Zombie companies continuing to surge, says KPMG
Data from the big four firm has revealed a 31 per cent increase in ASX-listed ‘zombie companies.’
Recent data from KPMG Australia highlighted that the number of zombie companies that were ASX-listed had increased by 31 per cent in the last six months.
The firm outlined that there were currently 122 zombie companies, which had increased from 94 since May.
The total market capitalisation of the increased zombie companies was $3.1 billion, up 9 per cent from $2.9 billion in May this year.
KPMG said companies were considered ‘zombies’ when they exhibited indicators of financial distress for an extended period but were not yet insolvent or unable to trade.
KPMG head of turnaround and restructuring services Gayle Dickerson said a combination of factors could be attributed to the increased zombification of the ASX.
“Stubborn inflation, sustained high interest rates and low consumer sentiment have left businesses with little breathing room to keep themselves solvent,” Dickerson said.
“These factors are simultaneously biting into profit margins and increasing debt burdens which are turning once stable businesses into zombies.”
Dickerson noted that COVID-19 stimulus removal was previously the reason for an increase in zombie companies.
However, challenging market conditions were the main driver behind increased insolvency appointments.
Data revealed mining was the most zombified sector on the ASX, with a 51 per cent increase from 39 zombies in March to 59 in September. KPMG said mining made up 48 per cent of all zombies on the stock exchange, driven by a crash in nickel and lithium prices.
Behind mining as the most zombified sector were technology companies, as well as consumer and retail companies.
Dickerson said many companies in the tech sector were loss-making as elevated interest rates made it harder to raise capital to fund operations, with investors having sought less risky assets.
“The continued pressure on consumer spending is really starting to put pressure on the retail and consumer sector and we expect this contraction in wallet spend to remain for the short to medium term,” she said.
The sectors that had not registered a zombie company in the last six months included aerospace and defence, agriculture, REITs, manufacturing and utilities.
“These sectors appear to have stronger underlying market conditions; however, we have seen stress in the non-listed agriculture and manufacturing space,” Dickerson said.
Beyond the ASX, KPMG said zombie companies in the construction sector had significantly increased at the SME level.
The firm said despite the demand for housing in Australia, increases in cost and labour constraints had placed a strain on builders and developers.
It was noted that construction business insolvencies had impacted businesses higher up the chain and that there was uncertainty for developers and asset owners due to increased debt and risks.
Despite a turbulent economic outlook, Dickerson said there was light at the end of the tunnel for struggling businesses.
“The taming of inflation and the subsequent lowering of interest rates by the RBA, which we anticipate by February next year, will be the best cure of zombification.”
“It does take time for the effects of interest rate drops to filter through the economy, but for businesses struggling, there are still a raft of options available like safe harbour laws and private credit that simply didn’t exist in previous downturns.”
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