Assessing ZIM’s Third Quarter Results: Think About Your Investment Horizon
ZIM Integrated Shipping (NYSE:ZIM) released its third-quarter financial results earlier this week, surprising investors by beating estimates. There is a debacle over whether the ZIM will falter in the face of rising systemic risk. Moreover, many investors are wary of the stock’s illustrious dividend profile and question its sustainability. In today’s article, we uncover key talking points about ZIM Integrated Shipping and discuss investor horizons as a key decision variable.
Unlike Golden Ocean (GOGL), ZIM Integrated Shipping experienced year-over-year growth with a 3.2% increase in revenue. The company’s integrated growth remains on track, with its average TEU rate increasing 4% year over year, with cumulative rate increases since the beginning of the year reaching 43%. Despite ex post rate increases, ZIM carrier volume fell 5% from Q3 2021 due to port congestion and lower consumer demand.
The size of ZIM’s fleet has remained the same since its last report, with its current number of vessels standing at 149. The average remaining life of the company’s current capacity is 27.4 months and 37 of its vessels are up for renewal. in 2024.
Generally speaking, shipping rates are down. We think rates are falling due to the demand destruction caused by the uncertain economy. For example, the Port of Los Angeles experienced a 25% decline in container activity since October last year. In addition, the International Monetary Fund recently reported slowing economic growth, which could be one of the main reasons for lower shipping rates.
Despite growing year over year, we think it’s only a matter of time before ZIM starts to feel systemic heat.
The diagram below reiterates the state of the current economy. The slowdown in purchasing power will likely influence global trade, hurting demand from ship operators. The economy is a cyclical vehicle, and we won’t be surprised if the shipping industry experiences a sharp downturn in the coming quarters.
Before we dive into ZIM’s accounting metrics, let’s look at a few line items. The company’s adjusted EBITDA fell 7% year over year and its net profit was compressed by 20%. We believe inflation will remain resilient, leaving ZIM’s P&L under pressure.
Additionally, the company’s operating cash flow fell 17% year-over-year, reflecting an apparent slowdown in the company’s core businesses. Many believe that revenue represents the growth of a business; however, cash flows present a better view as they are not accounted for on an accrual basis. Additionally, observing operating cash flow is the most critical as it gradually eliminates any non-organic cash inflow.
Based on our observation, ZIM’s core cash inflows are down.
One point that concerns us is ZIM’s Beneish M-score, which is at -0.93. As a general rule, the Beneish M-score should be less than -1.78 to conclude that a firm is an unlikely earnings manipulator. ZIM’s high M-score implies it might recognize some income statement items prematurely, leaving investors at risk of facing a backlash in subsequent earnings reports.
Despite its unfavorable M score, ZIM has no positive rollups, which means that its remaining operating and investing cash flow above its net income, indicating that its organic cash flow is greater than its earnings on an accrual basis (which is a good thing).
To assess the prospects of ZIM, an investor must determine his investment horizon. Some investors prefer to buy and hold, some change portfolio weightings, and some execute short-term trades. Thus, a cyclical stock such as ZIM will yield different results for different categories of investors.
Let’s talk about the elephant in the room: ZIM’s illustrious dividend yield. The company’s huge dividend yield posted at 105.98% is a policy-based payment. The company redistributed 10% special dividends after its second quarter due to superior performance. However, it is ZIM’s general policy to distribute 30% of its net income to investors.
Although ZIM is a mature company, its shares have not been listed on the stock exchange for a long time; therefore, it is difficult to understand the company’s dividend model. However, returning to our top-down approach discussed earlier, it is evident that this company and other shipping companies are severely exposed to economic cycles. Additionally, it’s worth mentioning that shipping rates were likely unrealistic during the pandemic, and ZIM’s presence in an industry with “high barriers to entry” allowed it to take full advantage of that. So Basic Economics 101 tells us that ZIM’s current level of net income is likely unsustainable, and the squeeze on the income statement could force the company to tap into investor resources to sustain the business.
Now back to the central argument, which is your investment horizon. ZIM is expected to pay a quarterly dividend worth $2.95 per share on December 7, with a shareholder whose registration date is set for November 29. If you invest now, assuming the stock price remains static, you could earn a return of over 11% (from dividends). Given the stock’s 5% monthly VAR of 30.43% and its beta sensitivity (sensitivity to the broader stock market) of 2.041, I’d say it’s a plausible tactical play.
Assuming a longer-term view, you would likely be more exposed to dividend destruction and price risk than short-term investors. Again, this goes back to the macroeconomic argument I made earlier.
In ZIM’s defense, the stock boasts impressive price multiples with its price-to-earnings and price-to-book ratios at 0.52x and 0.59x, respectively. Investors might view the asset as a bargain; however, we argue that cyclicality will upset the stock’s valuation metrics, causing a possible value trap.
Moreover, the annualized standard deviation of the ZIM is exceptionally high. Therefore, investors should consider whether the stock’s dividend benefits are sufficient to phase out price risk.
The prospects of ZIM depend on the horizon of the investor. The stock’s dividend yield offsets short-term price risk. However, longer-term price risks and cyclicality of dividends could be adverse.
Despite solid year-over-year revenue growth, ZIM Integrated Resources may face demand destruction, in turn causing its recent progress to stagnate. Additionally, the company’s income and cash flow statements are polarized, which presents concerns.
From an investment perspective, holding a position in ZIM depends on your time horizon. The long-term outlook looks uncertain, but short-term allocation could bring significant benefits. The stock is undervalued; however, keep cyclicality in mind.
Considering a quarterly horizon, we assign a holding rating to the ZIM and will review our position thereafter.