October 29th 2024.
According to new research, major building companies are facing challenges due to rising costs and a shortage of skilled labor. This has led to concerns that these companies may become what is known as "zombie" corporations. KPMG Australia has released data showing that the number of ASX-listed zombie companies has increased by 31% in the past six months, from 94 in May to 122 today.
A business is considered a "zombie" when it shows signs of financial distress, but is still able to continue trading. The demand for housing in Australia remains strong, but builders and developers are struggling with increasing costs and a shortage of skilled labor. Amanda Coneyworth from KPMG explains that while the number of zombie construction companies listed on the stock exchange is still relatively low, the number of smaller businesses falling into this category is growing rapidly.
One of the main factors contributing to this trend is the risks faced by sub-contractors. This is having a ripple effect on the profitability of builders and developers, which could eventually lead to larger companies also facing financial distress. In order to avoid this, it is crucial for developers and builders to work closely with their sub-contractors, lenders, and other stakeholders to proactively mitigate risks such as cost increases and delays in completing projects.
The building industry is facing a range of challenges, including supply chain issues, rising interest rates, and the end of pandemic-era stimulus measures. These conditions have caused turmoil in the industry, resulting in a growing number of zombie companies. The sectors most affected by this trend on the ASX are mining, technology, and consumer and retail. Mining companies make up 48% of all zombie corporations, largely due to the decline in nickel and lithium prices.
The total market capitalization of these zombie companies has now reached $3.1 billion, up from $2.9 billion in May. Gayle Dickerson, KPMG's head of turnaround and restructuring, explains that businesses in this situation have very little room for error as they struggle to remain solvent in the face of stubborn inflation, high interest rates, and a pessimistic consumer outlook. However, there is hope for struggling businesses with expected interest rate cuts and the federal government's safe harbor laws.
These laws provide protection for company directors from personal liability for insolvent trading if the business is attempting to restructure. This offers some relief for businesses facing financial distress, giving them the opportunity to turn things around. For the latest updates on breaking news, celebrity gossip, and sports news, follow us on our WhatsApp channel. This is a safe and private way to stay informed without any comments or algorithmic interference. Your private details will not be shared with anyone.
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