I had not heard of ZIM (NYSE:ZIM ) until recently and since have read several excellent articles on SA that have conclusions suggesting ZIM could be sailing anywhere from boom to bust.
That ship in the photo is a bit of a rust bucket but when I scrape off the barnacles below the water line I see no Titanic like iceberg on the horizon that will sink it. Apart from occasional choppy waters I mostly see ongoing smooth sailing for some time to come.
The use of the word integrated in ZIM’s full name - ZIM Integrated Shipping Services Ltd. - tells part of the difference between it and many other shipping companies. That integration is enabled by the use of advanced technology that put ZIM into a niche occupied by few plus it keeps them closely integrated with customers in a near partnership arrangement; a closed loop. And many of those customers choose ZIM to reliably transport their higher end products and perishables.
In addition to those competitive advantages, which enable ZIM to maximise profits, container shipping is a growth market. About 90% of global trade is carried at some point by ships, with seaborne trade up nearly threefold in the 30 years to 2020. Much of that is in containers. During the pandemic downturn when others were cutting back ZIM expanded and gained market share.
Other major shipping companies are doing different things that they call integrated but I find offers them no special advantage in a crowded space such as buying into onshore storage.
I will touch on that later but will first dive deeper into ZIM...
ZIM is an Israeli based shipping company established in 1945 and transformed in recent years under new management into a container only shipping company. It had its IPO on the NYSE last year (Jan 2021) and was one of the best performing IPOs that year on the back of super financial results following the transformation. Their average revenue per TEU (a 20-foot container to us laymen) by quarter from 2020-2022 left competitor's ships in its wake...
According to marine digital data, ZIM now has the world’s 10th largest liner fleet, with less than an eighth the capacity of the largest one, Maersk (OTCPK:AMKAF).
It has an asset light model that is a non balance sheet asset in bad business conditions because its fleet is almost entirely chartered in. 94% of ZIM's vessels are chartered. The company has also expanded its car carrying activities to diversify its operations.
Chartering means some profit is transferred to the companies the ships are chartered from but ZIM has no costs for their upkeep and crews in an economic downturn when they might not need to renew the charter contracts. Nor does ZIM have the costs of de-rusting ships owned by others.
It owns the containers those ships carry and those containers carry key parts of ZIM’s advanced technology.
Some of that technology is well proven in other applications but the shipping industry has a tradition of being backwards as can be seen by the filthy fuels many shipping companies use. NPR Org tells us that about 90% of the world's trade is transported by sea. But the cost to the environment is enormous. Every year, those container ships plying the world's waterways spew about 1 billion metric tons of carbon dioxide into the air, which is about three 3% of all greenhouse gas emissions. Some even dump filthy fuel waste into the sea!
ZIM is cleaning up its act with an order to charter 15 LNG powered ships that will become operational next year as will the world’s first LNG fueled Very Large Container Ship (VLCS) fleet to operate on the Asia-North America shipping route. They have signed a $1 billion contract with Shell to supply the LNG. Last year they entered a chartering contract with Seaspan for 25 new ultra-modern "green" vessels. That demonstrates their commitment to the environment and will attract customers who want to burnish their ESG credentials at no extra cost.
The Revelator revealed that around 3,000 were lost in the Pacific in one recent winter. They are untraceable but ZIM’s technology could trace theirs. At any given time, there are around 30 million shipping containers moving around the globe on ships, trucks and trains. With sensors built into the containers ZIM’s are traceable at all points from supplier to user even after they have been offloaded from ships onto trucks and trains. Those sensors feed back precise location details to a remote inland monitoring centre thus keeping all in a closed loop. In temperature controlled containers other sensors can feedback information so that any problems can be detected and rectified before the contents - such as fresh food - get damaged. That keeps insurance premiums lower and ZIM can earn extra money from operating remote monitoring and control services.
It should be pointed out that Israel is a world leader in new technologies and ahead of the US. ZIM has made recent investments to further their technology leadership in the shipping sector.
While sea transportation moves at a very low speed of 13 knots on average, ZIM decided to make a strategic decision under new management to jump on the technology wagon and lead a revolution that would bring about change. Until three years ago, it was almost impossible to find digital practices, high-end technologies and focus on customer experience in the world of cargo transportation. ZIM was among the first to realise that the world was changing drastically, and that a focused, customer-centric approach was a must to continue to lead in the industry.
