Quicky on ZIM Integrated Shipping (ZIM US)

Global supply chains are still in disorder and shipping rates are ‘sky high’, providing record profits for container liners operating at sea …

This is not investment advice. Please read the disclaimer.
I currently own shares (economic interest) in mentioned companies.

The company/business is not my ususal investment and maybe this should have been enough to stay away (a quick no), but …

ZIM Integrated Shipping is a USD 6bn market cap Israeli shipping company, predominantly leasing (not owning) its ships (capacity) and serving mostly trans-pacific and intra-Asia routes. The company develops a digital freight forwarding platform, targeting SME called SHIP4WD*. Within the current development, I believe such a product might have ideal conditions to gain tractions, since available capacity is rare, thus reducing search costs might be a very good argument. Anyway, this is not core to my thesis. (overview)

*obviously, companies using the digit ‘4’ in a certain way are superb,
as readers of the searching4value blog might have guessed.

Its stock (ZIM US) is listed in the US since Jan’21 ($15). Further capital was raised at $40 per share in June. I bought a 2% position at Dec 8 for $56.28 a share. After dividend ex-date was a much better entry point (perfect hindsights). Rumors are some big shareholders (DB) sold their shares like amateurs in big blocks at depressed intraday prices.

This is another part of my series of Quickies on new companies.

Cyclicality at its best (or worst) ?

This is not my typical defensive long-term investment. Quite the contrary. Shippers currently enjoy record profits on levels never seen before due to much higher prices per unit and costs simply did not rise (explode) as much. Stock prices have of course reacted accordingly. They did explode as well. The most important questions here are

1. how long will this extraordinary cicumstances persist?
2. what will capitla allocation look like?

I. High container rates

Of course I have no firm view how things will develop, but … (This is the moment you shoul run 😉 ) there are a bunch of good reasons for higher container rates for longer before falling back to normal profits bringing profitability back down. The relevant metric is not merely capacity (nmbr of containers) but capacity times turnover-rate. The below bullets idicate the problems / support for high rates.

• In 2021 almost non TEU-equivalents were scrapped. The scrapped ones seem a neccessity
  • … with avg age of scrapped units at c. 27yrs (highest since 2012, see slide #22)
• Harbours closed due to covid restrictions
• limited warehouse space
• issues with crews, partially not vaccinated and getting home only a few months after contracts end
  • governments do a terrible job here (but how many Phillipine sailors are voters (in the EU or the US?))
• Higher demand for goods (Americans receiving stimmies to spend and having a lot of spare time at home)
• Many ships waiting in long queues infront of overwhelmed harbours
  • … partially slowed down by unions (finally working men (and women) have a say again. sorry geeks)
• not enough truckers
  • … nothing new, PGR’s business is booming (maybe the trucking business is so profitable (supply/demand) currently that truckers do not compare for twenty different insurance rates
• fewer new built ships
  • … partially due to regulatory uncertainty for ships (ESG) and a usually low industry profitability/overcapacity
• voluntarily sailing at below-maximum speed at sea
  • … more efficient/burning less fuel per km (signed ESG initiatives)

Elevated rates do not need to stay at current levels for very long times, since earnings (and hopefully capital returns) are astronomically high when compared to current market capitalization (c. $6bn). Important container rate indexes hit another record. These sky high spot rates will inform negotiations for the next contracting period (mostly May-April). Further, some clients are singaling interest in long-term agreements which should carry over current high rates (profitability) further into the future and when lt-contracts get renewed, it might even get better for ZIM in the near-term (before getting back to normal). Though, longer term agreements are not the bulk.

Most importantly and consistent with our primary objective to grow profitably, third
quarter net profit was a record $1.46 billion compared to $144 million in the third quarter
of last year, growing by more than 900% 10 times. Adjusted EBITDA in the third quarter
also significantly increased to $2.08 billion compared to $262 million in Q3 2020.

earnings call

Another argument: Bloomberg had indeed the latest cash figure too low, which I discovered after a twitter discussion (scrolled down in my twitter notifications for a long time for my dear readers!). Indded, BBG had no tthe correct cash figure vs company reports.

