Everything About ZIM Integrated Screams Undervaluation

Key Points

• ZIM Integrated has reported some disappointing metrics in its first quarter 2023 earnings results, causing the stock to sell off in the pre-market hours of Monday morning.
• Despite leading the releases with declining metrics, management has shown a commitment to investors via dividend payouts, which are set to continue amid recovering trends in the shipping industry. 
• Analysts suggest a 50% and higher upside in the stock from today's prices, which follow improving macro conditions and management's guidance for a better second half of 2023. 
• There are some hidden tailwinds that people need to talk about, and ZIM is very well positioned to ride on to deliver a pleasant 2H-2023 and beyond. 

As global shipment volumes decline as a result of normalization within supply chains after dire bottlenecks were experienced during the peak effects of the COVID-19 pandemic, some investors have taken an extremely pessimistic view toward companies operating within the space, assigning rock-bottom valuations while at the same time leaving behind valuable assets at attractive discounts for others. ZIM Integrated Shipping Services NYSE: ZIM is one of those rare cases where investors are presented the opportunity to gain exposure in a highly profitable business for cents on the dollar. 

Analysts agree that there is a massive upside within ZIM stock; management has provided similar guidance within their reports and presentations for the first quarter 2023 results, all pointing to what could become the rally of the decade for the shipping operator. What becomes of utmost importance for investors today is whether the company can afford the high dividend yields it is paying currently; a brief overview of the financials within should serve as some guidance. 

Sustainability 

ZIM's dividend yield is at a high of 96.80% to mark its second-highest yield, with 113% in January 2023 being its highest. Considering that the company has been able to sustain payouts since January, accounting for a $2.95 per share payout on November 2022, followed by an increased $6.40 payout on April 2023, investors can remain hopeful of some stable income shortly.

However, throughout 2022, the industry's volumes declined by ninety TEU (Twenty-foot Equivalent Units), marking a 10.4% contraction for ZIM. These declines directly affected the free cash flow levels of the business, which in turn forced management to slash dividends from their $17.00 per share high in March of 2022 to a $2.85 low on April 2022. Since April, dividend payouts have increased on a net basis despite continuedly deteriorating macro conditions. 

Considering that ZIM's analyst ratings point to a near 60% upside from today's stock prices, there should be enough reason to believe the worst is behind ZIM. Within the first quarter 2023 earnings press release, highlights may have led markets to the sell-off seen in the stock this morning, declining by as much as 12.6% in the pre-market hours.

However, seeing that the stock price has found some footing in this sell-off, it may follow the following information within this release. With double-digit declines across the board, led by a 63% revenue decline, and ending with a net loss of $58 million compared to net income of $1.7 billion a year prior, ZIM investors should acknowledge the root causes and what comes next. 

Despite volumes only declining by 10.4%, the average freight rate drove the contractions investors see today. During the first quarter of 2022, the average freight rate stood at $3,848 for each TEU; twelve months later, this rate fell by 64% to represent a $1,390 level, severely capping the company's cash flow abilities. According to Statista, these average rates are below the normalized pre-pandemic rates of $1,400 to $1,600, which may be the foundation for management's optimistic outlook. 

The Future Looks Bright

Considering that the average freight rates are poised to showcase a swift recovery, especially with macro tailwinds developing in some regions of the world regarding shipping demand, management has set out some expectations for the remainder of the year.

As CEO Eli Glickman stated during the press release, "Our expectation is for recovery in demand with inventory restocking to begin in the second half of this year..." This is a reasonable expectation as most industries have managed to contain volatile inventory levels and pent-up demand. Due to these recovering trends, the company expects to see positive EBITDA at the end of 2023, between $1.8 billion and $2.2 billion.

As ZIM is a significant player in the trans-pacific trade routes, providing the necessary freight network to allow Chinese ports to send and receive good products, there is a quiet building tailwind only a few are considering. China's latest economic data suggests that the Asian powerhouse is experiencing a 0.10% inflation rate, translating into severe underconsumption and a compressed demand cycle.

Despite some nations experiencing slowdowns and tightening monetary policies on behalf of governments, China is set to accommodate some of its policies to stimulate demand, to bring inflation to healthier levels for sustained GDP growth targets. By performing these increases, the nation naturally needs to import more perishable goods and other products to cater to the economic stimulus, a trend that ZIM is more than capable of riding on.