Consulting firm KPMG has new research on the rise of ‘zombie companies’, which have indicated signs of distress for an extended period of time but have not yet declared insolvency.

The danger for companies and investors dealing with them is that it might occur.

KPMG Australia data has revealed the number of ASX listed ‘zombie companies’ has increased +31% in the last 6 months, up from 94 in May to 122 companies today. 

“Stubborn inflation, sustained high interest rates and low consumer sentiment have left businesses with little breathing room to keep themselves solvent,” Gayle Dickerson, KPMG Head of Turnaround and Restructuring Services said in a statement.

“These factors are simultaneously biting into profit margins and increasing debt burdens which is turning once stable businesses into zombies.  

“In prior years the increase in zombie companies was largely due to the removal of COVID stimulus which had propped up many businesses. Now, insolvency appointments are 50 percent higher than pre-COVID levels, which is a symptom of more challenging market conditions.  

Sector risk

The most? Mining

The mining sector is the most ‘zombified’ sector on the ASX with a +51% increase from 39 at March 2024, to 59 at September 2024.

Tech, consumer and retail are the next most dangerous sectors.

Miners make up 48 per cent of all zombies on the stock exchange which has been largely driven by the crash in nickel and lithium prices.  

But some sectors remain immune.

Ms Dickerson says Aerospace & Defence, Agriculture, REITs, Manufacturing, and Utilities have not registered a zombie company in the last six months. 

“These sectors appear to have stronger underlying market conditions; however, we have seen stress in the non-listed agriculture and manufacturing space.”

Most and least contagious sectors  

Beyond the ASX, zombie companies in the construction sector have been growing rapidly at the SME level. 

Amanda Coneyworth, who deals with the construction sector for the firm, one of the ‘Big Four’ consultants, says those issues are pushing problems up the chain. 

“Despite the housing demand in Australia, cost increases and labour constraints are putting enormous strain on builders and developers.”  

“Risks in the subcontractor market are impacting the profitability of builders and developers up the chain which if not rectified will potentially see larger construction companies tip into zombie territory. To avoid this, developers and builders need to work closely with their subcontractors, lenders and other stakeholders to proactively mitigate risks associated with costs increases and delays to complete developments.” 

Loading

And just in case anyone thinks we’ve forgotten, KPMG Australia knows all about costs, as this Four Corners report from last year makes clear.