KPMG Australia data has revealed the number of ASX listed ‘zombie companies’ has increased 30 percent in the last 6 months, up from 94 in March to 122 companies today.
Generally, companies are considered ‘zombies’ when they exhibit indicators of financial distress for an extended period of time* but are not yet insolvent and continue to trade.
The total market capitalisation of the growing horde of zombie companies is now $3.1 billion, up 9 percent from $2.9 billion in March 2024.
KPMG Head of Turnaround & Restructuring Services, Gayle Dickerson says a combination of factors are behind 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. 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.
“Safe Harbour legislation has provided Boards of some listed companies with more time to work through restructuring options, however we have still seen some failures in recent months,” added Gayle Dickerson.
Most and least contagious sectors
The mining sector is the most zombified sector on the ASX with a 51 percent increase from 39 at March 2024, to 59 at September 2024.
Miners make up 48 percent of all zombies on the stock exchange which has been largely driven by the crash in nickel and lithium prices.
Technology and Telco companies had the second largest number of zombies with 16 making up 13 percent of zombies, while Consumer & Retail sector was third with seven zombies making up six percent.
“Many companies in the tech sector are loss making, so with interest rates remaining elevated many are finding it challenging to raise capital to fund operations as investors seek less risky assets,” says Gayle Dickerson.
“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,” Ms Dickerson adds.
Sectors that remain immune from zombies include Aerospace & Defence, Agriculture, REITs, Manufacturing, and Utilities. These sectors have not registered a zombie company in the last six months.
Gayle Dickerson says, “these sectors appear to have stronger underlying market conditions; however, we have seen stress in the non-listed agriculture and manufacturing space.”
ASX Zombie Companies per sector at September 2024
| Sectors | Total companies | Mkt cap ($'m) | Total Zombies | Zombie mkt cap ($'m) | % of zombie companies | 6 month variance |
| Aerospace & Defence | 5 | 787 | 0 | - | 0% | - |
| Agriculture & Husbandry | 5 | 681 | 0 | - | 0% | - |
| Biotechnology | 31 | 91,463 | 4 | 228 | 3% | (1) |
| Business Services | 32 | 11,095 | 1 | 9 | 1% | (2) |
| Chemicals | 22 | 1,927 | 3 | 16 | 2% | 2 |
| Consumer Markets | 60 | 103,917 | 7 | 91 | 6% | 2 |
| Energy | 93 | 88,825 | 5 | 486 | 4% | (2) |
| Equity Real Estate Investment Trusts (REITs) | 35 | 86,961 | 0 | - | 0% | - |
| Financial Services | 65 | 224,473 | 2 | 15 | 2% | 2 |
| Food & Beverage | 25 | 9,703 | 6 | 50 | 5% | 2 |
| Healthcare | 51 | 33,473 | 6 | 46 | 5% | 2 |
| Infastructure & Real Estate | 39 | 22,669 | 1 | 12 | 1% | - |
| Life Sciences | 6 | 352 | 2 | 35 | 2% | 1 |
| Manufacturing | 30 | 4,093 | 0 | - | 0% | (1) |
| Media & Entertainment | 29 | 29,094 | 4 | 19 | 3% | 1 |
| Pharmaceuticals | 25 | 2,028 | 4 | 76 | 3% | 1 |
| Mining | 577 | 305,389 | 59 | 631 | 48% | 20 |
| Tech & Telecommunication | 117 | 136,537 | 16 | 104 | 13% | 1 |
| Transportation & Logistics | 12 | 42,940 | 1 | 6 | 1% | - |
| Trading Companies & Distributors | 9 | 14,669 | 0 | - | 0% | - |
| Travel & Hospitality | 14 | 14,808 | 1 | 1,307 | 1% | - |
| Utilities | 5 | 12,641 | 0 | - | 0% | - |
| Total | 1,287 | 1,238,524 | 122 | 3,131 | 9% | 28 |
Note: data excludes wholesale and retail debt issuers and certain companies that do not meet certain financial benchmarks
Construction sector primed for more zombies
Beyond the ASX, Zombie companies in the construction sector have been growing rapidly at the SME level.
KPMG Australia Partner and Turnaround & Restructuring Services Property and construction sector lead, Amanda Coneyworth, says construction business insolvencies are impacting businesses higher 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.”
Despite commercial property values generally remaining resilient in Australia, there is further uncertainty for developers and asset owners in that subsector due to increased costs of debt and perceived risks.
“Retail vacancies have been increasing quarter to quarter consistent with the overall weakening of retail trade, so this is a subsector to keep an eye on for further zombification,” says Amanda Coneyworth.
Hope on the horizon
Despite a turbulent economic outlook, Gayle Dickerson says there is 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.”
*Through its Financial Performance Index (FPI), which analyses a combination of publicly available market and financial data, KPMG defines a zombie company as having an index score of zero for three or more consecutive quarters.
For further information
Hayden Jewell
+61 423 868 454
hjewell@kpmg.com.au
