'Zombie' firms cause concern
Companies in Australia’s construction and mining sectors are increasingly teetering on the brink of collapse.
KPMG Australia has reported a 31 per cent rise in ASX-listed “zombie companies” over the past six months, up from 94 in May to 122 by September.
These entities, while not yet insolvent, exhibit prolonged financial distress, with the mining and construction industries particularly affected.
The mining sector now has the highest number of zombie companies on the ASX, accounting for 48 percent of the total.
The number of mining zombies surged from 39 in March to 59 in September.
The downturn in nickel and lithium prices has been a major contributor, according to Gayle Dickerson, KPMG’s Head of Turnaround & Restructuring Services.
She attributes this rise to stubborn inflation, persistent high interest rates, and low consumer sentiment, factors that are squeezing margins and increasing debt burdens.
“These factors are simultaneously biting into profit margins and increasing debt burdens which is turning once stable businesses into zombies,” Dickerson said.
Meanwhile, the construction sector faces a potentially worse situation, especially among small and medium-sized enterprises (SMEs).
Zombie companies have rapidly increased in this sector due to rising construction costs and labour constraints, both of which impact project feasibility.
Amanda Coneyworth, KPMG’s property and construction sector lead, says that “cost increases and labour constraints are putting enormous strain on builders and developers”. She warned that this risk extends beyond SMEs, potentially affecting major developers if subcontractor-related challenges persist.
The total market capitalisation of zombie companies on the ASX has grown to $3.1 billion, a 9 per cent increase from May’s $2.9 billion figure.
While ‘Safe Harbour’ legislation offers some companies a buffer to restructure without immediate insolvency, the broader outlook remains challenging.
Dickerson anticipates that an interest rate cut by the Reserve Bank of Australia (RBA), expected early next year, could help stabilise both sectors.
“The taming of inflation and the subsequent lowering of interest rates by the RBA… will be the best cure of zombification,” she noted.