Financial brink: ASX-listed ‘zombie’ firms up 31pc up amid Australian economic slowdown

Australia’s economic deterioration has led to a sharp increase in ASX-listed zombie companies who are barely staying afloat, according to KPMG.

More than 100 companies listed on the Australian Securities Exchange are teetering on the edge of collapse, according to accounting giant KPMG, which warns that the economic slowdown is creating more “zombie” companies.

Analysis from KPMG of publicly available market and financial data found 122 companies listed on the ASX were considered zombies, an increase of 31 per cent from 94 in May. The total market capitalisation of the zombie companies is now $3.1bn, up 9 per cent from $2.9bn in May 2024.

Companies are considered zombies when they exhibit indicators of distress for an extended period of time but are not yet insolvent and continue to trade. The firm defined a zombie company as having an index score of zero for three or more consecutive quarters.

A combination of stubborn inflation, sustained high interest rates, rising operating costs such as electricity and wages, along with low consumer sentiment and a crackdown on unpaid tax from the ATO has put mounting pressure on companies.

Small cap mining stocks are the most likely to be an ASX zombie.

KPMG turnaround and restructuring services head Gayle Dickerson said the increase in zombie companies was not a surprise against that backdrop with companies having little breathing space to keep themselves solvent. Many were now looking to raise capital, refinance or sell assets.

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

“We know many of these listed companies and directors are seeking safe harbour advice, they’re either at risk of insolvent trading or are insolvent and believe there’s a better outcome out there.”

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 per cent higher than pre-Covid levels.

Corporate insolvency appointments increased 40 per cent in the 2024 financial year to a record high of 11,049 – surpassing the peak of the global financial crisis, according to the Australian Securities & Investments Commission. There was a 45.5 per cent uplift in the September quarter compared to 2023.

KPMG says stubborn inflation, higher for longer rates and rising costs are driving companies to the brink. Picture: NCA NewsWire / Andrew Henshaw

Retailer Mosaic Brands on Monday became the latest listed group to enter into voluntary administration following a number of unsuccessful attempts to restructure the business.

It comes after airline Rex fell into voluntary administration in July, while The Beston Global Food Company enlisted KPMG last month to find a path forward.

The mining sector is the most zombified sector on the ASX with a 51 per cent increase from 39 in March and 59 by the end of September, largely driven by the crash in nickel and lithium prices.

KPMG saw small miners coming under pressure with the firm appointed to a string of restructures including Kalium Lakes, which collapsed in late 2023 owing more than $200m and is now seeing its assets sold off. The listed operator of the Peko mine in the Northern Territory, Elmore, entered voluntary administration earlier this year. Technology and telco companies had the second largest number of zombies with 16 making up 13 per cent of zombies, while the consumer and retail sector was third with seven zombies.

Rex is the most high profile company on the ASX to enter into voluntary administration this year. Picture: NewsWire / Jeremy Piper

“Technology has struggled to raise the levels of capital that some have needed and being able to monetise or make some of those businesses economic,” Ms Dickerson said.

Listed zombie companies came under greater scrutiny due to greater visibility around disclosures of their financials, share price and debt levels

“Increasing levels of potential credit risk to companies can have an impact down the supply chain. If one of those listed companies falls over that can have a contagion impact all the way through their supply chain,” Ms Dickerson said. “Consumer retail has increased as well. Some of the larger retailers have seen quite significant year-on-year pressure around earnings this year.”

KPMG expected that there would be another 12 to 18 months of increased volumes of zombie companies and insolvencies across the economy. Taming of inflation and the subsequent lowering of interest rates by the RBA, which markets suggest could occur by February, would be the best cure of zombification.

“There’s still 12 to 18 months of continued elevated levels of insolvency from the small end all the way up through to listed companies. Numbers will keep rising until we see more green shoots around interest rate cuts, a rise in consumer confidence, but those are not in the near term,” she said.

“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.”

Sectors that remain immune include aerospace and defence, agriculture, REITs, manufacturing, and utilities. These sectors have not registered a zombie company in the last six months.

Originally published as Financial brink: ASX-listed ‘zombie’ firms up 31pc up amid Australian economic slowdown