shaunl/E+ via Getty Images

shaunl/E+ via Getty Images

Yesterday, it was one of the days that people invested in shipping companies would like to forget quickly. The bad thing about stock markets is that they are often prone to generalizations. I often visualize the following conversation, in situations like this:

Analyst A, Tommy: "World economy is slowing down, ECB announced monetary tightening, inflation, things are looking grim. "

Analyst B, Gina: "You're right Tommy, let's sell all the shippers, despite the conservative valuations of many of them, the abundance of cash and the controlled leverage, not to mention their monstrous dividends. In fact, let's opt for zero dividend growth stocks, they seem like a top-notch deal trading at 100 times their earnings. "

Seems funny, but the dialogue listed above could have happened in some meeting rooms, resulting in a sharp decline in shippers' prices. In fact, I find it quite possible, as the financial bourgeoisie aren't exactly notorious for their seriousness. Anyone older than 20 years old should be aware of this by now. How else could I explain yesterday's 10% drop in ZIM Integrated Shipping Services' (NYSE:ZIM ) share price?

In the following paragraphs, I will support my decision to not sell ZIM's shares, but, in fact, to add to my current position, expanding my shippers' portfolio.

As I'm writing this article, ZIM's shares are trading for $54, down by another 7% since yesterday's close. This means that the company's shares are trading at 1.4 times its forward earnings.

Let that sink that a bit.

ZIM Integrated Shipping Services, a company which paid its shareholders a dividend of $2.85 per share for Q1 2022, has common shares whose price is trading just around the company's FY 2022 earnings projection point. Now, this isn't something that one encounters every day. But, when one does see such a valuation, the proper thing to do is to wonder why is this happening.

In my experience, extremely low valuations are usually a sign of higher risk premium, due to managerial, financial, or regulatory factors. For example, externally managed REITs traditionally have lower valuation multiples than internally managed ones. Or, a heavily leveraged company could show a more conservative valuation in relation to a company with less debt. Adding to that, a company striped off its cash could show lower valuation multiples than its peers. But guess what: None of the above is true for ZIM.

The company has a total cash and cash equivalents figure of $4.82 billion, which corresponds to $40.23 per share. In other words, 75% of the company's current share price is only due to its current cash holdings.

Let me put this in a different way. Let's say that tomorrow morning the company's boss decides to become a Buddhist monk, somewhere in the heights of Tibet, and for that reason he liquidates the company. This will result in investors taking $40 for every common share they have in the company, which is 75% of the current share price.

For the sake of simplicity, let us also assume that there is no goodwill and no residual time charter contracts in place, despite the fact that the average remaining time charter duration is 28.6 months. So, in all fairness, it seems like Tommy and Gina find it reasonable to apply a "Bruce Willis Armageddon" - type valuation to ZIM, in order to bring it 25% above its cash value. And I'm not looking into the dividends at all. Well, you can call me a lot of things, but crazy ain't one of them.

No, it is not. The company's net leverage ratio has reached zero during the last few quarters. ZIM currently has a total debt of $4.3 billion, up by almost $1 billion from the end of Q4 2021. These figures give a total debt to equity ratio of 101%, which may be a little increased, as compared to the company's peers.

ZIM net leverage ratio (ZIM Israel Investor Presentation, May 2022)

ZIM net leverage ratio (ZIM Israel Investor Presentation, May 2022)

However, the company is making good progress in the area of profitability, which gives us a very nice, 1.27x Debt to FCF measurement, which is significantly better than the peers. According to the company's management, the spike in the leverage of the last quarter was particularly due to the increased time charter rates.

We're talking about a company that owns only a fraction of its operated vessels. This gives them the flexibility to switch to more environmentally friendly vessels when such regulations become mandatory. In fact, in my opinion, 2023 targets state that carbon dioxide emissions generated from shipping should be reduced by 40% by 2030, compared to 2008 levels, as well as sulfur oxide emissions by 75%. ZIM will have absolutely no problem in abiding to these rules, by operating more modern vessels and by slow steaming, which is good for rates in general.

I believe that the market is overreacting to the inevitable trimming of operating margins of the company. To those unfamiliar with ZIM, they boomed by securing long-term contracts in low prices and then benefiting from the increasing rates. The market is discounting the large average duration of time charters together with the anticipated global economic slowdown.

Indeed, this rationale has a nice chance to come true. However, we are still near the end of the first half of the year, at the end of a traditionally mediocre quarter. What Tommy and Gina are missing, in my opinion, is that the "free cash" economy operated during the recent years is not so easy to be pulled back from one day to the other.

When I see a stock trading near the company's cash per share level, I consider it a buy. And this is why I will increase my exposure in ZIM.

This article was written by

Disclosure: I/we have a beneficial long position in the shares of ZIM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written for information purposes only. You should not, in any case, take the contents of this article to be an urge to buy, hold or sell securities. Always perform your own research before investing in the stock market.