ZIM: Fade The Houthi Induced Rally (Rating Downgrade) (NYSE:ZIM)

As the shipping channel in the Red Sea has the been upset by Houthi militants, shipping stocks like ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) have soared. The stocks were crushed in 2023 due to weak container shipping demand and high new vessel supply hitting the market. My investment thesis is now turning Bearish on the stock following the surge to $12 this last week after ZIM traded down at $6.

Short-Term Shipping Surge

The market clearly faces a huge unknown regarding how long the current shipping cycle will last. The Iran-backed Houthi attacks on ships traveling in the Red Sea area are causing some ships to travel down around the Cape Horn in South Africa, adding up to 2 weeks to the travel time for those ships to reach destinations in Europe.

The Drewry WCI has jumped to over $1,600 per 40ft container. The rate is nearly flat with 3 months ago, but the WCI rate dipped below $1,400 back in early October.

Of course, the major impact on container shipping rates are those traveling to Europe or the East Coast U.S. from Asia. These trade routes from Shanghai have seen big jumps in the shipping rates, though the one to Los Angeles has been flat to down since August, as this route bypasses using the Red Sea to travel through the Suez Canal.

The world is working together to find a safe shipping solution, including the U.S. firing missiles at Iranian sites to combat the attacks. The U.S.-led Operation Prosperity Guardian, includes a coalition of 20 countries, aims to stop the Yemeni Houthi attacks from a relatively unsophisticated militant group, though one possessing deadly missiles and drones.

The impact to shipping appears nothing more than a short-term blip, though outcomes definitely can’t be guaranteed.

Market Got Too Negative

Our view had turned more neutral on the stock following the slumping demand for container shipping. ZIM had a more neutral risk/reward scenario and the rebel attacks further highlight why one has to be careful getting too negative or positive on any investment thesis with uncontrollable scenarios always lurking around the corner.

Only in mid-November, ZIM had just warned of weaker financial numbers for 2023. The shipping company missed Q3’23 estimates and had guided down the adjusted EBIT loss for the year to between $600 and $400 million from a prior forecast of a loss of $500 to $100 million.

Management has been highly focused on long-term contracts, but the company suggested up to 70% of their business is in the spot market. ZIM should see some benefits to the financials based on these hikes in shipping rates.

ZIM has contributed mightily to the industry capacity problem by agreeing to take 46 newbuilds by the end of 2024 while redelivering existing charters to be utilized by other shippers. On the Q3’23 earnings call, CFO Xavier Destriau made the following comment regarding capacity growth:

But you’re right we will operate larger ship on average as the ships that are coming in are replacing smaller vessel. So today, give or take, we operate an equivalent capacity of 600,000 TEUs for the 129 container vessels that we operate. And this should go near or closer to the 700,000 TEU mark by the end of 2024 when we have taken delivery of all of our fleet.

A lot of the investor focus has been on the vessel numbers, with ZIM redelivering ships while taking on newbuilds. The reality is that ZIM will grow capacity by 100,000 TEUs over the next year, when shipping rates are likely to remain weak. The TEU increase amounts to a nearly 17% growth in capacity and is a prime reason the company is focused on being profitable until 2025, though analysts still generally forecast a large loss.

Takeaway

The key investor takeaway is that ZIM clearly has more downside risk now, with the stock trading at $6 on the last dip and the current situation in the Red Sea not altering the industry picture. The Houthi militant issue won’t last, and investors should prepare for a likely retest of the recent lows.