ZIM Integrated Shocks The Market

ZIM Integrated Shipping Services (NYSE:ZIM) submitted first-quarter earnings on Monday before the market opened which caused the stock price to fall 16% and reach a new 1-year low. ZIM Integrated Shipping Services experienced continual headwinds in the freight pricing arena in the first-quarter as well as broader macroeconomic headwinds that seriously cloud the company’s EBITDA and free cash flow outlook for the current fiscal year. The dividend elimination for Q1’23 due to ZIM’s first-quarter net loss was a bombshell and it will likely weigh on the company’s shares for the foreseeable future!

ZIM: Massive Deteriorating Of Financial Performance

I have warned of a potentially devastating earnings release for ZIM Integrated Shipping Services in my work “ZIM Q1: Brace For Impact”. To summarize quickly: Because of crashing freight rates throughout the first-quarter, I suspected that the shipping company was set for a very weak earnings release which could result in a new round of downward revision of the shipping company’s EPS estimates.

The post-pandemic drop-off in consumer demand has led to a fundamental deterioration of operating and financial metrics for the shipping company. ZIM Integrated Shipping Services saw a decline in shipment volume (as measured by the number of containers shipped) which together with a collapse of freight rates led to a massive decline in revenues and free cash flow. ZIM Integrated Shipping Services’ revenues plunged 63% year over year to $1,374M while free cash flows dropped 90% to just $142M.

It is noteworthy that ZIM Integrated Shipping is not just experiencing pressure regarding freight rates. Weak consumer demand has led to a contraction in the company’s container volume: ZIM shipped 769 thousand container equivalents in the first-quarter, showing a decline of 10%. Demand for consumer goods chiefly determines the level of global shipping volumes and with decline falling, shipping companies like ZIM Integrated Shipping Services are facing a very uncertain future right now.

ZIM Integrated Shipping Services’ adjusted EBITDA, a key measure for the capital-intensive shipping industry, declined 85% year over year to $373M, suggesting that the company’s overall guidance for FY 2023 adjusted EBITDA might be at risk. Although the shipping company (for now) confirmed its outlook for FY 2023 adjusted EBITDA of $1.8-2.2B, I believe the risks to the guidance have further increased after the company reported earnings for the first-quarter.

All eyes on the balance sheet and cash drain

ZIM Integrated Shipping Services’ balance sheet is a key asset for the company until recently, largely because it posted a net cash position. In Q1’22, the shipping company had a net cash position of $279M which changed to a net debt position of $381M in Q1’23. The decline in cash is due to the company experiencing a large drop in free cash flow, so that ZIM Integrated Shipping had to draw down its cash balance. There is nothing wrong with this, of course, but it goes to show that investors better pay more attention to the company’s balance sheet going forward.

EPS down-side revisions

I expect analysts to adjust their EPS estimates for ZIM Integrated Shipping Services to the downside following the company’s disappointing first-quarter earnings release. As said in my previous work on the shipping company, EPS estimates for FY 2023, FY 2024 and FY 2025 are now negative and I expect analysts to further down-grade the firm’s estimates after Q1’23.

No dividend for Q1’23

Due to the company’s first-quarter net loss and variable dividend policy (ZIM pays 30-50% of its net income to shareholders), the company will not pay a dividend for Q1’23. ZIM Integrated Shipping Services’ generous dividend payout has attracted a lot of investors to the company’s shares. As is often the case with companies whose shares have exorbitant dividend yields, they are often not sustainable. Investors that bought ZIM chiefly for its dividend are now facing the very real prospect of not receiving any dividends in the short term. Uncertainty about the resumption of dividend payments is likely to also weigh heavily on ZIM Integrated Shipping Services’ shares in the near term.

Risks with ZIM Integrated Shipping Services

The business environment for ZIM Integrated Shipping Services has significantly deteriorated in the first-quarter and the broad decline in all key metrics such as revenues, adjusted EBITDA and free cash flow indicates that the business is experiencing major headwinds. I believe further EPS estimate down-grades are now the biggest near term risk factor for ZIM.

Final thoughts

ZIM Integrated Shipping Services submitted a very weak earnings card for the first-quarter, and I believe that the firm’s shares are set for new lows as the company is not paying a dividend for Q1’23. ZIM Integrated Shipping Services’ decline in free cash flow is especially concerning to me, as is the decline in average freight rates and container volumes, but the writing was already on the wall for the shipping company. I believe investors have very few reasons to buy the shipping company right now and a new round of EPS downward revisions could further pressure the company’s valuation factor. For those reasons, I would expect ZIM Integrated Shipping Services to go into a new down-leg as well as make new lows!