After years of failed attempts, ocean carrier ZIM finally went public on Jan. 28, pricing an IPO and listing on the New York Stock Exchange (NYSE). At first blush, its debut looked like an embarrassing flop. The IPO had to be downsized. Shares immediately plunged. But just two weeks later, ZIM (NYSE: ZIM) is riding high.
The IPO was priced at $15 per share, below the $16-$19 per share target range. Then it got worse: Shares collapsed all the way to $11.38 within hours of being listed.
Since then, however, it’s been all up. On Thursday, the stock closed at $18.69, 64% higher than its post-IPO nadir. Over the past 11 trading sessions, its market capitalization (shares outstanding times share price) increased $837 million — to $2.14 billion.
To put that valuation in perspective, only one U.S.-listed pure ocean shipping company is larger: liner company Matson (NYSE: MATX) with a market cap of $2.87 billion. ZIM’s valuation is well above the shipping names in third and fourth place: tanker majors Euronav (NYSE: EURN), with a market cap of $1.79 billion, and Frontline (NYSE: FRO), at $1.34 billion.
Swift recovery after post-IPO plunge
ZIM IPO’s timing was about striking when the iron is hot. Container rates are at historic highs. Liner companies are the public entities most exposed to those rates. Yet there have been limited liner choices for U.S. investors, creating an opportunity for ZIM.
Before the ZIM IPO, Matson was the only liner company with listed common shares. And while Matson has significant exposure to the booming trans-Pacific trade, it primarily operates in the Jones Act domestic trades serving Hawaii and Alaska. Maersk also has a presence in the U.S. public market, but its common shares are listed in Copenhagen; in the U.S., it trades over-the-counter via American Depositary Receipts (OTC: AMKBY).
ZIM’s IPO timing turned out to be unlucky. “Shares were caught in a broad market downdraft,” noted Marine Money in its Freshly Minted Newsletter.
J Mintzmyer, in his report on ZIM for Seeking Alpha’s Value Investor’s Edge, commented, “Their IPO had abysmal timing. It went public literally at the peak of the GameStop [NYSE: GME] panic.”
Now that ZIM has settled into regular trading, the attractive fundamentals of the liner business are taking hold. Those fundamentals have propelled Matson’s stock and Maersk’s ADRs to gains of 129% and 114% respectively since June.
Freight rates remain at record highs
There are two big variables in ZIM’s business model. On the revenue side: container freight rates and the mix of spot versus annual contract rates. On the cost side: vessel and container leasing rates.
The revenue side of the equation is flashing bright green for ZIM. While ZIM may only be the 10th largest container line, it’s the most exposed to the red-hot trans-Pacific market — with 52% of its fleet deployed in that lane.
According to the Freightos Baltic Daily Index, base spot rates on the Asia-West Coast route (SONAR: FBXD.CNAW) on Wednesday were very close to all-time highs, at $4,440 per forty-foot equivalent unit (FEU).
Meanwhile, contract rates are tracked by Norway-based Xeneta. During its latest outlook, Xeneta noted that contract rates are being renegotiated at substantially higher levels this year, up by 30-50% higher, in some cases more.
During Maersk’s quarterly conference call on Wednesday, Maersk CEO Soren Skou refused to divulge numbers, but confirmed that contract-rate talks are going very much in liners’ favor. “The signal we want to give is: It’s not like the contract market is weakening,” said Skou.
But ship charter rates also very high
Most container lines own around half their fleet and lease the other half. ZIM stands out because it leases 98% of its fleet. And when freight rates are high, so too are charter rates. Particularly in ZIM’s case, high income from freight rates is partially offset by high costs from ship leases.
Of the 96 ships in its fleet at the time of its IPO, 26 were chartered between Oct. 1, 2020 and the IPO data, a period when charter rates were unusually high.
On Friday, ZIM announced a landmark deal with Atlas Corp. (NYSE: ATCO). Atlas ordered 10 newbuilds (5 firm, 5 options), each with capacity of 15,000 twenty-foot equivalent units (TEUs), for deliveries beginning in 2023. ZIM agreed to charter the ships for 12 years (the rate was not disclosed) and deploy them in the Asia-U.S. East Coast trade.
Alphaliner reported details on a number of ZIM’s earlier charters. In December, ZIM chartered the 5,514-TEU APL England for 24-28 months at $28,750 per day. Also in December: the 3,460-TEU Navios Summer for 16-18 months at $17,950 per month. And in January: the 4,250-TEU Spyros V for 24 months at $22,750 per month.
This week, Alphaliner reported that the market “remains remarkably bullish for NOOs [non-operating owners] with a strong demand and a squeeze of supply leading to continuously rising charter rates for all ship sizes.”
That’s good news for ship lessors like Atlas, Costamare (NYSE: CMRE), Danaos (NYSE: DAC) and Global Ship Lease (NYSE: GSL). But it’s bad news for ZIM. Of its current fleet — excluding the Atlas newbuilds — 60% are chartered for one year or less.
Pros and cons of leasing fleet
As Marine Money put it, “The bad news is that the company must regularly go into the market to charter ships at the current rates to maintain its presence and meet its ongoing obligations. As a consequence, the company is a price taker, at least with respect to the rolling over of the existing short-term charters.”
According to Mintzmyer, who has a long position in ZIM’s stock, “Since ZIM leases almost the entirety of their fleet, they are more exposed to the spreads between revenues and costs than some of their peers. However, you can also argue that the laddered structure of one- to three-year leases also makes them more nimble to changing market conditions.”
Mintzmyer maintained that the increase in charter costs “pales in comparison to the surging rates for shipping cargoes.” Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON SHIPPING STOCKS: Shipping’s Wall Street saga: rags to riches to rags to occasional riches: see story here. Container rates are on fire. How can you invest in that? See story here. Shipowners with shares worth pennies rake in millions: see story here.