ZIM Integrated Shipping: Do Not Bet On Uncertain Dividend Yields (2024)

We previously covered ZIM Integrated Shipping (NYSE:ZIM) in November 2023, discussing how the prolonged macroeconomic recovery and container fleet oversupplies contributed to its impacted TEU rates and top/ bottom line.

With the volatile energy prices also triggering the inflation in its bunkering/ fuel costs, we had believed that it might be more prudent to wait for a floor to materialize and its lease liabilities completed, before adding this cyclical stock.

In this article, we shall discuss ZIM's near-term tailwinds, attributed to the sudden spike in the Drewry’s World Container Index on a YTD basis, likely to boost its top/ bottom lines in FQ1'24.

Even then, we believe that the stock's recent rally has been overly optimistic, with the inflated stock prices likely to offer underwhelming forward dividend yields.

The ZIM Investment Thesis Appears To Be Over- Inflated Here

Drewry’s World Container Index

For now, it is no secret that ZIM, a container shipping company based in Israel, is a beneficiary of the ongoing Red Sea crisis, with the Drewry’s World Container Index (WCI) already rising to $3,786 per 40ft container as of February 08, 2024.

As the 10th largest container shipping company with a carrying capacity of 619,349 TEUs, the rising WCI may trigger the increase in its freight spot rates and subsequently its top/ bottom lines.

10Y Drewry’s World Container Index

For reference, the average 2019 WCI rates were at $1,420, with the peak pandemic rates of $10,374.64 on September 16, 2021 directly inflating the 10Y average to $2,686 per 40ft container.

Much of the tailwind is attributed to ZIM having to take "temporary proactive measures to ensure the safety of its crews, vessels, and customers' cargo by re-routing some of its vessels, resulting in longer transit times in the relevant ZIM services."

We suppose part of the exuberance is warranted, since the equivalent 12% of the global trade passes through the Red Sea, according to the International Chamber of Shipping.

The same has been reported by ZIM, with up to 13% of its total TEUs carried through the Cross-Suez geographic trade zone in 2022 (+3 points YoY) and 11% in FQ3'23 (-2.4 points YoY), accounting for 14% of its freight revenues at the same time.

In addition, Flexport Inc. has reported an increasing number of container fleets diverting their courses through January 24, 2024, with most vessels rerouting via the Cape of Good Hope, prolonging transit times while triggering a shortage of empty containers in Asia in the coming weeks.

With the diversion through Cape of Good Hope requiring 15 additional days and 4K mileage, ZIM may also impose additional Transit Disruption Surcharge [TDS] and Peak Season Surcharge [PSS], similar to its container peers, such as Maersk (OTCPK:AMKBY) and CMA CGM, temporarily contributing to its improved top/ bottom lines.

However, here is where we want to exercise some caution.

With the Red Sea conflict only occurring by late 2023, we believe there may be minimal tailwinds for ZIM's FQ4'23 earnings, with things appearing to be promising only from the FQ1'24 earnings onwards.

This is based on Q4'23 average WCI of $1,452 (-10.5% QoQ/ -76.2% YoY) and YTD average WCI of $3,515 (+142% QoQ/ +61% YoY), implying that anyone hoping for rich FQ4'23 dividends may be disappointed indeed.

ZIM's Lease Liabilities And Borrowings

For example, readers must note that ZIM still reports elevated lease liabilities and borrowings of $3.03B (-8.4% QoQ/ -4.1% YoY), attributed to its fleet renewal and delivery of 47 new chartered vessels between Q1'23 - Q4'24.

The management has also refrained from paying out dividends since the last payout in April 2023, based on the company's policy of "distributing 30-50% of annual net income as a dividend to shareholders."

Combined with the mixed report on the potential ceasefire, we believe that the container industry's prospects remain uncertain in the intermediate term, with the freight rate tailwinds likely to last for only a few quarters.

This alone exemplifies why the shipping industry, including ZIM, is one that has been and will remain tightly tied to the macro global events and economies, with the extreme volatility and variable dividend payouts likely to burn anyone who attempted to time their entry points.

ZIM Valuations

For now, the same optimism has also been embedded in ZIM's valuations, with the stock trading at elevated FWD EV/ EBITDA of 4.38x, compared to the pre Red Sea events of 2.40x and hyper-pandemic heights of 3.07x.

The Consensus Forward Estimates

The exuberance embedded in its valuations is odd indeed, since ZIM is not expected to chart immense EBITDA profitability over the next few quarters, with FQ1'24 being the only exception in its net income profitability at approximately $15.15M.

Even then, based on the latest share count of 120.22M and the dividend policy of 30% in net income profitability, we are looking at approximately $0.03 in dividend payout/ share, underwhelming compared to the last payout of $6.40/ share in April 2023 and $2.95/ share in December 2022.

Readers must also note that ZIM has been prioritizing the deleveraging of its balance sheet, based on the last quarter's long-term debts of $79.3M (-4.4% QoQ/ -43.3% YoY) and $48.1M of its debts due over the next twelve months.

As a result, while we remain bullish about ZIM's eventual turnabout, we believe that anyone hoping for rich near-term dividends may be disappointed indeed.

Based on the management's prudence thus far, it is more likely that ZIM's dividends may only be reinstated once the company completes its lease repayments and achieves net income profitability, once it completes its fleet renewal by the end of 2024.

Only time may tell.

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

ZIM 1Y Stock Price

For now, ZIM has rapidly broken out of its 50/ 100/ 200 day moving averages and retested its previous resistance levels of $50s, with the news of potential ceasefire also temporarily ending its YTD rally.

With the management also prudently prioritizing capital preservation thus far, we believe that there is a certain folly in joining this FOMO rally, with any dividends paid out in FQ1'24 likely to occur only by May 2024.

As a result of the potential volatility arising from chasing uncertain variable dividends, we prefer to maintain our Hold rating for the ZIM stock for now.

It may be more prudent to await the management's guidance in the upcoming FQ4'23 earnings call on March 11, 2024, before one chooses to inflate their dollar cost averages at these elevated levels.

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