ZIM Integrated (NYSE:ZIM) is a main beneficiary of the current turmoil in the Red Sea, which is significantly disrupting container shipping and consequently leading to a noticeable increase in freight rates. Investors should consider that a major portion of Europe-Asia maritime trade passes through the Red Sea. In fact, it is estimated that approximately 30% of all container volume between Europe and Asia transits through the Suez Canal. If such a high trade volume would be diverted to pass the Cape of Good Hope, there would certainly be an enormous capacity shortage of shipping containers, as existing supply is locked-in for materially longer routes.
First signs of a potential supply/ demand balance disruption are already observable through sky-high container rates. In fact, the
Drewry World Container Index (WCI) for a 40-foot container indicates that costs for shipping are rapidly approaching COVID-like rates, with the Shanghai to Rotterdam benchmark having increased by almost 5x vs. early November, to about $5,000. For reference, the normalized pre-pandemic rate for this route was approximately $1,300 - $1,800.
Needless to say, companies like ZIM are poised to benefit greatly from these higher rates. The last time container rates have stood this high (post-COVID), ZIM showered shareholders with $3.3 billion in dividends, which is 2x ZIM's current market cap.
Although the thesis is so enormously appealing, it is interesting to note that market participants have so far failed to fully price the upside scenario, with ZIM shares trading around $1.65 billion market capitalization.
One reason why investors have not yet piled progressively into ZIM shares may be anchored on the uncertainty about the duration of the disruption. On that note, I argue that most scenarios look favorable. In fact, I point out that the presence of military ships in the region, and joint action by U.S. and U.K., has so far failed to solve the disruptions. This suggests that high container rates may potentially persist until the conflict in Israel/ Gaza stabilizes, which could take several months, if not years! That said, investors should consider that the supply chain disruption caused by COVID lasted only a few quarters and was nevertheless sufficient to prompt enormous dividend payouts.
Admittedly, I have argued already in May 2023 that a significant, unexpected dividend payout may be expected. The thesis turned out to be wrong, as container freight rates edged unexpectedly lower on a worse than expected trade volume backdrop. However, it is important to note that my thesis today contrasts sharply with my argument made 3 quarters ago: Today there is a catalyst and the core argument of the thesis is not anchored on "improving rates", but on rates that have already materialized. Thus, while the argument back in May 2023 was based on a "bet", the argument today is more fundamentally anchored.
On a different note, I also point out that current disruptions may have already caused enough stress with container/ shipping service buyers to lock in forward shipping rates at an elevated rate. This may support bullish commercial momentum throughout 2024, even if the Red Sea disruptions were to be resolved in a "timely" schedule.
In any case, current consensus estimates for ZIM are likely much too low to reflect the events of the past few weeks and a changing container shipping environment. In fact, referencing estimates collected by Refinitiv, I point out that analyst consensus revenue revisions have so far been minor, pricing a revenue delta of only +$500 million for 2024. I am not sure why analysts have so far failed to reflect the Red Sea disruptions in their estimates, as the impact on rates is indisputable (see DWCI). I argue that considerations about disruption duration play a role, as well as an equity research industry bias towards "wait and see" rather than "anticipate and speculate".
Personally, I take the chance to speculate that analysts are behind the curve, and I open a position in ZIM shares. Investors should take into account that 'returning cash to shareholders' remains a key priority of ZIM CEO Eli Glickman. And although predicting the probability and amount of a dividend distribution in 2024 is challenging, it's important to note that the potential for a dividend appears to be very promising on a likely profit surge due to the Red Sea route disruption. I assign a speculative "Strong Buy" rating.
As a final note, I point out that it is highly difficult, and arguably unreasonable to value a company like ZIM Integrated based on cash flow or earnings, because the fundamentals of the business are so volatile and cyclical. Accordingly, for valuation guidance I would rather look at accounting book value, or liquidation value. And on that note, I think at 0.6x P/B the downside for ZIM looks well-protected.
This article was written by
Cavenagh Research
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Experience as an investment analyst for a major BB-Bank, as well as private equity consultant for MBB. Currently working towards the CFA charter, having completed I&II. Passion for risk-assets (Growth, Contrarian, Emerging Market) ex-colleague and close friend of Investor Express
Analyst’s 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.
Not financial advice
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Regarding the concepts mentioned in the article about ZIM Integrated (NYSE:ZIM) and the current turmoil in the Red Sea affecting container shipping, let's break down the key points and provide insights:
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ZIM Integrated (NYSE:ZIM): ZIM is a major player in the container shipping industry, with its stock listed on the New York Stock Exchange (NYSE). The company operates globally and stands to benefit from disruptions in key shipping routes such as those in the Red Sea.
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Red Sea Turmoil and Container Shipping Disruption: The Red Sea turmoil, likely referring to geopolitical tensions or conflicts affecting maritime trade routes, is leading to disruptions in container shipping. This disruption is causing a significant increase in freight rates, particularly affecting the Europe-Asia trade route that passes through the Red Sea.
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Suez Canal Importance: Approximately 30% of all container volume between Europe and Asia transits through the Suez Canal, highlighting its critical role in global trade. Disruptions in this region can have far-reaching effects on shipping capacity and freight rates.
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Impact on Freight Rates: The disruption in the Red Sea is driving up container freight rates significantly. The Drewry World Container Index (WCI) for a 40-foot container, particularly the Shanghai to Rotterdam benchmark, has surged, approaching levels seen during the COVID-19 pandemic. This surge in rates presents a lucrative opportunity for companies like ZIM to capitalize on higher shipping fees.
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Investment Thesis for ZIM: The disruption in container shipping presents a compelling investment thesis for ZIM. The company has historically rewarded shareholders with substantial dividends during periods of high container rates. Despite the favorable outlook, the market may not have fully priced in the potential upside for ZIM shares, leaving room for growth.
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Duration of Disruption: Uncertainty remains regarding the duration of the disruption in the Red Sea. Factors such as military presence and geopolitical tensions suggest that elevated container rates could persist for months or even years, further benefiting companies like ZIM.
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Analyst Estimates and Speculation: Analyst consensus estimates may not fully reflect the impact of the Red Sea disruptions on ZIM's revenue and profitability. There could be a bias towards a "wait and see" approach rather than anticipating the potential upside. Speculation suggests that analysts may be behind the curve in adjusting their forecasts, presenting an opportunity for investors.
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Valuation Challenges: Valuing companies like ZIM based on traditional metrics such as cash flow or earnings can be challenging due to the volatile and cyclical nature of the container shipping industry. Alternative approaches such as accounting book value or liquidation value may provide better guidance for assessing ZIM's valuation.
In summary, the article presents a compelling case for considering ZIM Integrated as a strong investment opportunity amidst the current disruptions in the Red Sea and the container shipping industry. Investors should weigh the potential benefits of elevated freight rates against the uncertainties surrounding the duration of the disruption and the valuation challenges inherent in the sector.
