Date: Monday, May 24th, 2021
Spot ocean freight rates, already at epic levels, are still rising. As shipping companies move to take advantage of this historic bounty, strategies are diverging. Some are looking long term. Israel-based ZIM (NYSE: ZIM), which released blockbuster quarterly results on Wednesday, is pouncing on short-term gains.
Liner giant Maersk used the rate spike to increase long-term contract coverage by 20%, including multiyear contracts of up to three years. Maersk CEO Soren Skou emphasized that his company’s focus “has not been to maximize short-term income.”
Not so for ZIM. It kept contract coverage the same as in 2020, at 50% of trans-Pacific capacity, and shunned contracts lasting over a year.
“We had customers that were willing to agree to longer-term commitments [in exchange for] lower rates,” said ZIM CFO Xavier Destriau on Wednesday’s conference call. “We were not so keen on [that]. We are quite pleased to limit contracts to 12 months as we are still optimistic on the U.S. market.”
In the container-ship leasing sector, Danaos Corporation (NYSE: DAC) is using higher income to amass a war chest for future vessel acquisitions and not handing back windfall cash to shareholders at the top of the cycle. It instituted a 50-cent-per-share quarterly dividend that does not automatically rise with earnings, and its CEO, John Coustas, emphasized, “There is no special dividend” (referring to a one-off payout).
Not so for ZIM. In addition to an annual dividend that will begin being paid in 2022, at 30%-50% of net income, ZIM announced Wednesday that it will pay a special $2-per-share dividend — totaling approximately $238 million — on Sept. 15 to all those who own shares as of Aug. 25.
Outlook for US imports
ZIM is more exposed to upside from the U.S. consumer boom than any other liner because it has the largest share of total capacity — 45% — dedicated to the trans-Pacific. Thus, a positive outlook for ZIM is a negative outlook for the freight costs of U.S. importers of containerized cargoes.
The unfortunate news for cargo shippers is that ZIM’s short-term outlook is phenomenal. Its previous guidance for full-year 2021 was for adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.4 billion-$1.6 billion. On Wednesday, it raised EBITDA guidance to $2.5 billion-$2.8 billion, a 77% increase of the range midpoint.
Analysts believe that’s conservative. Jefferies analyst Randy Giveans hiked his full-year EBITDA estimate for ZIM to $3 billion. Clarksons Platou Securities analyst Omar Nokta, who dubbed the company “the gift that keeps on giving,” raised his to $2.87 billion.
“With the equipment shortages and port congestion, we see freight rates elevated through 2021,” said Destriau. “We expect import growth to remain elevated for the entirety of 2021.
“This is a very good situation to be in,” he said. “If we look at the SCFI [Shanghai Containerized Freight Index], it is going up. We had initially thought it would start to gradually decline but we are seeing the opposite.
“Time will tell, but we have clear visibility into Q2 obviously, and good visibility into Q3. Q4 is still a little bit blurry but we see very strong and resilient market conditions. We think 2021 is going to be extremely good, and we think that in 2022 the stars will continue to be aligned.”
“This is a truly momentous time in ZIM’s 75-year history,” said the company’s CEO, Eli Glickman.
ZIM reported net income of $589.6 million for Q1 2021 compared to a loss of $11.9 million for Q1 2020. Earnings per share of $5.35 came in well ahead of the consensus forecast of $4.70. The company earned more in the first quarter than it did in all of last year.
ZIM is a global operator, but at the same time, it’s a niche player, focusing its tonnage on higher-paying customers in trades like the trans-Pacific and intra-Asia. “Prioritizing a better-paying cargo mix has allowed us to earn a premium compared to the average of the market,” said Destriau.
Higher-than-average rate gains are being multiplied by higher-than-average fleet growth. Unlike other carriers that split fleets between owned and chartered tonnage, ZIM’s fleet is virtually all chartered. It went from a low of 59 vessels a year ago to 110 today. (In comparison, Maersk has a fleet of 705; 305 owned, 400 chartered).
ZIM carried 818,000 twenty-foot equivalent units (TEUs) in Q1, up 28% year on year. In comparison, Maersk’s first-quarter volumes rose 5.7% and Hapag-Lloyd’s fell 2.6%.
ZIM’s average Q1 freight rate was $1,925 per TEU, up 76% year on year. Maersk’s was $1,331 per TEU, up 35%. Hapag-Lloyd’s was $1,509 per TEU, up 38%. Destriau also reported that annual trans-Pacific contract rates signed this year were up just over 50% from last year’s rates.
Share price soaring
ZIM’s shares have skyrocketed since its IPO on Jan. 28, which was priced at $15 per share. In the hours after its debut, shares sank to a low of $11.38. Since that nadir, they have quadrupled in value. On Wednesday, a down day for the overall market, it closed up 9%, at $45.45 per share.
Giveans raised his 52-week target for the stock to $55 per share on Wednesday, from $43 previously. Nokta hiked his target to $58, from $48. Both had initiated coverage of the company on Feb. 22 at $30 per share, a price that was quickly surpassed.
One of the sentiment overhangs on the stock is the significant ownership held by legacy holders that obtained shares in earlier restructurings. These include Deutsche Bank, with 15.7 million shares worth $715 million as of the market close on Wednesday, and Danaos, with 10.2 million shares worth $463 million.
The concern is that when lockup agreements expire in July, those shares will be sold, creating downward pressure. Coustas of Danaos stated that his company’s ZIM shares will be divested. “We are looking to monetize our nonoperating assets,” he said. “The ZIM shares, at some stage, will form part of our war chest.”
But the special dividend announcement guarantees that none of these shares will be sold before Aug. 26, and the future dividend potential might put off selling for even longer. According to Giveans, “With the pre-IPO lockup ending in July, we believe the special dividend and the upcoming larger annual dividend will help keep legacy shareholders in the name.”