The major challenge ZIM faced was enhancing customer experience and looking beyond operational service to adopt a more holistic approach where the customer’s needs are at the centre. That has become a ZIM differentiator and attracts customers shipping higher value added products.
More can be found about ZIM on their website. I would like to detail a bit more here about the financials behind that huge, seemingly “too good to be true” dividend.
This information all comes from their website and presentations.
Cash is a key attraction for my investment decisions too and some of ZIM's containers must be stuffed full with it.
ZIM ended the last quarter with $946.8 million of cash, $3 billion of bank deposits versus $4.3 billion in lease liabilities. If lease liabilities are ignored and the bank deposits included then that $3.9 billion net cash position represents more than 90% of the current market cap. ZIM’s leverage ratio is virtually nonexistent.
ZIM generated so much cash in the quarter that even after paying out $2.4 billion in dividends and investing in the future it still retained $743 million of cash that it used to pay down debt.
ZIM again confirmed full-year guidance which called for up to $6.7 billion in EBIT. That implies that ZIM will earn more net income than its current market cap! And that spells opportunity to me!
At the Q2 earnings call the CEO Eli Glickman said -
Based on our solid performance in the first half, we are reaffirming our full year guidance for 2022 and are on track to deliver another year of record earnings and profitability.
We are also announcing today the increase in our quarterly dividend payout from 20% to 30% of quarterly net income.
On virtually every key measure of financial strength and profitability ZIM beats all in the industry, sector and the S%P 500 averages...
Those wanting more can find it on that earnings call transcript and presentation
That is enough of figures, I will add some views in words ...
Container freight rates increased dramatically between January 2019 and July 2022. The year 2021 saw an especially steep increase in global freight rates, reaching a record price of nearly $10,400 in September 2021. In July 2022, the global freight rate index stood at almost $6,800.
How did that happen? The global supply chain is a fragile system consisting of numerous links and disruption to one can send cascading effects down the chain. That needs to function properly for the whole system to work and ZIM's holistic approach ensures that.
The COVID-19 pandemic turned out to be an event of such a magnitude to either bring to halt whole industries and supply chains, or severely reduce their efficiency. Due to its complexity and transcontinental nature, container shipping was hit especially hard by the COVID-19 pandemic and many cut back on services.
Since the start of the pandemic, the shipping industry has had to struggle with port closures and congestion, labour shortages, difficulties with capacity utilisation, as well as a lack of new shipping containers. Downturns are always a good time to gain market share for those with good financial underpinnings as - while the weak cut back - the strong get stronger gaining market share that stays with them when things turn up again. ZIM used that problem time as an opportunity to gain market share and that increased share has stayed with them during the ensuing upturn.
Since the pandemic, costs of operating a container fleet have increased but the surge in freight rates has more than covered rising costs. Container ship operators have been reporting record-high operating profit margins since the beginning of the pandemic.
Some of the carriers are using those profits to increase their carrying capacity by buying new containers and ordering new container ships. However, delivery of newly ordered ships is still years away.
This Financial Times article tells the full story; Shipbuilding Shortfall Will Keep Rates High And Dry due to an imbalance between supply and demand. Plus some of that demand is for new ships to replace old vessels that use filthy fuels and thus does not add to supply.
Demand at receiving ends is increasing too confounding recessioneers. They should read the figures on North American train loads:
US trucking is increasing too according to this FTR Transportation Intelligence report on Class 8 truck orders for August.
Excess inventories built up as a buffer during the pandemic are being sold off and new demand for replacements is increasing. Brambles, the Australian logistics company that owns the Chep pallet business, estimates that 80 per cent of the world’s consumer goods touch one of its blue-painted pallets at some point in the journey between production and sale, has raised its outlook three times this year.
China’s exports increased 7.1% YOY last month and that despite Covid lockdowns at home and much of Europe being in or near recession.
De-globalisation could be a threat but offers opportunities too. A different iteration of globalisation is evolving. The last 20 years have been organised around cost and efficiency. That’s being either balanced against or replaced by stability and sustainability with so-called re-shoring. As one example, the Biden administration is offering generous incentives to attract multinationals to build supply chains for chips and other key technologies in the US in order to eliminate dependency on China. Those chips are carried by air so that will be no loss to ZIM’s business which should continue to expand and especially when growth recovers in many of the world’s main economies including China where imports have been low recently.
Mostly de-globalisation is just a current political buzz word anyway. It would cost trillions, take decades and the skills needed to man the factories have gone.
