ZIM Integrated: Why A Rich Special Dividend May Be In The Cards For 2024 (NYSE:ZIM) (2024)

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.

Cavenagh Research