and bottom line accretive eventually, thus, not an issue for now.

ZIM Operating Expense (S&P Capital IQ)

These have also directly contributed to ZIM's increased operating expenses of $1.2B in the LTM, though we are not overly concerned, since it constitutes only 9.46% of its revenue and 20.6% of its FCF then.

ZIM is expected to report an apparent deceleration of revenue and net income growth over the next three years. Nonetheless, investors need not fret since it still represents a massive revenue growth at a CAGR of 20.28% from FY2020 to FY2024.

For FY2022, consensus estimates that ZIM will report revenues of $13.56B, representing an excellent increase of 26.4% YoY and 339.8% from FY2020 levels. In addition, the company is expected to report excellent net incomes of $5.22B and net income margins of 38.4% in FY2022, representing a tremendous increase of 1023.5% and 25.4 percentage points from FY2020 levels. Analysts will be closely watching its FQ2'22 performance withconsensus revenue estimatesof $3.86B and EPS of $13.98. We shall see.

ZIM's Guidance For FY2022

ZIM's Guidance For FY2022 (Seeking Alpha)

However, we do not expect to see much impact from the perceived "slowdown in freight traffic" as stated by J.P. Morgan analysts, since ZIM was able tosecure 5%more long-term contracts at $3.84K/TEU in FQ1'22, reflecting a doubled rate YoY, thereby improving its future sales. In addition, with a growing order book and operating capacity through 2024, it is evident that the company is relatively insulated from the1.8%contraction of market-wide demand in FQ1'22. As a result, we may potentially see an upwards rerating to ZIM's order book and consequently, contract rates, upon the ceasing of China's Zero COVID Policy and the Ukraine war.

ZIM Could Be A Strong Dividend Stock In The Future

ZIM 1Y Share Price (adj) and Dividend Yield

ZIM 1Y Share Price (adj) and Dividend Yield (S&P Capital IQ)

Despite its recent IPO in January 2021, ZIM had started its dividend payouts very early on by H2'21, with an outstanding dividend of $22.35 and a yield of 51.44% in the LTM. Compared with itspeers,such as Star Bulk Carriers Corp. (SBLK) at a dividend payout of $5.6 and yield of 22.52%, Golden Ocean Group Limited (GOGL) at $2.45 and 23.89%, and old-timers such asA.P. Moller - Maersk(OTCPK:AMKBY) at $351.37 ( estimated ) and 10.7%, it is evident that ZIM has delivered well for this segment.

However, we do not expect a replay of ZIM's massive dividends in March 2022, given the projected moderation in its revenue and net income, therefore, reduced FCF. Nonetheless, we still expect the company to retain its steady dividends payouts, though at a lower yield moving forward. Speculatively, we may also see ZIM commence its share buyback programs in the far future, assuming a robust FCF profitability.

So, Is ZIM Stock A Buy, Sell, or Hold?

ZIM 1Y EV/Revenue and P/E Valuations

ZIM 1Y EV/Revenue and P/E Valuations (S&P Capital IQ)

ZIM is currently trading at an EV/NTM Revenue of 0.41x and NTM P/E of 1.30x, lower than its 1Y mean of 0.72x and 2.24x, respectively. The stock is also trading at $47.10, down 48.3% from its 52 weeks high of $91.23, though at a premium of 39.7% from its 52 weeks low of $33.71. Nonetheless, despite the recent correction and bearish market sentiment, it is apparent that ZIM has also performed well since its IPO, with a price appreciation of 232.16% and a 1Y price total return of 49.1%.

ZIM 1Y Stock Price

ZIM 1Y Stock Price (Seeking Alpha)

Nonetheless, despite the attractive buy rating from the consensus estimates with a price target of $77.43, we do not advise adding now, since there is a moderate possibility of stock retracement in the short term. In fact, ZIM as with other shipping stocks, has been on a downwards spiral since March 2022 and already lost half of its pandemic gains as well.

As a result, we encourage investors to wait for a more attractive entry point before adding more exposure, given the weaker demand based on theBaltic Exchange'smain sea freight index, potentially impacting ZIM's services in the short and intermediate-term. Thereby, highlighting the industry's cyclical trend. As a result, though ZIM might have an excellent year in FY2022 and say H1'23, we might see a slowdown moving forward, especially with thescaling back for TSMC chip ordersimpacting the whole suppliers and raw materials network, despite the supposed global shortage of semiconductor chips.

Nonetheless, speculative investors with a higher tolerance for volatility may choose to nibble here, since the current stock price offers a 64.39% upside, made even sweeter by its high dividend yield.

Therefore, werate ZIM stock as a Hold for now.