ZIM down 51% from peak despite bumper profits

In March this year, a year and two months after its flotation in New York at a valuation of $1.7 billion, Israeli shipping company ZIM Integrated Shipping Services Ltd. (NYSE: ZIM) reached a market cap of over $10 billion. Since then, the company’s share price has fallen by more than half, and its market cap is currently $4.1 billion, 370% above the flotation valuation but 51% down from the peak (return adjusted for dividends).

ZIM’s share price shot up shortly after the release of its financials for 2021, a year in which the boom in sea cargo boosted its net profit to nine times the previous year’s, at $4.64 billion, as its average cargo tariff rose 227%.

At the time, ZIM estimated that its revenue for 2022 would be similar, and that annual EBITDA would grow from $6.6 billion in 2021 to $7.1-7.5 billion. The EBITDA guidance was later raised to $7.8-8.2 billion.

The results that ZIM has reported for the last four quarters, from the third quarter of 2021 to the second quarter of this year, are nothing less than astonishing: EBITDA of $9.1 billion and a cumulative net profit of $6.2 billion.

For the second quarter of this year, the results of which were released recently, ZIM posted a net profit of $1.3 billion, 50% higher than in the corresponding quarter of 2021, but 24% lower than in the first quarter of 2022. For the first time, ZIM missed the analysts’ consensus earnings estimate rather than beating it handily. Since the second quarter financials were released on August 17, the company’s share price has fallen by 25%.

Dividend raised

Talking to “Globes” after the results were published, ZIM CEO Eli Glickman commented on the fall in the share price. He dubbed the profit for the quarter “phenomenal”, and added “the investors have got used to doing well; they expected that we’d earn more in the quarter.”

Since its New York listing, ZIM has distributed dividends totaling $3.5 billion, double the valuation at which it was floated, and it recently announced that it was raising its dividend policy to 30% of net quarterly profits from 20%. ZIM’s largest shareholder, which did not participate in that offer for sale, is Idan Ofer’s Kenon Holdings, with a 26% stake.

At the end of June this year, ZIM had $3.9 billion in cash and cash equivalents, of which about $1 billion was cash, and since its flotation it has carried out several large investments, among them a number of ship leasing deals.

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Last week, ZIM announced a long-term agreement estimated to be worth over $1 billion with energy company Shell for the supply of ten container ships fueled by LNG (liquefied natural gas) for the cargo service from China and South Korea to the East Coast of the US and the Caribbean region.

Despite the impressive results, which have made ZIM Israel’s most profitable company over the past year, only one of the analysts covering the stock gives it a positive rating, according to “The Wall Street Journal” data. Five are neutral and one is negative. Just three months ago, most of the ratings were positive. It appears that the prevailing view is that ZIM will find it harder and harder to present quarterly growth in its financial results, against the background of changes in the macro-economic environment, and in the shipping industry in particular.

Chen Herzog, chief economist at BDO Consulting Israel, points out that shipping tariffs have fallen substantially in the past few months, although they are still relatively high. “When the Covid-19 pandemic started in 2020, there was a phenomenal rise in shipping prices,” he says. “There’s sea freight and air freight, and at the start of the pandemic all the airports were shut, and air freight almost came to halt, especially freight carried on passenger flights.

“Meanwhile, there was disruption at the seaports, and the result was shipping bottlenecks all over the world, which led to a sharp rise in sea freight prices.

“The cost of shipping by container, which was $2,000, reached a peak of $11,000 six months ago. The trend accelerated as the world emerged from the pandemic and demand grew. The global shortage of freight capacity filtered through into inflation, because a rise in shipping costs affects the cost of imports, and that is passed on to the consumer.”

What happened in the past few months?

Herzog: “In the past six months, supply has risen in the shipping industry and more lines have become operational, while the restrictions that affected air freight were removed. At the same time, the policy of higher interest rates and a slowdown in global economic growth led to a decline in demand.

“The combination of all these things led to a decline in shipping prices. They’re still much higher than they were before the Covid-19 pandemic, but from $11,000 for a container prices have now fallen to around $5,000, that is, they are more than 50% below the peak.”

Before the pandemic, were prices stable?

“There are always fluctuations in the shipping industry, because the process of building more ships and expanding shipping lines to meet demand is not instant. There was a similar crisis in shipping in 2003-2004. Then too, a boom period turned into a slump. It’s part of the business environment. The Covid-19 pandemic led to disruption and to a price rise the like of which had never been seen before, and now we’re seeing a moderation.”

Herzog says that this is encouraging news for consumers, since the fall in shipping prices eases inflationary pressures. “In the end, it affects the consumer’s pocket,” he says. “There is also an improvement in supply times. There are things that just couldn’t be shipped before. It’s a more balance structure in the industry.”

What does this mean for shipping companies?

“Even after the decline, shipping prices are still higher than what we knew in the past, and I think that in the end demand for shipping will continue to rise – the economy continues to grow. I don’t think there’s a warning sign to the industry here. At $11,000 for a container, it was clear to everyone that this was an exceptional price level that would not be permanent, and I’m sure that the companies planned accordingly.”

You say that demand for shipping continues to rise. On the other hand, there’s talk of slowdown and recession in the leading economies. Shouldn’t that have an effect?

“The talk is of a slowdown in the rate of global growth, but not of a decline in demand. You have to remember that sea freight, globalization and international trade are intrinsic to the modern economy. The population is growing, the global economy is growing, and even when we speak of a slowdown it’s short term. I don’t think that there’s any cause for concern about growth in cargo in the long term.”

Published by Globes, Israel business news – en.globes.co.il – on September 6, 2022.

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