When I dealt with ZIM Integrated Shipping Services (NYSE:ZIM) stock a month ago it was trading at $10.24. Today, the Israeli company’s shares trade at $19.18. The stock has risen 88% in the past month as sentiment improved and analysts noted a strong tailwind in the container shipping sector. At the current price, I am neutral on ZIM because there is a chance that the ZIM ship has sailed. Despite the positive transformation the company appears to be undergoing, I just need more data to justify the rising share price.
Sector wind helps ZIM
Analysts remain bullish on the container shipping sector and recent notes from brokers have contributed to the improving sentiment around ZIM. These institutions have pointed to increased shipping from Chinese ports – the world’s largest exporter of container goods – and rising freight rates, partly due to attacks on maritime trade.
By early May, the Shanghai Container Freight Index (SCFI), which tracks shipping costs from major Chinese ports, was up 31% since mid-December and up 72%, the highest level of the year so far. Meanwhile, Jefferies analysts, led by Omar Nokta, noted that “freight rates have surged after a brief lull on major trade routes, with this momentum spilling over to secondary routes.”
With Houthi attacks on ships transiting the Bab-el-Mandeb Strait, coupled with low water levels on the Panama Canal, analysts have also highlighted that route diversions are eating up spare capacity. According to Jefferies, 90% of normal Red Sea freight is routed around South Africa.
Jefferies also suggested that the seasonal rebound in demand occurred earlier than normal. The brokerage noted that the peak season normally covers the months of June to September and suggested that early competition for capacity indicated that freight rates were likely to remain elevated throughout the second quarter.
ZIM’s Red Sea Escort
ZIM also notes that these disruptions have a positive impact on the rates achieved. In the fourth quarter report, management emphasized that the effects were not yet visible in the reported quarter, but were in the direction of higher freight rates in the first and second quarters.
“In November 2023, we expected rates to remain flat through 2024 amid a supply-demand imbalance. Today, the SCFI is well over 80% higher as the longer voyages around the Cape have absorbed an estimated 6% to 7% of global capacity, creating a more even balance between supply and demand.”
ZIM, echoing Jefferies’ comments, said these diversions had sucked up some of the oversupply in the market and pushed up rates on certain trade routes. It also added that restrictions on the passage of ships through the Panama Canal had increased pressure.
Across the industry, from container shipping to tankers, companies have been cautious in issuing guidance regarding these high shipping prices. After all, even the best geopolitical advisors can get their predictions wrong, and we’ve certainly seen that in recent years. However, five months into 2024, ships are still being diverted and freight rates are high.
ZIM’s transition to success
No analysis of ZIM is complete without a dive into the company’s transition. The company wants to replace its old fleet with a younger, more economical one that is better suited to its routes. The transition includes the delivery of 46 new ships under long-term charter agreements, of which 28 are LNG. On the Q4 call on March 13, management said 24 had been delivered and 22 more would be delivered over the remainder of 2024.
“Our core fleet will be modern, larger and better suited to the sectors in which we operate. Our costs per TEU are declining as we continue to take delivery of cost-effective newbuild tonnage and redeliver expensive COVID-era vessels. We expect further improvement in the future,” said management. The downside, however, is that debt, or lease obligations on the balance sheet, has continued to rise and is expected to continue to rise until the last ship is delivered.
Profits are rising
ZIM’s first quarter earnings report is expected on May 21 and analysts are relatively positive. There have been two positive revisions and no negative revisions in the last 90 days. Analysts expect ZIM to report normalized earnings per share (EPS) of $1.93 or GAAP EPS of $1.54. Analysts expect revenue of $1.62 billion.
Is ZIM Stock a Buy According to Analysts?
ZIM stock is rated a Hold, according to the four Wall Street analysts who have set 12-month price targets over the past three months. There are currently one buy, one hold, and two sell ratings. The average price target for ZIM Integrated Shipping Services is $10.01, with a high forecast of $18.00 and a low forecast of $5.00. The average price target represents a downside potential of 47.8%.
The result of ZIM Stock
At the current price, I’m hesitant about ZIM stock. The company is likely to perform well at this point, given the inflationary impact of diversion on freight rates. Combined with strong data from China, ZIM’s profits could go into overdrive. However, I need more evidence to justify the 88% increase in the share price since I last covered the stock.
Revelation
