ZIM Shipped A Monster 20% Dividend, At A Low Valuation

Summary

• Zim (NYSE:ZIM) Integrated Shipping Services is one of the top 20 global shipping companies.
• The firm has recently (March 22nd) announced a gigantic $17/share dividend, which equates to a massive 23% of their share price.
• ZIM's net cash generated from operations has increased by 5 times to $2 billion in Q4,2021 compared to the prior year.
• ZIM has benefited massively from rising shipping costs & volume, Is the stock still a buy? or Has this ship sailed?

xavierarnau/E+ via Getty Images

ZIM Integrated Shipping Services (NYSE:ZIM) is one of the top 20 global shipping companies which operates on the world's most popular trade routes. The firm has benefited massively from rising freight costs which Bloomberg estimates to have increased by up 50% and Time reports a 547% increase in the average price to ship a container from Shanghai to Rotterdam. These rising freight costs have caused Zim's revenue to increase by 155% and their EBITDA margins to nearly double. This has left the firm flush with cash and they recently paid out a gigantic $17/share dividend, which equates to a whopping 23% of their share price.

The firm trades at a low valuation relative to its peers and moving forward are expected to generate strong cash flows. They are even investing for growth and chartering at least 8 new vessels to be built for emerging market growth routes such as Asia-Africa and Latin America.

Most investors are weary of shipping stocks as freight prices can be notoriously cyclical. However, according to a study by McKinsey US consumer demand is expected to remain strong in 2022 and even though shipping costs are predicted to normalize, this is estimated to be "above levels seen in 2019". Therefore I do expect revenue growth rates to slow substantially, but the firm should still be poised to "ship" a healthy dividend moving forward.

ZIM share Price (Created by author Y charts)

Solid Business Model

ZIM was founded in Israel in 1945 and became a pioneer in container shipping. The company IPO'd at $12/share on the NYSE in 2021 and since then the share price has skyrocketed by 503%, which has been mainly driven by rising shipping costs.

The firm covers the world's major trade routes, today they have their operations split with a strong presence in the Trans-Pacific (39% of their shipping) which covers Asia-America (west coast). This is followed by Intra-Asia (27%) and the Atlantic (18%). The firm runs an asset light "chartered in capacity" model to reduce the risk to their business model as shipping is notoriously cyclical. As of the end of 2021, ZIM had a long term charter for 10 x 15,000 TEU (twenty foot unit) vessels and 18 x 7000 TEU LNG dual fuel vessels.

ZIM shipping Routes (Investor Relations Presentation)

ZIM shipping Routes (Investor Relations Presentation 2021)

Investing for the Future

ZIM is investing in order to increase market share in high growth emerging markets, where the firm currently has niche offerings. They have chartered new vessels thus far in 2022, these include:

• 3 X 7,000 TEU dual-fuel LNG vessels

• 5 x 5,300 TEU (Navios Maritime Partners)

These vessels are new-builds which are expected to be delivered by 2024. Zim's management is expected to use these vessels for operation on emerging growth routes. These include Asia-Africa and South America, routes where an increase in trade is expected. In addition the firm increased it's offering between India, Israel and Turkey.

Strong Financials

ZIM produced some fantastic results in Q4, 2021 with revenues of $3.47 billion, up 155% from $1.36 billion in the year prior. This was driven by both increased freight volume & rates.

ZIM carried 858 thousand TEUs in Q42021 up 7% from 799 thousand TEUs in Q42020. However, the average freight rate per TEU was more than double at $3,630 in Q42021, compared to $1,518 for Q42020. Thus the firm has generated an adjusted EBITDA of $2.36 billion for Q4, 2021 up a massive 344% from $531 million in the prior year. The company's adjusted EBITA margin has close to doubled from 39% in 2020 to 68% in 2021.

The firm's cash position has also increased substantially to $3.81 billion for FY2021, up from $572 million in 2020. While the firm prudently decreased their debt from $1.74 billion to $1.24 billion over the year.

Paying a Monster Dividend

ZIM was flush with cash in 2022 and thus they paid a gigantic 50% of their net income ($2.04 billion) out as a special dividend, this worked out at $17 a share which is approximately 23% of their current share prices.

