ZIM: US importers buckle, sign contracts early, pay 50% more
March 24, 2021
(American Shipper) Liner operator ZIM (NYSE: ZIM) just offered a fresh glimpse at annual ocean contract negotiations — and the picture isn’t pretty for shippers.
The good news for ZIM and the bad news for shippers is that contract rates are way up and shippers appear very nervous about getting space, prompting them to capitulate early.
But it isn’t all smooth sailing for newly listed ZIM.
It faces significant cost pressures from ship-charter rates in the months ahead. More immediately, it faces pushback from shareholders on its decision to opt for an annual versus quarterly dividend.
ZIM’s call early on Monday morning did not go over well with investors. At one point in midday trading, shares were down 15% versus Friday’s close. It ended the day down 5% in more than double average trading volume.
Annual contract rates jump
“Long-term contracts are being signed much earlier than in previous years,” confirmed ZIM CEO Eli Glickman on the call. “As of today, we have signed five times as many contracts compared to the same period last year.” ZIM does not intend to decrease its percentage of spot-market exposure, implying that its slots for contract customers will sell out more quickly than in 2020.
Recently negotiated contract rates are around 50% higher than rates negotiated last year, Glickman disclosed. Jefferies analyst Randy Giveans wrote in a client note that ZIM expects contract rates to move even higher in the coming weeks.
ZIM appears more bullish on the duration of the U.S. import boom than some other liner executives. “We expect import levels for the entire year of 2021 to remain elevated simply to restock retail inventory to the same levels as prior to the pandemic,” said Glickman.
Xavier Destriau, the company’s CFO, maintained the volume strength will persist beyond the initial pandemic disruptions. “The larger question is what is the expectation for the new normal for the industry,” said Destriau. “We think COVID-19 has been an accelerator of the e-commerce trend. We think consumer behavior will remain very strong toward e-commerce. And we don’t expect any collapse [in consumer demand].”
Guiding for stronger 2021
ZIM reported net income of $366.4 million for Q4 2020 compared to $1.2 million in Q4 2019.
For full-year 2020, the carrier posted $1.036 billion in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). Its just-released 2021 guidance calls for adjusted EBITDA of $1.4 billion-$1.6 billion, a year-on-year gain of 35%-54%.
On Monday, Giveans raised his one-year target price for ZIM’s stock from $30 per share to $35 per share. Omar Nokta, analyst at Clarksons Platou Securities, went even further, hiking his target from $30 per share to $38 per share.
ZIM’s volumes rose 1% in full-year 2020, to 2.84 million twenty-foot equivalent units (TEUs). Its rates rose 22%, to $1,229 per TEU. According to Giveans, ZIM expects volumes to grow 20% this year and freight rates to increase 15%.
On the negative side, charter rates are also surging, which will offset some of the carrier’s upside from freight rates. Unlike its peers, which own around half their ships, ZIM charters virtually its entire fleet.
Challenges in the charter market
Among the expensive charters reported in recent weeks by Alphaliner: ZIM chartered the 2014-built, 5,071-TEU Sea Dream for three years at $35,500 per day; the 2004-built, 4,311-TEU Deva for two years at $30,750 per day; and the 2013-built, 6,811-TEU Kea for three years at $38,500 per day.
Meanwhile, ZIM faces a chartering challenge on its pivotal Asia-East Coast route. It has long-term charters for newbuild tonnage for this service from Seaspan, a division of Atlas Corp. (NYSE: ATCO). But those ships don’t start delivering until February 2023.
ZIM has been using four 2016- and 2017-built, 11,010-TEU ships it charters from Costamare (NYSE: CMRE) to handle Asia-East Coast volumes: the Cape Akritas, Cape Tainaro, Cape Kortia and Cape Sounio. ZIM had been paying $34,750-$38,000 per day for durations of 1-1.5 years.
Last month, Costamare revealed that MSC had taken all four ships on 10-year charters at $33,000 per day. The quartet is being redelivered by ZIM from this month through October.
“It is unclear how ZIM will be able to replace these ships on its network if the current short supply of large tonnage persists in the next few months,” commented Alphaliner when the news broke.
If replacement options in this size category are even available, the price could be steep. With that in mind, American Shipper asked Giveans about the relative bottom-line importance of rising charter costs compared to rising freight rates.
Giveans responded, “Higher freight rates are more than offsetting higher charter rates. While all the costs are going up, the freight rates are going up by more.
“There is a high earnings sensitivity to rates. If your revenues are going up 10%, 20%, 50%, depending on rates and volumes, the cost increase is not commensurate with the revenue impact.”
Stock price sinks after call
Stocks don’t usually sink after a public company reveals a potential year-on-year EBITDA rise topping 50%. But ZIM’s stock did.
Asked why, Giveans cited two primary drivers. The first was the announcement of an annual — not quarterly — dividend. Destriau said on the conference call that the decision was made because “we are in an industry that is volatile and there are parameters we do not control.”
Giveans explained, “So, we have to wait a year [for dividends]. That takes out a lot of the people trading in and out, collecting the dividend.”
The second reason the stock sank, he said, was lack of quarterly guidance. “The [annual] EBITDA guidance was strong but they didn’t give anything on the first quarter. The first quarter is nine days from being over. The revenues are in the books, so it’s surprising they didn’t give more guidance.”
Giveans estimated that Monday’s pullback was 80% due to the dividend decision and 20% due to guidance shortcomings.
ZIM stock’s roller-coaster ride
Monday’s price action was just the latest twist for ZIM’s equity. It went public on Jan. 28, pricing at $15 per share, below its target range of $16-19. Within hours of its listing in New York, it sank to a low of $11.38, 24% below its IPO price.
Then it bounced back and kept rising. It hit a high of $28.78 per share on Friday, nearly double its IPO price.
Giveans told American Shipper, “The sell-off immediately after the IPO was just market capitulation. They had a lot of hedge funds needing to exit a lot of positions because the IPO was priced on the day of the whole GameStop-Reddit fiasco. It was a very messy day or two with a lot of margin calls. You had a lot of unnatural holders who got allocated [IPO shares] and sold out immediately.
“Also, a lot of people participate in IPOs hoping to get the 20%-30% pop on the first day. They have stop losses, so as soon as it falls 5%, 10%, 15%, they sell out.
“What happened after that was you saw a much stronger-than-expected Chinese New Year. Rates did not collapse as people had feared. They’re still within 10% of all-time highs.
“The trading liquidity of the company has gone up dramatically. The market cap has risen to close to $3 billion. That makes it a big fish relative to other U.S.-listed shipping names. And when you look at its valuation compared to peers, it was cheap. So, it converged in terms of valuation with its peers.”
On the outlook for ZIM in 2021, Giveans said, “The first quarter is obviously going to be robust, better than the fourth quarter. I think it’s a given that the second quarter is going to be stronger than people expect. A few months ago, people feared the second quarter was going to stink. That is not the case. Rates are still very good.
“When ZIM releases its first-quarter earnings, we expect it to give a revised full-year guidance — we think it will be higher — and to show a Q1 balance sheet that’s much better than Q4’s.
“As for the rest of the year, do we expect rates to go down? Yes. But do we expect them to fall below $1,500 [per TEU]? No, we don’t. And we think an average of around $1,500 a day for the full year is conservative.”
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