Instead of an investment thesis
ZIM Integrated Shipping Services (NYSE: ZIM) paid a huge dividend on March 22, $17 per share (>19% of the closing price before the ex-date).
On March 21, I wrote the following comment under Nikolaos Sismanis’ ZIM article:
Historically, ZIM goes up like ~20% just days after paying for divs. I am a buyer before the ex-date. Who is with me?
Yes, ZIM has only paid dividends twice as a public company (IPO took place at the end of January 2021), but I did not lie in my comment – after each dividend payment, ZIM shares returned to their previous price value within a few days:
So I bought more ZIM shares on March 21 to get $17 per share (pre-tax) to test how my theory of the price returning to its old level would work. And so far so good:
Due to heavy bullish activity, ZIM stock price closed just $10.73 below the previous close ($77.28 vs. $88.01) – already an excess return of $6.27 per share (7.12% of the March 21 price).
Such a speculative opportunity is, of course, fraught with risk and cannot be made out of the blue. As mentioned in all shipping inventory articles, ZIM and its peers are in a very cyclical business – if the actual supply of ships increases and consumer demand decreases, these inventories will come under fire. For this reason, we often see P/E multiples of 3x, 2x and even 1.5x – this is how much investors are willing to pay for a company that doesn’t guarantee it will always generate its huge free cash flow. current in, say, two years.
Nonetheless, I believe ZIM will be able to repeat the momentum of past dividend payouts and reach the $88-90 per share levels shortly. I have several reasons for this.
First, services from companies like ZIM remain stable and high enough to offer a high probability of sustaining the current high total return (divs plus nominal gain). We can see this by the height of HARPEX, an index that shows current freight costs:
Despite all the fears that freight costs will fall as much as they have risen in recent months, HARPEX’s current value is the highest in 24 months. This can only reflect strong demand for shipping and a limited supply of vessels in the market.
If we compare the dynamics of ocean container shipping rates in 2022 with previous years, we can see a reserve for the current value – in any case, it depends on the time of year, and over the past 2 last years, the costs from April/May to August increased significantly, although they were quite high compared to 2019.
Therefore, I believe that ZIM will be able to maintain the current high utilization rate until 2022, which should please us, common shareholders – the dividend yield will probably not decrease significantly.
SecondI think demand from the US market is still strong and will most likely continue through the end of 2022.
Monthly import growth has slowed due to a high base but remains at the average monthly level of the past 2 years. Meanwhile, import prices rose 10.86% month-on-month and the volume of $314.09 billion hit all records.
The container shipping industry is forced to pass on rising costs to end users and therefore continues to benefit from strong demand as long as Americans are ready to order more and more goods. If inflation rises above current levels, the number of imported products may actually increase – I have talked about this in my previous articles – because the price spike will cause consumers to rush to order a product before its price drops. increases again.
The thirdI like the operating leverage of the business – over the past 2 years net profit growth has exceeded gross profit growth many times over, which also indicates the sustainability of the dividend in the context of a decrease in financial leverage:
Fourthdespite its high dividend yield, ZIM has enough cash continue to develop its businessthus increasing its potential market value.
With the development of the new direction of e-commerce, ZIM is likely to win even more customers – the exclusive right to serve ZXB will become a competitive advantage for the company compared to peers.
Risks and conclusion
The main risks for my thesis “Buy”:
- Possible sale of ZIM shares after generous dividend payout – shareholders may be looking for something better
- A faster decline in container transport costs
- Operational issues and inability to grow with such a large dividend (ZIM’s payout ratio equals 50.16%)
These risks may be justified, but not for me. Given the company’s current valuation levels – although TTM values have little to do with the future – ZIM stock looks undervalued enough to buy after dividends hit my account (April 4).
Based on this, I expect ZIM to gain another 20-30% after the recent dividend payout. Additionally, given that today’s hot market is expected to last until at least the end of 2022 (in my opinion), ZIM’s current valuation looks heavily undervalued with an EV/EBITDA
I continue to own 7,000 ZIM shares (~$545,000 at the time of this writing), which is the largest portion of my investment portfolio. And I see no reason not to reinvest the dividends in the shares of the company.