Is the stock undervalued?

Zim is trading at a very low forward PE ratio of just 1.9, however relative to historical levels this is actually at the high end. It seems investors as a collective are still wary about the cyclical nature of the industry. However, ZIM does trade at a lower PE ratio of 1.9 compared to its peers in the shipping industry. These firms include (NMM) which trades at a forward PE of 2 and Danos (DAC) which trades at a forward PE of 4.2.

PE Ratio Shipping Stocks (Created by author at Y charts)

Risks

Shipping Rates Normalize

The shipping industry is notoriously cyclical, thus the firm is not expecting its historic 155% revenue growth rates moving forward. ZIM's guidance suggests an Adjusted EBITDA of approximately $7.1 billion for 2022, this is an increase of 7.5% from 2021 levels at $6.6 billion. These growth rates seem much more realistic moving forward & I would expect a decline in revenues as shipping prices normalize. According to a McKinsey study, they do expect rates to "normalize" but still be above levels seen in 2019. In addition, the same study highlighted that the high shipping rates are not due to a lack of ships but rather a lack of "effective ships". Port congestion was the main issue and inland infrastructure which was over capacity, this included a lack of trucking capacity, full shipyards and railways congested. Therefore, as these factors normalize shipping rates will decrease & thus ZIM's financials will decline.

Decreasing Globalization

The recent supply chain crisis has highlighted the risk of complex supply chains to firms. Thus moving forward economists agree the trend is towards "deglobalization", which is the movement of supply chains to localized regions. For example, Intel (INTC) has recently announced a new $20 Billion Ohio Factory. While fast fashion retail firm Boohoo (BOO) has also accelerated the opening of their US Factory after major supply chain issues caused a profit warning to be issued in 2021. Therefore as deglobalization continues the demand for ocean shipping may decrease, in the super long term. However, I believe for at least for the next decade, demand will remain strong.

Conclusion: Has the Ship Sailed?

Zim is a fantastic company which has benefited from the huge tailwinds brought on by increased shipping costs. These tailwinds have left the firm in a strong financial position. However, as most economists expect these rates to normalize, although at slightly higher levels than prior, I would lower your expectations of the stock moving forward. Despite this, the stock is still trading at a low PE ratio relative to competitors, they are investing for growth in key markets and have a solid strategy moving forward. Thus the stock is still a high dividend play, which offers exposure to the shipping industry.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[ESW3]

Bodes well for the industry, and for $ZIM:

Container shipping jackpot continues: CMA CGM profits soar

French carrier CMA CGM posts net income of $7.2 billion for Q1 2022

www.freightwaves.com/...

[ESW3]

More optimism:
+++++
Clarksons Platou tips ‘multi-year upcycle’ as newbuild prices could rise 20%
Newbuilding constraints support re-drawing of global trade map
...
“Shipping is a cyclical sector with booms and busts, although the previous peak was a long time ago,” said Clarksons Platou analysts Frode Morkedal and Even Kolsgaard.
But they added: “Based on high commodities demand, restricted shipyard capacity, and a re-routing of the global trade map, we believe the industry has started a multi-year upcycle. Let the festivities begin.”

www.tradewindsnews.com/...

[john boy]

@ESW3 maybe the shipping industry is learning what the oil industry is learning the oversupply of ships actually hurts thebottom line and they are keeping a lid on new ships aquisition.

[Tippsology]

Let's see gorgeous numbers tomorrow!

[valuinvst]

@Tippsology they were. stock down.

[Tippsology]

@valuinvst yes they were...Ms. Market isn't taking any prisoners.

[Philipsonh]

Has ZIM set a dividend date policy or is it still paying only special dividends ? I sure have missed this information. Thanks

[ESW3]

@Philipsonh

"Commencing from the third quarter of 2021, the Company intends to distribute a dividend to its shareholders on a quarterly rather than on an annual basis. The quarterly dividend will be paid at a rate of approximately 20% of the net income derived during such fiscal quarter. The dividend payable on the fourth quarter of the fiscal year is expected to be at such rate that the cumulative annual dividend amount to be distributed by the Company (including the interim dividends) will total 30-50% of the annual net income (including in respect to 2021). All future dividends are subject to the Company’s Board discretion and to the restrictions provided by Israeli law."

www.sec.gov/...