The political leaders maybe poles apart but the Chinese economy is now integrated in the world economy and I do to see that changing any time soon because history maybe repeating itself in strange ways. A former head of General Motors (GM) is reputed to have said that “What is good for GM is good for America”. Today GM sells more cars in China than it does in the US!
...are doing well but some are sailing to different destinations to ZIM's. The largest one - Danish company Maersk - has a totally different concept of integration. ZIM is using technology to surround its containers and customers in an integrated package. Maersk is going to become an even bigger giant by buying onshore storage and other links in the chain from supplier to user. While that sounds logical it will distance Maersk from those supplying customers by again becoming a conglomerate. Despite their claims to be doing the opposite those at the top of a conglomerate become totally remote from customers.
Maersk even made much in recent years about de-conglomerating. The Company's operational structure once comprised eight segments: Maersk Line, APM Terminals, Damco, Svitzer, Maersk Oil, Maersk Drilling, Maersk Supply Service and Maersk Tankers. It thinned down to specialise on container shipping. Now it appears to be becoming a conglomerate in the name of supply chain integration.
It will use its large shipping profits to take global the contract logistics part of LF Logistics, a Hong Kong-based warehousing business it bought in December last year for $3.6 billion as it aims to integrate its supply chain around the world. Its two main rivals — Switzerland’s Mediterranean Shipping Company and France’s CMA CGM — are doing likewise having used some of their bumper profits to push into land-based logistics, aiming to offer big shippers such as retailers and manufacturers the ability to move goods from the factory floor to the end consumer.
Added to that it a $1bn push into air freight last November and a $1.7bn deal this year for a US logistics group. That puts them in direct competition with DHL and Kuehne + Nagel (OTCPK:KHNGF), new age conglomerate Amazon (AMZN) and any number of well established warehousing companies around the world such as Prologis (PLD) and temperature controlled warehouse and inland transport company Americold (COLD). Storage is mostly a nicely profitable sector but it is becoming saturated. Also if they are to meet their ultimate end ambition of moving goods from the factory floor to the end consumer they will need vast fleets a trucks too. It already has light trucks...
While those big boys also have traceability technology in place - that will do some of the things ZIM’s can - it is open loop and I much prefer ZIM’s close closed-loop container control that partners them with their product producing customers.
That will make ZIM an outstanding leader in a growing niche it is creating. A ocean seafarer widening its moat against competitors who are heading for a dry dock...
So far that wide moat has put the stock price at a 52 week low and me deep underwater! It hit a high of $91.23 on March 17 this year and yesterday closed at a year low of $33.07. That low put the dividend up to 81.95%! The PE is also crazy at 0.64.
Given all the good news in between that suggests there is another wide moat; lack of investor knowledge and acceptance of ZIM’s excellent results and potential.
That conclusion is reinforced by the SA Quant Rating on the stock as a Hold, with Profitability having a factor grade of A+ and Growth with a factor grade of F. The average Wall Street Analysts' Rating agrees and labels the stock as Hold, with 5 out of 7 analysts seeing it as Hold.
Quants have no brains. Growth factor of F!! They are merely computers that cannot see the future. Analysts have brains and they are programmed to parrot whatever a well known “expert” says.
I choose to navigate by thinking for myself and that has put my portfolio - including the so far sinking ZIM ship - up 25% YTD. According to MarketWatch the S%P 500 is down 18% YTD!
Freight rates remain high too; ZIM's average freight rate increased from $2341 per TEU in 2Q 2021 to $3596 per TEU in 2Q 2022, up 54%.
ZIM’s profits and cash flow will continue to go up as well, meaning...
The CEO, Eli Glickman, gets 75% of his compensation in stock so he has a deep vested interest in getting ZIM’s stock price higher and preserving that huge cash payout. Selfishly that also means I will not complain about his very high pay!
I see no reason why it should not get back to the high of $91.23 it hit on March 17 this year, sometime in coming months.
When the stock price and PE go up to a sensible level the dividend in percentage terms will come down but the dividend in cash terms will stay the same or go up if ZIM repeats history and gives a year end bonus to shareholders.
Shipping maybe an unloved sector generally but within most unloved sectors there are niche gems. ZIM is one of those.
My advice is to get on board now and get a container load of cash shipped safely delivered into your wealth fund every quarter. That huge cash payout is a dividend hunter's dream come true.
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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.