US investment bank Jefferies has cut its price target for Israeli liner company Zim to $27 from $55 per share in acknowledgement of the weaker freight market ahead. But with a cash position of some $3bn that is close to the size of Zim’s market capitalization, it would take two years of rock-bottom rates of $1,200 per teu for the operator to burn through its reserves, according to Jefferies lead shipping analyst Omar Nokta. That provides confidence for Jefferies to maintain a “hold” rating on the stock, which was trading around $24 on the New York Stock Exchange early Friday.

Jefferies’ action to some extent acknowledges reality. Zim shares have been in decline since hitting a peak of $91.23 on 17 March. Zim has not traded at the previous $55 target since 9 June. After its wild run coinciding with record container markets in 2021 and early 2022, Zim’s current trading price is not so far above the $15 pricing of its broken initial public offering in January 2021. “Freight rates have declined materially over the past two months as slowing demand, high retail inventories and easing congestion have led to a pullback in liner earnings power,” Nokta wrote. “The weakness is not a surprise though the aggressive decline recently has taken the market by surprise.”

On Zim’s bread-and-butter trade between Asia and the US East Coast, rates have fallen to $3,000 per teu as compared to the highs of $5,000 seen earlier this year. Still, even the lower figure keeps Zim solidly profitable, as the pre-2001 long term average on the route was only $1,500 per teu. Jefferies puts Zim’s operating costs at $1,400 per teu, with its lease-adjusted costs at $1,700 per teu. Further weakness is forecast. Jefferies estimates Zim’s average freight rate at $3,060 per teu for the quarter ended 30 September, down from a prior estimate of $3,200. The number falls to $2,150 for the fourth quarter against a previous bet of $2,600. Rates get even weaker for 2023 and 2024. Jefferies sees Zim’s average rate at $1,860 per teu next year against its original projection of $2,210. For 2024 the number falls to $1,640 per teu, down from a prior estimate of $1,880.

Zim’s rising costs are projected to peak later this year or early next. “And we expect they will decelerate as Zim begins to take deliveries of its cheaper newbuildings and renews expiring charters at lower rates,” Nokta wrote. Jefferies projects Zim to turn a profit throughout the period, with full-year 2023 earnings at $7.80 per share and $2.73 in 2024. But if things get tougher, Zim’s massive pile of cash, expected to exceed Zim’s $3bn market cap this month, is expected to see the Eli Glickman-led operator through. “Freight rates would need to fall to $1,200 per teu for two full years before Zim works through its entire cash position,” Nokta wrote. “In our view the probability of such low rates for an extended period is unlikely, especially given the consolidated nature of the industry, a healthier demand-side equation likely at this time next year and tougher vessel regulatory standards.”