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Zombies rise as more companies head into ‘twilight’ zone

More companies head into ‘twilight’ zone

The ASX average Distance to Default (D2D) score increased marginally between December 2017 and June 2018 but there was significant underlying positive change reflected in improved D2D scores in 49 percent of companies analysed, according to the latest D2D Report from KPMG Australia released today.

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  • 32 percent of companies analysed had a D2D score below 1.0
  • 77 percent of ‘Zombies’ operated in Materials, Energy or IT – nearest to default 
  • 63.8 percent of companies with a D2D score above 3.0 were in the Real Estate, Financial Services and Consumer Discretionary sectors – furthest from default
  • 32 percent of companies analysed had a D2D score below 1.0
  • 77 percent of ‘Zombies’ operated in Materials, Energy or IT – nearest to default 
  • 63.8 percent of companies with a D2D score above 3.0 were in the Real Estate, Financial Services and Consumer Discretionary sectors – furthest from default

 

The ASX average Distance to Default (D2D) score increased marginally between December 2017 and June 2018 but there was significant underlying positive change reflected in improved D2D scores in 49 percent of companies analysed, according to the latest D2D Report from KPMG Australia released today.

“Analysis of ASX-listed companies using market data points is a key way of assessing deteriorating corporate health – and hence the potential risk of default,” according to Carl Gunther, Partner Restructuring Services and Head of Turnaround for KPMG Australia. He said KPMG had analysed the performance of 1941 ASX-listed companies across 11 industry sectors and 24 industry groups.

Mr Gunther said the fact that there were more companies with a D2D score below 1 reflected the volatility seen on the ASX in recent months. While Industrials and Construction, and Engineering had showed improved D2D scores, the hardest hit sectors according to the KPMG Report were Information Technology, Telecommunication, and Healthcare.

“We define ‘zombies’ as companies which have held a D2D score of below one for more than 18 months,” he said. “Nearly 1 in 5 companies on the ASX are stuck in a twilight zone, representing almost $5bn in stranded capital waiting to be restructured and deployed towards more efficient uses.”

Some notable trends were observed across those industry groups with the largest decline in D2D score – signalling signs of pressure. Up to 73 percent of companies examined in those industry groups took on more debt over the reference period. Interestingly, top line revenue shrunk for more than 20 percent of companies within the Healthcare, Consumer Durables & Apparel, and Insurance industries.

“In looking at the performance of sectors and industry groups, the market can see signs of weakness in declining D2D scores, particularly across these specific metrics,” according to Gayle Dickerson, Partner Restructuring Services, KPMG Australia “If a company carries low net debt and can continue to raise equity it’s unlikely it will require debt refinance. However, for companies where net debt is increasing and there are other stressors, the opportunistic investors looking for a bargain might take notice.”

She said this a particular signal for Private Equity looking for opportunities as well as M&A sector players considering ways of acquiring and rebuilding balance sheets of distressed targets.

“One additional key trend the fourth edition of our D2D Report shows is that a slowdown in Residential building is impacting the Construction Materials companies industry – that is those supplying building products for residential housing. We see this in the context of headwinds for construction more broadly.”

About KPMG’s Distance to Default Report – November 2018

The fourth edition of KPMG’s bi-annual Distance to Default (D2D) Report profiles the corporate health of companies across all ASX sectors in the 6-month period to June 2018. The D2D score serves as a useful metric for benchmarking company performance across different industries, irrespective of company size. Default risk (or insolvency) stems from the uncertainty surrounding a company’s ability to service its debt as and when it falls due. Prior to default, there is no way to easily discriminate unambiguously between companies that will default and those that will not. At best we can only make probability-based assessments of the likelihood of default. With this in mind, KPMG sought to identify an effective financial metric to determine the industry sectors with higher default risk as compared to their peers hence the D2D scoring system.

 

For further information

Marjorie Johnston
KPMG
0407 329 430
mjohnston4@kpmg.com.au
 

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