In the past month, ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) stock price increased by 20% as container shipping freight rates stopped decreasing as sharply as before. Freight rates are now below their pre-pandemic levels, and according to the not-strong demand for container trading and the increasing net fleet capacity, I don’t expect freight rates to increase in the following months; however, I expect them to remain relatively stable. Furthermore, it is important to know that ZIM has chartered more than 94% of its capacity, and container charter rates plunged in the past six months. At the current freight rates and charter rates, ZIM can remain profitable. However, I don’t expect the company’s 4Q 2022 (expected March 13) and 1Q 2023 financial results to be as strong as in the previous quarters. ZIM stock is a hold.
The market outlook
The Drewry World Container Index (WCI) decreased by 2% to $1.955 per 40ft container in the week ending 16 February 2023. Figure 1 shows that Drewry WCI is about 80% down, compared to the same week last year. However, it can be seen that in the past few weeks, the Index has decreased at significantly lower rates compared to the weekly sharp decreases in the second half of 2022. “The average composite index for the year-to-date is $2,054 per 40ft container, which is $638 lower than the 10-year average,” Drewry stated.
Figure 2 shows that year-over-year, freight rates from Shanghai Rotterdam, Los Angeles, Genoa, and New York are now down 88%, 81%, 80%, and 77%, respectively. However, it is important to know that in the past few weeks, freight rates from Shanghai to other major cities have been relatively stable. For example, in the past week, the freight rate for 40ft containers from Shanghai to Rotterdam and Los Angeles decreased just by 1%, which is not comparable to the route’s freight rates sharp weekly decreases in September 2022.
Figure 1 – Drewry World Container Index
Figure 2 – Container freight rates for trade routes from Shanghai
Due to the economic recession around the world and trade disruptions caused by the war in Ukraine, the demand outlook for container shipping is not strong. Also, fleet growth is sharply rising. MSI forecasts fleet growth of 7% in 2023 and 2024. Also, it projects fleet growth to be higher than the average in 2025. Figure 3 shows the container shipping net capacity growth and container transport volume growth rates. It can be seen that container transport volume growth in 2023 is expected to be higher than in 2022; however, significantly lower than in 2021. Also, as global container port congestions decreased in the past months and are expected to decrease further during 2023 (because of lower global cargo demand and the ending of lockdowns in China), net capacity growth of container shipping in 2023 is by 360 bps more than in 2021 and 2022 (see Figure 3). Thus, in the best-case scenario for container shipping companies, I expect container freight rates to remain relatively stable in the first half of 2023. However, I don’t expect container freight rates to increase as I don’t expect trade volumes to rise soon.
Figure 3 – Net capacity growth of container shipping and container transport volume growth
ZIM performance outlook
The effects of the COVID-19 pandemic on the supply side of container shipping were about to be recovered when the Russia-Ukraine war started and again put obstacles in the shipping industry. Due to the war, several ports shut down, which led to increases in ocean shipping costs. Thus, worsening the global supply chain condition. These incidents affected ZIM Integrated Shipping’s financial statements.
ZIM’s cash balance declined by 31% from $4820 million in 1Q 2022 to $3306 million in 2Q 2022. Notwithstanding a slight drop in ZIM’s cash generation in 3Q 2022, its amount was higher year-over-year compared with the level of $2800 million at the same time in 2021. Also, the company’s net debt level increased considerably to $1245 million and $1527 million in the second and third quarters of 2022, respectively. Meanwhile, the company’s total equity increased well since the second quarter of 2022 and ultimately sat at $5817 million in 2Q 2022. When all was said and done, the ZIM Integrated net debt level is well beneath its equity amount and thus brings an opportunity to successfully pay off its obligations and keep its shareholders’ distributions (see Figure 4).
Figure 4 – ZIM’s capital structure (in millions)
The company’s operating cash flow declined by 17% from $2004.6 million at the end of 2021 to $1660 million in the first quarter of 2022. After slight fluctuations, it ultimately sat at $1671.6 million in 2Q 2022. Meanwhile, ZIM’s capital expenditures dropped from $182.5 million in the first quarter to $80.6 million and $54.6 million in 2Q 2022 and 3Q 2022, respectively. Ultimately, the company could generate a high amount of free cash flow of $1617 million at the end of the third quarter of 2022, which cater to a scope of capability for ZIM Integrated Shipping for more reliable distributions in the future (see Figure 5).
Figure 5 – ZIM’s cash structure (in millions)
Also, I provided some leverage ratios as well as cash and capital structures to illustrate the credit ratings of ZIM Integrated Shipping. One key way for investors to keep an eye on each company’s performance outlook is by considering their debt levels. High debt levels may lead to a lower ability to purchase new equipment or meet other obligations. Thus, I catered to some specific leverage ratios to assess the financial health of a shipping company.
Figure 6 shows ZIM’s debt-to-EBITDA ratio during the recent quarters. This ratio determines the probability of defaulting on issued debt, and thus, this ratio could be of help to determine how many years of EBITDA would be necessary for ZIM Integrated to be able to pay back its debt. It is observable that the company’s debt-to-EBITDA was on an increasing path during the preceding year. Albeit the EBITDA amount was almost constant, a boost in debt levels led to increases in debt-to-EBITDA amount. ZIM’s debt-to-EBITDA was 2.44 in 3Q 2022, which was 12% higher than 2Q 2022 and 80% higher year-over-year compared with its level of 1.35 in 3Q 2021.
Figure 6 – ZIM’s debt-to-EBITDA ratio
Moreover, Figure 7 is a picture of the company’s debt-to-equity or risk ratio. The debt-to-equity ratio is a leverage ratio that measures the weight of total debt and financial liabilities compared with total shareholders’ equity. Generally, this ratio determines whether a company’s capital structure is toward debt or equity financing. As it is indicatable, after a boost in the risk ratio of 0.72 at the end of 2021 to 1.01 at the end of 1Q 2022, its amount decreased back and sat at 0.81 in 3Q 2022. This was because the company’s total equity jumped by 36% from $4260 million in the first quarter of 2022 to $5817.3 million in 3Q 2022. Also, the company’s level of risk ratio decreased by 7% year-over-year compared with its amount of 0.88 in the third quarter of 2021.
Figure 7 – ZIM’s risk ratio
The container shipping market outlook is not as strong as before. Freight rates slashed in the second half of 2022. However, I expect the rates to remain relatively stable in the following months. Also, ZIM Integrated Shipping Services Ltd. has chartered more than 94% of its shipping capacity, and as charter rates are now significantly lower than six months ago, ZIM can remain profitable at the current freight rates. Moreover, ZIM improved its capital and cash structures in the past few quarters and is financially healthy. ZIM Integrated Shipping Services Ltd. stock is a hold.