[ESW3]

I summarized $ZIM's dividend history / policy in a spreadsheet; here's a .jpg image of same:

drive.google.com/...

[Philipsonh]

@ESW3 Thank you for guidance. Howard

[Desert Wolf]

So what is ZIM Worth??? Now that the Run Up to the $17 Sp Div is Over and ZIM Trading at $55

[ScottMitchellFL]

@Desert Wolf Considering they'll make more than $60/Share on income in 2022, had $30/Share of cash on their balance sheet coming into the year, and paid a $17 dividend (60+30-17) I'd say that if they weren't a state controlled company, a private equity group would have already bought them for $73/share.

Honestly, at this point, why doesn't the company just buy all of its' stock back? Or, why doesn't the management team do a leveraged buyout? Or, why don't they use the cash on their balance sheet and buy $DAC or $TRTN or $TGH?

This stock is so undervalued! This is getting ridiculous.

[Tippsology]

@ScottMitchellFL shaking my head every day it drops. This is beyond silly.

[foo_star]

@Tippsology $34/share in cash per
datastudio.google.com/... and I think that's legit. So question is about capital allocation. Div policy is pretty new so may be awkward to update it again so soon, but what are they going to do with the cash?

[Daniel Sternick]

Thanks, @Ben Alaimo for the nice article. Do you have any thoughts on the recent price movement and the effect of all these mounting pressures from multiple black swans (Chinese covid lockdown, Ukraine war, and now US recession talk). Would appreciate your feedback.

[user43812966]

Some good info. Thank you.

[Tippsology]

Trucker fleet news is actually positive, but of course getting misinformed. There was an increase in the number of Truck Drives. This is strong news for the industry. In return this pushed down the numbers.

[EricCartmansMom]

@Tippsology i think, the market thinks more and more about an upcoming recession and a global economic slow down and less consumer spending.

[DABO777]

Dividend less 25% tax now in the account! Thanks ZIM !!

[Sphygmomanometer]

@DABO777 Yeah. I almost fell out of my chair when I was going over my account activity for the day.

[Mreiffel]

Thanks for a great article 👍🏻

[Andrew Corporate]

This last dividend some weaks ago was the highest dividend they will pay until next year 2023, next quarters they will pay smaller ones. So it is a special dividend.
So in the next 9 months: 3 quarters, how much more yield (/dividend yield) will we get on ZIM?

[john boy]

@andrew1corporate1
6 $?

[foo_star]

@andrew1corporate1 Not a "special" regarding options pricing.
Ref
www.bigtrends.com/...

[gsamhwang]

@andrew1corporate1 ZIM pays 20% of net income for the first 3 quarters, then in the final quarter pays a dividend in the amount that total annual dividend equals 50% of net income. Assume 2022 net income of $40, or $10 per quarter, the dividend will be $2, $2, $2, $14, for yearly total of $20. Pre-tax (25% to Israel), at today's price of $67, the dividend yield will be about 30%, or 22.5% after tax.

[Quickbuck01]

Any comments in today´s market move ? I see this stock struggling to recover

[kevn1111]

Normally my funds hit my account before market. No money yet

[Sartre]

@kevn1111 Unfortunately my broker deposits the distributions the day after. I won't see the ZIM distributions until early tomorrow morning. I've take my broker to task but they still won't deposit distributions until the next day. My broker is part of JPM. I think the term for it is kiting. My dividends total in the 6 figures annually, it's not a small amount. However, I checked other brokers, Fidelity, etc., and they all deposit the same day.

[kevn1111]

@Sartre TDA here and I have sometimes seen them the day before if a weekend. I expected to see this morning. Nothing yet. My thought was people who DRIP would buy today. But stock is down, again.

[Sartre]

@kevn1111 I bought more about 10 days ago at around $68. Would love to consider buying a little more below $68 or buy DAC or KEN below (taking a hit today) $63.50.

