Investment thesis – Exemplary dividends ahead despite a drastic correction
ZIM Integrated Shipping Services Ltd. (NYSE: ZIM) radically updated its dividend policy in FQ2’22, as can be read here. In short, the first three quarters of dividend distributions be capped at approximately 30% of the company’s quarterly net income. Here’s the smacker – the cumulative annual dividend payout can reflect up to 50% of its annual net earnings, in effect triggering a loaded payout in the fourth quarter.
We made a detailed calculation based on these changes and came to an important achievement. Even though its forward payouts will obviously be lower than the previously unsustainable $17 dividend payout for the fourth quarter of 2021, these revised numbers still reflect a more than impressive dividend yield ahead. Here we are:
ZIM Projected Dividend Distribution
With $2.85 paid at FQ1’22 and $4.75 at FQ2’22, we are looking at conservative quarterly payments of $2.47 and returns of 43.5% for FQ3’22 and FQ4’22, on the basis of the 30% lower estimate of its projected net revenue of $5.03 billion for FY2022. However, if we were to refer to its previous 50% loaded payout at FQ4’21 and update going forward, ZIM investors could potentially see up to $20.88 paid out for the full year. This would trigger a very nice $10.81 in dividend payouts by FQ4’22. Impressive indeed, given dividend yields of 72.5% then.
In the meantime, for the projected net income of $1.61 billion for fiscal year 2023, we will naturally see a much lower dividend payout of $1.01 for the first three quarters with up to 3.69 $ by FQ4’23. This indicates an excellent dividend yield of 23.3% then. For FY2024, we could see $0.45 every quarter with up to $1.63 for FQ4’24, then triggering a decent return of 10.34%.
While ZIM’s declining dividend yields may seem disheartening, we must also point out that no company would be able to sustain these high payouts once freight rates drop. Furthermore, even the conservative dividend yield of 6.21% for FY2024 (based on a 30% payout) is comparatively better than its peers, averaging 3.3% up to 2024. now. Hence, signifying the massive stock returns over the next few years. Investors, don’t miss this goldmine during a time of economic uncertainty like now.
To note: These calculations are based on ZIM’s 120.44 million diluted shares outstanding in the second quarter of 2022, its stock price of $28.80 at the time of writing, and consensus estimates of its projected net earnings through ‘in fiscal year 2024. Therefore, depending on the fluctuation of freight rates, actual earnings, number of shares and different applications of company policy in the future, these projected figures may differ from the results. real.
ZIM is still on a winning streak despite macro headwinds
In the second quarter of 2022, ZIM recorded revenues of $3.42 billion and gross margins of 63.2%, representing excellent increases of 43.69% and 4.7 percentage points year-on-year, respectively . This directly contributed to its growth in profitability, with net revenues of $1.33 billion and net profit margins of 38.9% last quarter. This indicates a considerable increase of 51.13% and 1.7 percentage points year-on-year, respectively.
Volumes transported ZIM / Charter rate
These exemplary growths were primarily attributed to record freight rates so far, with ZIM earning $3.59,000/TEU in the second quarter of 2022. This represented a considerable increase of 53.6% YoY or 335, 76% from FQ2’20 levels. With the company claiming another record number for H2’22 contract rates, double the 2021 rate of $2.78K, we expect to see more exemplary earnings for the next two quarters, if not until ‘at S1’23.
High rates have also directly improved ZIM’s free cash flow (“FCF”) generation so far, with $1.62 billion and a 47.5% FCF margin reported in the second quarter of 2022. It indicated a monumental increase of 92.85% and 11.9 percentage points year-over-year, respectively. It’s no wonder the company increased its dividend payout to about 30% of net quarterly income in the last quarter, from 20% previously.
For now, ZIM also appears well positioned for future growth and expansion, with excellent cash and cash equivalents of $946.8 million on its balance sheet. This is on top of management’s skillful deleveraging from FQ4’20 levels of $519.47M to $164.8M in FQ2’22 and massive growth in PPE net assets from $1.53B to 5.76 G$ at the same time. Stellar indeed.
Mr. Market could potentially improve ZIM’s FY2023 numbers by 10%
Over the next three years, ZIM is expected to see a drastic normalization in revenue and net income as freight rates are expected to drop from Q1 23. Nonetheless, it’s critical to note that these numbers still represent excellent adj. Revenue CAGR of 19.06% and net income CAGR of 108.78%, respectively, between FY2019 and FY2024. Excellent indeed, given the massive improvement in its net profit margins of – 0.6% in FY2019 to 43.3% in FY21, eventually settling at a comfortable 9.14% by FY24, relative to others giants such as AP Møller – Mærsk A/S ( OTCPK: AMKBY) at 6.3% and Evergreen Marine Corporation (Taiwan) Ltd at 17.1% by FY2024.
There is a good chance that these high freight rates will also hold until FQ1’23 or even until H1’23, given China’s insistence on the Zero Covid policy, congested ports at the global scale and sustained high demand relative to incoming supply. These would point to an aggressive 20% uptick from current levels, albeit conservatively, more likely 10% to $10.15 billion in fiscal 2023 revenue.
In the meantime, consensus estimates that ZIM will report revenue of $13.21 billion and net revenue of $5.03 billion in fiscal 2022, representing an impressive increase of 23.22% and 8.4% YoY, respectively, despite the tougher year-over-year comparison. We will see, even if current trends seem cautiously optimistic.
As noted above, we also expect excellent dividend payouts ahead, due to stable charter rates and 3% volume growth through Q4’22. Thus, ZIM stock valuations could rise, despite the deteriorating macro economy and the Fed’s aggressive efforts to raise interest rates through 2023.
In the meantime, we encourage you to read our previous article on ZIM which would help you better understand its market position and opportunities.
- ZIM Integrated Shipping: charting new growth and new territories – but don’t add
So is ZIM Stock a buySell or Keep?
ZIM 2Y EV/Revenue and P/E Valuations
ZIM is currently trading at an EV/NTM Revenue of 0.42x and a P/E NTM of 1.05x, below its 5-year average of 0.68x and 2.11x, respectively. The stock is also trading at $28.80, down -68.43% from its 52-week high at $91.23, closing in on its 52-week low at $28.33. Nonetheless, consensus estimates remain bullish on ZIM’s prospects, given their price target of $55.00 and a 90.97% upside from current prices.
ZIM 2Y stock price
We believe that current levels offer investors an extremely attractive risk/reward ratio, given the potentially rich dividend payout of $10.81 by FQ4’22. As the Fed prepares to raise interest rates by 75 basis points on September 21 (otherwise speculation 18% chance of a 100 basis point hike), we expect the stock market as a whole to continue falling over the next few days. The S&P 500 index had already plunged -19.61% in the first nine months of 2022, indicating a period of maximum pain for highly opportunistic investors.
Accordingly, we encourage those with a higher tolerance for risk and volatility to add to current levels, due to the massive returns ahead. Otherwise, bottom-fishing investors could potentially be waiting around $20 for a jaw-dropping dividend yield of 83.52%.
Yes, yes, load the boat!