ZIM Integrated: I Was Wrong - It Was Never A Gift To Begin With (Downgrade)

I have been patiently waiting to assess whether dip buyers in ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) could return to help stem the "unstoppable" hammering in its stock since its disastrous first quarter earnings release in late May.

However, much to my disappointment, ZIM went on to stage a lower low in June, consolidated, but failed to regain decisive upward momentum. I gleaned that ZIM dip buyers seem to lack sufficient conviction in holding on as the prospects of seeing income investors returning have likely dissipated.

ZIM Integrated's decision to axe its dividends in its first quarter report card didn't surprise me, as I argued in my previous update that analysts have already penciled in uninspiring forward estimates for the company.

However, even though I expect market operators to have anticipated the departure of income investors at ZIM's May lows, even value-conscious investors didn't seem to be keen to partake in the company's potential recovery in the second half.

Notably, global container freight rates have continued to weaken over the past three months, according to Freightos. Notwithstanding, management appeared to have covered that possibility, as it articulated that "demand is still weak." However, management attempted to lift investors' optimism that the company expects "the trend to change in the second half of the year as the destocking effect comes to an end." As such, the company telegraphed its confidence that it "would support freight rates," although ZIM Integrated also cautioned that it was too early to be certain.

I believe tepid buying sentiments in ZIM demonstrate that investors aren't expecting a massive recovery in the second half. China's economic recovery from its COVID reopening has not panned out and seems to be losing traction. China appears to be beset by significant structural problems that short-term stimulus measures could be insufficient to bolster a sustained recovery. Hence, the demand side challenges remain highly uncertain, coupled with the supply side challenges that could worsen the outlook for container shipping companies like ZIM Integrated.

Accordingly, "seaborne ton-mileages are expected to increase by more than 3% in 2023." Therefore, increased capacity has arrived at a time when the industry is facing a significant trade slowdown. While the overall demand growth could bottom out in the second half and inflect positively upward next year, investors appear to remain cagey about the prospects.

ZIM Integrated investors should not anticipate a quick recovery without the allure of dividends in the near term. Moreover, analysts' estimates on ZIM over the next two FYs could dampen investors' anticipation of a resumption of dividends, putting further pressure on investors thinking ZIM is a "value buy."

Accordingly, ZIM Integrated is expected to report adjusted EPS of -$3.24 and -$1.47 over the next two fiscal years, suggesting the potential lack of a turnaround in buying support. Moreover, with earnings expected to be deeply negative, value investors are not likely to support the stock, taking out another critical pillar of support since income investors left the ship.

With that in mind, I don't see how ZIM Integrated could recover sustainably from its malaise, and investors buying at the current levels need to be circumspect.

While ZIM Integrated Shipping Services Ltd. stock's price action indicates that a mean-reversion bounce could occur as some dip buying sentiments could support the stock, I no longer view ZIM as a strong recovery play and thus move to the sidelines from here.

Rating: Hold (Revised from Buy).

Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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