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Elevator Pitch
My investment rating for ZIM Integrated Shipping Services Ltd.’s (NYSE:ZIM) stock is a Buy. I wrote about ZIM in an earlier article published on June 17, 2022 focusing on the stock’s appeal as a dividend play.
The sell-side analysts have cut their bottom line forecasts for ZIM in an aggressive manner recently, as their views on the outlook for freight rates have turned negative. But long-term oriented investors should watch ZIM’s recent agreement with Shell plc (SHEL) (OTCPK:RYDAF) instead, which is supportive of the company’s LNG transition plans and beneficial for its investors. In the long run, ZIM should benefit from a stronger competitive position and a more optimal cost structure, as it grows the number of LNG-powered vessels in its fleet over time. In conclusion, I retain my Buy rating for ZIM in view of the company’s pivot towards LNG-fueled vessels.
What is ZIM Integrated’s Business Outlook Now?
In the past one month, the spotlight was on ZIM’s poor stock price performance with its shares dropping by -41.2%. ZIM’s recent share price weakness is attributable to the fact that the market has a dimmer view of the company’s business outlook now.
Notably, the sell-side analysts from Citigroup (C) have called the “end of freight rate upcycle” as highlighted in a late-August Seeking Alpha News article. The other Wall Street analysts are also likely to be bearish about the growth prospects for the shipping industry and ZIM as well. The fiscal 2023 and 2024 consensus normalized earnings per share or EPS projections for ZIM have been slashed by -10.4% and -27.9%, respectively in the last month.
However, there was a piece of news with greater significance for ZIM’s long-term outlook which didn’t get as much attention as its share price drop and the change in its business outlook. I am referring to ZIM Integrated Shipping Services’ deal with Shell plc that is the subject of my latest update for the company.
What Is ZIM Integrated’s Deal With Shell?
ZIM Integrated Shipping Services announced at the end of last month that it entered into “a ten-year marine liquefied natural gas (‘LNG’) sales and purchase agreement” to “supply ten (15,000 TEU) LNG-fueled vessels” which “will be transporting goods from China and South Korea to US East Coast and the Caribbean (referred to as the ‘Asia to USEC trade’)” in the 2023-2024 period.
In the next section, I will touch on the positives relating to ZIM’s deal with Shell and its focus on LNG-powered vessels.
Is This Deal Beneficial For ZIM Investors?
This deal with Shell is beneficial for ZIM Integrated Shipping Services and its investors, as this allows ZIM to increase the proportion of ZIM’s future capacity that is powered by LNG. As indicated in the company’s announcement, ZIM can “secure LNG at competitive terms” and “ensure our fuel sourcing is well planned” thanks to the partnership with Shell.
One key thing to note is that LNG is energy efficient, so the change in ZIM’s capacity mix with a tilt towards LNG should lead to a reduction in fuel-related expenses and an improvement in the company’s profitability in the future.
At Bank of America’s (BAC) Transportation, Airlines & Industrials Conference on May 19, 2022, ZIM highlighted that “there are some costs that went up, not to mention the cost of fuel, for example, which went up quite significantly since 2019.” It is noteworthy that the company specifically mentioned about fuel expenses when it was trying to make a point about cost pressures. This is a clear indication that fuel costs have a substantial impact on the profitability of ZIM and its shipping peers. As such, the recent deal with Shell which is part of the company’s transition to LNG vessels is a major move.
As an illustration of the positive effects of LNG-powered vessels on fuel efficiency and costs, research by DNV Group, a consulting firm focused on the shipping industry, suggests that “LNG-fueled vessels can reduce their EEDI rating by 20%.” On the International Maritime Organization‘s website, it is noted that “the smaller the EEDI (Energy Efficiency Design Index)” is, “the more energy efficient” a ship is.
Another key factor to watch is that the shift in its capacity mix towards LNG vessels makes ZIM Integrated Shipping Services more competitive.
An increasing number of companies, which include ZIM’s current and potential clients, are under immense pressure from various stakeholder to become “greener” and comply with the best-in-class ESG (Environmental, Social, and Corporate Governance) practices.
In the company’s May 2022 investor presentation, ZIM stated that its goal is to be “among the lowest carbon intensity operators” and “assist customers in reducing carbon footprint.” ZIM’s recent agreement with Shell will help the company take a step towards achieving its target.
More significantly, ZIM is in a better position to make the transition to LNG-fueled vessels as compared to its competitors. While the majority of ZIM’s rivals own their fleet, the bulk of ZIM’s fleet is chartered. In other words, ZIM doesn’t have the burden of tackling the issue of legacy fleet unlike its peers.
I discuss ZIM’s pivot to LNG-powered vessels in quantitative terms in the subsequent section.
ZIM Stock Key Metrics
Going back to the company’s end-August 2022 announcement on the Shell agreement, ZIM revealed a number of key metrics that are worth highlighting.
One key metric is that ZIM Integrated Shipping Services cited a research study by ESG consulting firm Sphera which shows that LNG boasts “20% less GHG emissions when compared to conventional marine fuels. This suggests that companies which have set ambitious carbon reduction targets will be very much inclined towards utilizing LNG-fueled vessels, and this means that it is critical for ZIM and its peers to optimize their respective capacity mix with a greater focus on LNG.
Another key metric is that ZIM will have the distinction of running the “first LNG fueled vessels in Asia to USEC trade” as highlighted in its August 31, 2022 announcement, which gives ZIM a clear first-mover advantage. Earlier, ZIM also mentioned in its May 2022 investor presentation that the company expects a third of its fleet in operations to be powered by LNG in 2024. All of the above implies that ZIM should boast a competitive edge over rivals and peers by virtue of being ahead in the LNG transition race.
Is ZIM Stock A Buy, Sell, or Hold?
ZIM’s stock remains as a Buy. Investors are worried that freight rates have already peaked, and this has put the share price of ZIM under immense pressure. Looking beyond short-term headwinds, ZIM is progressing well in terms of LNG transition, and the company is most probably going to be more competitive and cost-efficient in the intermediate to long term. This makes ZIM a Buy-rated name in my opinion.
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