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ZIM – Is the timing right for an IPO?

According to reports, Israeli shipping line ZIM is considering an initial public offering (IPO), following the company’s most profitable quarter in a decade. Meanwhile, this will be the fourth attempt by ZIM for an IPO after three previous unsuccessful attempts in 2008, 2011 and 2016, due to weak market conditions and poor earnings track record. However, the IPO is crucial to raise new cash to improve its balance sheet.

That said, investors would account for ZIM’s poor earnings track record, failed IPO attempts in the past and State involvement in the company. The Israeli government holds a special ‘Golden Share’ in ZIM, among other terms, which requires the company to obtain the state’s consent to transfer more than 35% of its shares and also ensures the maintenance of minimal operational ability and freight capacity in times of crisis.

Is the key shareholder behind the IPO decision?
ZIM’s shareholders include New York and Tel Aviv-listed Kenon Holdings, which owns 32% of the carrier. Israeli billionaire investor – Idan Ofer – who owned about 58% in Kenon Holdings at the beginning of 2018 still holds the majority shares in Kenon Holdings and is believed to have a key say in all major decisions. Kenon Holdings was itself spun off from Israel Corp, which was formerly a majority shareholder in ZIM. Although speculative at this stage, we wonder if the decision to list ZIM has been directed by Idan Ofer through Kenon Holdings.

As of 2 September 2020, Kenon owns 70% of the shares in OPEC Energy, 12% of the shares in Chinese auto manufacturer Qoros and 32% of the shares in ZIM. However, at the beginning of the year, Kenon had a massive 91% stake in another company ‘Primus Green Energy, Inc but on 8 August, the latter sold substantially all of its assets to Bluescape Clean Fuels LLC for USD 1.6mn.

The tendency to divest or sell stakes in loss-making entities is not a new phenomenon for Kenon Holdings. In 2018, after incurring huge losses on its investment in Qoros, Kenon sold the majority of its stake to Baoneng Group, and it currently holds just 12%. Going by this trend, there is a strong likelihood that after three previous failed attempts for an IPO by ZIM, Kenon Holdings will offload its stake in ZIM, which has been a loss-making entity for years.

Is the container shipping industry going through its best period financially?
Industry dynamics change as rising tide keeps all boats afloat: Major container lines across the board have reported their best second-quarter earnings since 2010 as capacity discipline pays off. Aggregate profit of 14 carriers inflated to about USD 2bn in 1H20 as against negative USD 351mn in 1H19. Extended blank sailings supported freight rates to hold up despite sluggish throughput, while lower oil prices allowed shipping lines to save on bunker costs. Carriers’ approach to chase profitability rather than the market share also played its part, ensuring that the pandemic does not impact container shipping to the extent initially feared.

High freight rates positive news for shipping lines but regulatory hurdles could limit growth
Shipping lines made a profit and successfully handled the pandemic on the back of booming freight rates. However, regulators mainly from China and the European Union have threatened to intervene in operations. Recently, Chinese shipping and transport authorities suggested major container carriers inject more capacity into the Transpacific trade besides putting a cap on the aggressive pricing. Authorities have argued that liner companies should pass on the benefits of savings achieved from the drop in oil prices and a reduction of port fees. Consequently, Maersk reportedly reduced its planned mid-September General Rate Increase (GRI) and Cosco Shipping also cancelled GRIs scheduled for 15 September. In addition, the 2M Alliance, where Maersk is a partner with MSC, has announced that it will return more capacity to the transpacific trades.

Nonetheless, as of 17 September, the World Container Index (WCI), a composite spot rate comprising eight major trade routes, assessed by Drewry, was up 105% YoY. Spot rates from Shanghai to the US West Coast were 182% higher than it was a year ago, while pricing from Shanghai to Genoa was up more than 92%.

Monthly sales development for July and August look promising, indicating a robust 3Q20 result – YoY % (Taiwanese lines): Another evidence of a strong 3Q20 is the monthly revenue growth of the three Taiwanese carriers as they recorded an uptick in their revenue growth for August on a year-on-year basis with Evergreen posting a 17% growth.

ZIM posts profit for the first time in 10 years
ZIM reported a net profit after 10 years, and hence, all the stakeholders may have decided that this could be an apt time for the IPO. Moreover, ZIM has allied itself with 2M partners Maersk and Mediterranean Shipping Co through a ‘strategic operational agreement’ that sees the Israeli line sharing vessels and slot exchanges on several services. The IPO speculation comes days after the company reported 2Q20 net profit of USD 25.3m, a whopping 394% increase over the same period last year.

However, despite the profit, the company still has a negative book value, a trend seen since 2015, standing at a deficit USD 240mn at the end of June 2020. Its total gearing and net gearing were also negative at -653% and -568% respectively. The poor financials are reflected in its latest Z-score of 0.29 – meaning a highly distressed zone. An Altman Z-score (a formula for predicting the likelihood of bankruptcy based on many metrics from a company’s public statements) of less than 1.81 indicates financial distress. A score higher than 2.99 depicts that the company is in the safe zone.

Global IPO trend
Globally, one of the better-positioned sectors during the crisis has been healthcare, which has many companies that aim to raise capital to create solutions to combat the pandemic. The total amount offered for the IPO deals was heavily tilted in favour of the US, which alone accounted for 53% (USD 22.35bn) of the total IPO amount in 2Q20.

Regarding container shipping sector, since the GFC, equities have mostly been underperformers in global markets and highly volatile with very few providing above-average investor returns. Although financials have recovered in 2020, the sustainability is questionable, in turn, leading to weak investor confidence in the industry. The return on invested capital has rarely been enough to cover the weighted average cost of capital for most of the operators.

Depressed share prices and credit downgrade adds to financing woes
As stock prices of shipping companies remained weak in recent years, carriers did not have a great run, in terms of equity market funding. For instance, Cosco Shipping Holdings was unable to raise the amount it expected in 2018 as its stock price was low. Private placement of new stocks in Cosco Shipping Holdings, announced in December 2017, raised just RMB 7.7bn (USD 1.15bn) instead of RMB 12.9bn (USD 1.94bn) anticipated earlier. The reason behind this disappointing outcome was a substantial drop in share value from RMB 6.40 when the plan was announced to around RMB 4.40 at the time of the sale. Similarly, container tonnage providers or non-operating owners, including Danaos and Euroseas, had their share prices trading at such low levels that they were either delisted (Danaos) or received a non-compliance notice from the Nasdaq stock exchange (Euroseas) as it traded below USD 1 for 30 consecutive business days. Meanwhile, given the failure of the IPO attempt, Navios Containers dropped marketing of the IPO in September 2018 and instead sought a direct listing on Nasdaq.

Hapag-Lloyd: The last major IPO in the container shipping sector
Hapag-Lloyd was pushed to go public when the container shipping was facing tough times in 2015-16. Initially, the German carrier sought to raise equity of USD 500mn from a listing which was later downsized to USD 300mn. The offer included 11,503,197 new shares, aimed to generate EUR 265m (USD 300mn). Meanwhile, the core shareholders Kuhne Maritime and CSAV injected USD 30mn each into the offering, down from the USD 50mn cheques they had initially planned to sign.
Source: Drewry

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