The recent fall in ocean freight spot rates has not been good news for Zim Integrated Shipping Services (ZIM) or its share price, for that matter. The stock was on a constant downtrend throughout 2022 with the losses accelerating toward the end of the year. To wit, the Israeli container shipping company’s stock has lost 57% of its value over the past 12 months.
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Given its lease structure, J.P. Morgan’s Sam Bland considers the company the “most exposed operator” to the decline in spot rates amongst those under his coverage.
As such, when the company reports 4Q22 earnings around mid-March, Bland reckons EBITDA will have halved sequentially compared to just a 35% drop for Maersk’s Ocean business.
“Despite this,” says the analyst, “consensus appears to have already factored in these risks adequately, and we note that much of ZIM’s transpacific volume is to the East Coast, where rates have held up better than to the West Coast. This, combined with the lag between spot rates and revenue, lead us to be c.12% above consensus EBITDA.”
That said, looking ahead, with its unit costs being roughly 75% above pre-COVID levels vs. just 30% higher at peers, Bland now thinks it is “likely that ZIM will be loss making in 2023 at EBIT.” According to Bland’s understanding, ZIM has already “renegotiated its contracted rates lower,” so insulation from these is “limited.” Considering the duration of high charter costs, Bland estimates the losses will continue into 2024.
While Bland notes that short-term profitability “has been very strong,” the result of which has been current cash generation above expectations, he believes it is now on a “sharply deteriorating trend” and anticipates that over the coming quarters, the company “may become cash flow negative.”
All told, Bland keeps a Neutral rating on the shares, backed by a $17.60 price target. This suggests the stock is currently trading for its fair value. (To watch Bland’s track record, click here)
Looking at the consensus breakdown, with an additional 2 Holds and 1 Sell, the analysts’ view is that this stock is a Hold. (See ZIM stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
