In my last two articles on ZIM Integrated Shipping Services Ltd. (NYSE:ZIM), see "The Big Picture: ZIM Integrated Is Undervalued," and "Danaos Corporation And ZIM Integrated: Both Are Now More Opportunistic," I explained why the stock is a buy. Since 22 April 2022, ZIM stock price has increased by 19%, while the S&P 500 dropped by 9%.
For now, I downgrade the stock to hold, as my valuation shows that ZIM is worth $65 to $68 per share. Thus, I do not expect a rally to happen in the short term. However, due to the company's new lines, new vessels, new chartering agreements, performance, and the market conditions, I am long-term bullish on the stock.
In its 1Q 2022 financial results, ZIM reported revenue of $3716 million, compared with 1Q 2021 revenue of $1744 million, up 113%. The company's carried volume increased from 818 K-TEUs in 1Q 2021 to 859 K-TEUs in 1Q 2022. Also, its average freight rate increased from $1928 per TEU in 1Q 2021 to $3848 per TEU in 1Q 2022. The significant increase in ZIM's revenue in the first quarter of 2022 compared with the first quarter of 2021 was due to the jump in the freight rates.
ZIM reported a 1Q 2022 net income of $1711 million, or $14.19 per diluted share, compared with a 1Q 2021 net income of $590 million, or $5.13 per diluted share. The company declared a 1Q 2022 dividend of $2.85 per share, representing 20% of its quarterly net income. ZIM's adjusted EBITDA and adjusted EBITDA margin increased from $821 million and 47% in 1Q 2021 to $2533 million and 68% in 1Q 2022, respectively. "We once again generated our highest-ever quarterly revenues, net income, and adjusted EBITDA, while achieving industry-leading margins," the CEO said. The company entered into multiple charter agreements for 17 newbuilds, including 3 LNG dual-fuel container vessels. "We have launched 10 new lines since the beginning of 2022, and we increased our carried volume quarter-over-quarter during a time when overall industry volume decreased," the CEO commented.
Figure 1 shows that ZIM's 1Q 2022 revenue, adjusted EBITDA, adjusted EBIT, and net profit are higher than in 1Q 2021 and 4Q 2021. Also, Figure 2 shows that while the company's carried volume in the Pacific zone decreased from 328000 TEUs in 1Q 2021 to 285000 TEUs in 1Q 2022, its carried volume in other zones increased during the same period. Overall, ZIM's carried volume increased by 5% YoY in 1Q 2022, while 1Q 2022 total carried volume decreased by 1.8% YoY.
Figure 1 - ZIM's financial indicators in 1Q 2022 vs. 1Q 2021 and 4Q 2021
Figure 2 - ZIM's carried volume in 1Q 2022 vs. 1Q 2021 and 4Q 2021
Furthermore, it is worth noting that the number of ZIM's owned vessels increased from 2 in 4Q 2021 to 6 in 1Q 2022 (now, the company has eight owned vessels). According to the company's balance sheet, the value of ZIM's vessels increased from $2958 million in 4Q 2021 to $4038 million in 1Q 2022. However, the company still relies on its chartering strategy as 94% of its vessels are chartered.
According to Figure 3, the global container throughput capacity increased by 6.7% in 2021. Also, it is expected to grow by 4.9% and 4.5% in 2022 and 2023, respectively. The annual capacity grew by 4.5% in 2021, and it is expected to grow by 4.2% and 8.2% in 2022 and 2023, respectively. On the other hand, the orderbook-to-fleet development ratio has been increasing since mid-2020. Due to the higher orderbook-to-fleet development ratio, new environmental regulations, and port congestions (because of the COVID-19 pandemic and war in Ukraine), I expect freight rates to remain high for the next few years. With its new lines and new LNG dual-fuel container vessels, ZIM is ready to benefit from the market conditions as it did in 2021.
Figure 3 - Container vessels supply/demand and orderbook to fleet development
However, freight rates in 2Q 2022 are not as high as in 1Q 2022. Figure 4 shows Drewry's composite World Container Index and spot freight rates by major routes from 31 March to 14 April (down) and from 5 May to 19 May (up). It shows that spot freight rates have decreased in most of the routes. Also, we can see that Drewry's composite World Container Index decreased from 8152 on 31 March to 7648 on 19 May, down 6%.
