ZIM Integrated Shipping Services Ltd. (ZIM, Financial), a marine transportation company, is starting to look interesting. In a comment to a bullish article published on GuruFocus published last year on ZIM, I had written the stock will fall to below the initial pu blic offering price. This has now happened. At over 90% off its high, is it worth taking a chance on ZIM ? I think yes. Why? Because I think we may be approaching peak pessimism.
Together with its subsidiaries, ZIM provides container shipping and related services internationally. It provides door-to-door and port-to-port transportation services for various types of customers, including end users, consolidators and freight forwarders. The company also offers ZIMonitor, a premium cargo tracking service. As of Dec. 31, it operated a fleet of 150 vessels, including 139 container vessels and 11 vehicle transport vessels.
Incorporated in 1945 and headquartered in Haifa, Israel, the shipping company went public in January 2021 via a special purpose acqusition corporation for $15 a share. It soared to $85 in March 2022 and has now crashed to $7.89 as of the time of writing. The company raised gross proceeds of $217.5 million before fees. ZIM followed that with a secondary offering of 6,975,000 ordinary shares at a price to the public of $40 per ordinary share by certain selling shareholders of in June of 2021.
ZIM operates in a highly competitive and cyclical market. Unlike many of its bigger competitors, like COSCO (HKSE:01919, Financial), MSC and Maersk (OCSE:MAERSK A, Financial), the company is relatively asset light, meaning it leases a majority of its vessels. During the pandemic, the marine shipping industry soared because of extraordinary profits induced by huge demand as consumptions shifted towards goods versus services and as shipping rates soared because of shortages of crew and ships as well as bottlenecks at the ports. This scarcity caused rates to spike to generational heights. The shipping rates can be seen in the Baltic Dry Index in the chart below. The shipping freight-cost index is issued daily by the London-based Baltic Exchange. Note that Y axis in the chart below is log scale.
Source: Stockcharts.com
ZIM is not the only company suffering. Most of the other shipping companies also soared during the pandemic, though ZIM's stock price bubble rose the most and now has burst the most. The chart below compares ZIM with some other marine shipping companies.
Because of the extraordinary dividend paid by ZIM, a lot of newbie investors, who were trading on sites like Robinhood in their pajamas during the pandemic lockdown, were attracted to the stock. GuruFocus is showing an incredible dividend yield of 118%, but that is a function of past dividends and the currently depressed stock price. The forward dividend is zero.
Zim has a stated policy of paying about 50% of earnings as dividends, but earnings are likely to be non-existent in the next couple of years as it navigates the slump in shipping rates. However, the trailing dividend yield is a tantalizing taste of what may also be possible in the future. One year's dividend can pay for the entire investment if we go into a cyclical bull market again.
The current pricing environment for shipping containers is bad from a shipping industry point of view (obviously opposite and good from a customer point of view). I expect the company will lose money for the next couple of years. According to analysts, the container shipping industry will likely remain in an over-supply position till 2025.
Company management guided last May that adjusted Ebitda is expected to be between $1.8 billion and $2.2 Billion in 2023. The company's enterprise value is currently around $4 billion. This works out to a enterprise value/Ebitda ratio of only 2. This is cheap by any reasonable measure.
ZIM's balance sheet is not bad with financial strength of 6 out of 10 and it is still free cash flow positive. However, I expect all metrics to get worse before they start to improve.
The company's major shareholder appears to be Kenon Holdings, which has an ownership stake of 20.67%. Kenon itself is controlled by a the Ofer family from Israel.
Conclusion
Marine shipping is a cyclical industry and highly sensitive to the global economy. The trick to investing in highly cyclical industry is to invest when pessimism is high and sell when optimism is peaking. While we cannot time the exact tops and bottoms, even if we can get it roughly right, we can make a lot of money. The rewards can be multi-bagger. Markets are forward-looking and have already worked out ZIM is going to lose money for the next two to three years before the cycle turns. That is why it has sold down the stock and thinks it is dead money. On top of that there are recession fears. This appears to me that we are close to peak pessimism. By the time the actual fundamentals hit rock bottom, the stock price would have long turned up. ZIM is also a Israel-based company. Even though it operates globally, it is negatively affected by the war news.
The low stock price also leaves room for surprises like the end of the Israeli-Hamas war as well as recovery of the Chinese economy, which is a huge driver of the marine shipping industry. The risk to my thesis is a worse-than-expected global recession, the current wars get out of control and geopolitical situations worsen and the slump in global trade lasts longer than expected.
I, therefore, plan to start a small speculative position in ZIM that I will slowly build up, informed by actual business results, with anticipation of better times ahead.