[WhineNot]

The article says that ZIM is chartering at least 8 new vessels. That is technically correct, but is like saying that most people have at least three fingers. ZIM has agreements to charter 21 new vessels for delivery in 2023 and 2024. Importantly, it will also take delivery of five second-hand vessels in the first and second quarters of 2022, which help to push up revenues and and, reasonably, net income, this fiscal year. That, hopefully, will help to add to the big year-end dividend.
investors.zim.com/...
www.offshore-energy.biz/...
www.offshore-energy.biz/...

[usera2020]

@WhineNot Excellent, thanks for sharing the links.

[ScottMitchellFL]

Dwery (Container Shipping Experts) see continually elevated rates through at least 2023 with significant risks of increasing. Very bullish for $ZIM $DAC

www.hellenicshippingnews.com/...

[usera2020]

@ScottMitchellFL Thanks, great link and info. I've been wondering why all of the shippers were down, even knowing the BDI was down. There's a good article on the correlation of dry bulk stocks to the BDI at:
www.breakwaveadvisors.com/...

[zip6485]

I have no complain about ZIM even though 25% tax withheld from my cut. That 25% ( ONE QUARTER ) is more than some of my annual preferred stock dividends.
Long ZIM.

[ScottMitchellFL]

$ZIM has much less cyclical risk than analysts seem to believe. This is an excerpt from $KEN (Zim's largest shareholders) press release on Friday:

"ZIM carried approximately 3.5 million TEUs in 2021 representing a 23% increase as compared to 2020, in which ZIM carried approximately 2.8 million TEUs. The average freight rate in 2021 was $2,786 per TEU, as compared to $1,229 per TEU in 2020."

So, yes, rates have doubled and may normalize several years into the future as supply chains recover and new ships are delivered. However, we're looking at a company that took 23% additional market share (keeping the rate increases out of the equation) and that is impressive. Absolutely worth more than a 1.8 P/E.

[Mick Research]

"Despite this, the stock is still trading at a low PE ratio"

According to Peter Lynch the time to buy cyclical companies is when the PE ratio is high, and not when the PE is low.

[Bultaco-13]

@Mick Research True. A painful lesson I learned the hard way.

[justinmaxwell86]

@Mick Research why?

[Mick Research]

@justinmaxwell86 His starting point for analyzing cyclicals was the price-earnings ratio; usually, a low price-earnings ratio is attractive when buying stocks, but not when buying cyclicals. A very low price-earnings suggests a cyclical's good times are about to end. Unsophisticated investors continue to hold these stocks because business is still good, though change is brewing below the surface.

On the other hand, a high price-earnings suggests a cyclical stock is going through the trough and business should improve soon.

Ref: finance.yahoo.com/...

[john boy]

So author what is your reccomended stock price?

[Rakesh.B]

ZIM - My largest holding. I give management A grade in competency and shareholder friendliness. Further, stock gets an A grade in valuation - selling at less than 2 times forward p/e. I suspect dividend for this fiscal year ( for payments in next 4 quarters) will still be substantial - at least $10 based on their commitment to payout at least 30% of earnings. You can't ask for much more in a stock. They already are investing in new ships, so I am comfortable they are preparing for the eventual decline in rates, to be made up by more business. GLTA.

[Daniel Sternick]

@Rakesh.B Hey Rakesh, thanks for the great comment. Wondering if you had any thoughts on the recent movement? Also a shareholder here, fortunately sold it pre-dividends to avoid the dividend withholding hit. I'm now considering adding to my post-dividend position--what do you think about the fact that ZIM is pretty much spot rate-based amidst all these negative pressures coming from Shanghai lockdown and recession chatter in the US?

[Occulous]

@Daniel Sternick From the Q4 call, TP trade accounts for ~50% of ZIM volume and they have contracted ~50% of the TP volume. So as far as spot exposure is concerned they are least exposed to the TP trade.

Regarding freight rates, they may be down from the peak in Q3 2021, but they are still significantly elevated Y/Y. At least according to FBX https://fbx.freightos.com/

[pademau]

also check out SBLK

[Sartre]

@pademau Thanks for the suggestion...Are they paying out a quarterly dividend of $2.00 per share or is that a one time event?

[kevn1111]

@Sartre it is variable. They have a specific calculation. You should be able to google and find it.

[Bultaco-13]

@pademau I own SBLK & GNK …both very impressive companies with tailwinds at their back.