Figure 4 - Spot freight rates by major routes
Moreover, the Global Container Freight Index shows that compared with the first quarter of 2022, freight rates in the second quarter have decreased. Does it imply that ZIM's 2Q 2022 financial results will not be as strong as 1Q 2021? We cannot say that for sure. Figure 5 shows that Global Container Freight Index in 4Q 2021 was higher than in 1Q 2022. However, in Figure 1, we saw that ZIM's financial indicators in 1Q 2022 were better than in 4Q 2021. Thus, lower freight rates do not necessarily mean weaker financial results. With a well-managed performance, ZIM can continue benefiting from the market conditions even with lower freight rates.
Figure 5 - Global Container Freight Index
In my recent articles on the stock, I investigated ZIM's cash and capital structures in detail. Updating and analyzing the company's operating conditions indicate that ZIM's cash flow surged amazingly to $1543 million in 2021, compared with its amount of $570 million at the end of 2020. This cash performance led to a deep drop in the company's net debt amount. ZIM's net debt sat at $(365) million in 2021 compared with its previous level of $1203 million at the end of 2020.
Moreover, ZIM's operating conditions show the economic recovery after the COVID-19 pandemic. The company's operating cash was boosted to $5971 million in 2021 from only $881 million at the end of 2020. On the other hand, ZIM's capital structure increased to about $1000 million in 2021. Thus, its free cash flow declined by 57% to $354.48 million in 2021. In a word, ZIM's cash and capital structure represent the company's ability to pay its shareholders' dividends in the future (see Figure 6).
Figure 6- ZIM's cash and capital structure
To analyze the company's liquidity and performance conditions, I investigated ZIM's operating cash flow and CFO-to-sales ratios. ZIM's operating cash flow ratio surged to 2.17 at the end of 2021 compared with 0.76 in 2020, up about 185%. This ratio indicates how well the company is able to pay off its current liabilities with the cash flow generated from its business operations. Thus, at the end of 2021, ZIM could cover its current liabilities 2.17x over.
ZIM's CFO-to-sales ratio increased by 3358 bps to 55.6% compared with its 22% at the end of 2020. This is a sign of the company's ability to turn its sales into operating cash flow. Generally speaking, it indicates that ZIM is profiting and growing steadily (see Figure 7).
Figure 7- ZIM's performance ratios
To estimate ZIM's fair value, I investigated its EBITDA growth during the last five years. The company's EBITDA grew impressively in recent years. Meanwhile, its net debt declined by over 33% in the previous five years. In the 1Q 2022 financial release, ZIM announced the highest-ever quarterly adjusted EBITDA of $2.5 billion. Based on 1Q 2022 data and the long-term contracts in 2022, the company updated and increased its full-year 2022 guidance and expects to generate adjusted EBITDA between $7.8 billion to $8.2 billion. Based on the company's TTM EV/EBITDA, there are different scenarios for ZIM stock price (see Table 1).
Table 1- ZIM stock valuation
Scenario 1: Based on the estimated 2022 adjusted annual EBITDA of $7.8 billion and the company's estimated net debt, I evaluated that ZIM's price is around $64 per share, which is in line with the company's market price.
Scenario 2: Based on ZIM's 2022 guidance, if its adjusted EBITDA reaches $8.2 billion, ZIM's price would have an upside potential to reach around $68 per share.
Scenario 3: If the company's adjusted EBITDA reaches $8 billion at the end of 2022, I evaluate that the stock's fair value is about $66.
In a nutshell, based on the ZIM Integrated Shipping Services' recent financial results and operation conditions, I investigate that its fair value is $65 to $68 per share.
According to my valuation, ZIM is worth $65 to $68 per share. Thus, a hold rating is appropriate for the stock for now. However, based on the company's new lines and vessels, its financial performance, and my expectations of the market conditions, ZIM stock is a long-term buy.
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Disclosure: I/we have a beneficial long position in the shares of ZIM either through stock ownership, options, or other derivatives. 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.