Some more arguments (economist): The industry consolidation resulted in a break of the historical pro-cyclical behaviour of ordering more ships in harder markets that hit the road (sea!) when the economy turns down a few years later. There might be more consolidation and ZIM is one of the smaller players, and …

The strange result of the pandemic is that the industry is awash with cash. Simon Heaney of Drewry, a consultancy, says that profits could reach $200bn in 2021 and $150bn in 2022, an unimaginable bonanza beside the cumulative total of around $110bn for the previous 20 years.

economist

II. Capital Allocation

The new dividend policy promises interim quarterly dividends of ~20% of quarter’s net income and a fourth quarter dividend at a rate that the cumulative annual amount will total 30-50% of annual net income. They reduced net debt dramatically, bought some containers and a few second hand ships (fast delivery than new builds).

Big pay-day coming in April 2022. Expected distribution for the annual dividend is April 2022. Since the special dividend of approximately $238m, or $2 per phare, comes on top of the 2021 Annual Dividend (news), so far only the Q3 dividend of $296m or $2.50 per share payable in December is to be taken into account. Current estimates are for adj Ebitda of 6.3bn (upper range of guidance) and adj Net Income of 4.4bn or adj EPS of $36.82 (which might be too low). An aggreagte pay-out ratio of 30-50% would imply $11.05-18.41 and thus a dividend per share of c. $8.55-15.91 payable in April. (number of shares increases)

Israel has a withholding tax of 25%
(30% for bigger shareholders/corporations)
and German taxpayers can only ‘offset’ 10%

Conclusion

Am I too late? Obviously the risk here is to be late to the party and buying at a cyclical peak. The idea is certainly not new (search SeekingAlpha and Twitter). The Economist hinted at the cash earnings more than 12 months ago (above) and looking at stock charts I am clearly not early. Further, charter rates and bunkerfuel might increase costs. Charters are on average of a remaining duration of 25 months, so only a few are at risk for higher rates in the near term.

I think it is a good be to take but I would not feel comfortable with a bigger position.

Other players include Mearsk and COSCO Shipping (1919 HK), OOCL (316 HK) cooperates with the latter, and Mitsui Osk (9104 JP). Recent stock price charts and profits look similar across the board.

• Maersk is bigger and a bit more expensive, COSCO is also bigger than OOCL
  • COSCO: a good chunk of shares are sold short (BOA, GS, UBS, MS, Citi, JPM … partially for hedging loans?)
• 316 HK is cheaper and smaller than COSCO and pays (high) dividends which I would prefer.
  • Further, 316 HK latest results are from June’21 (H1), whereas COSCO’s are from Sept’21, indicating net cash around zero, whereas OOCL had significant net cash ($2bn) as of June, lowered by dividend payment and certainly replenished by very profitable business in H2.
    • OOCL does a lot of business on the trans-pacific route (HK-LA: the dewry benchmark just hit another record) and intra-Asia
  • quoted in HKD, but reports/declares divis in USD
  • mall float (c. 8%?), mostly owned by big shareholder
    • COSCO (71%), Shanghai Port (9%): might pursue own interests?

I hope you enjoyed this post.

Further reads

• https://www.economist.com/business/a-return-to-container-shippings-pre-pandemic-days-is-a-long-way-off/21806844
• https://investors.zim.com/overview/default.aspx
• https://www.ooilgroup.com/financials/investorpresentations/Documents/OOIL%202021%20Interim%20Results%20%5b20210823%5d.pdf
• MSC’s €5.7bn ($6.4bn) offer to buy Bolloré’s Africa assets (incl. 16 terminals) is a nice showcase for possible M&A deals I guess. Shippers are flush with cash, want to use it, and what better use case than to buy terminals (or other shippers?)
• https://www.wsj.com/articles/shipping-and-logistics-costs-are-expected-to-keep-rising-in-2022-11639918804?st=ssr16e7wfvbd1xk&reflink=desktopwebshare_permalink
• https://splash247.com/liners-hammer-home-their-advantage-seeking-hugely-inflated-long-term-contacts/

Addendum Dec 19th, chat with a friend at a bigger German corporate about their willingness to pay higher prices for securing delivery

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