KPMG Australia's Distance to Default (D2D) report has revealed an improvement in corporate health across Australian Stock Exchange (ASX) listed companies from December 2016 to June 2017.
The report analysed the default risk of nearly 2000 companies, based on results from financial statements and market information, including share price. The D2D score was attributed to each company/sector, on a scale of 0 to 5: five being the furthest from default.
Gayle Dickerson, KPMG Partner Restructuring Services, said: “2017 was one of the least volatile years for some time on the ASX. While business confidence remains reasonably strong, there is cautiousness about the broader economic and political environment, both nationally and globally. This business confidence, combined with the major banks reporting lower levels of bad debts off already low levels, suggests improved corporate health across the ASX. However, there are clear winners and losers across the sectors.”
Despite talk of housing bubbles deflating amid softening demandfrom Chinese investors, real estate was the highest performing sector with an average D2D score of 4.2, followed closely by financial services, with a score of 3.8. Energy (1.15) and materials (1.22) were the lowest performing sectors in the analysis. Sectors outperforming the average ASX D2D score (1.96) included retail and consumer markets (2.28); consumer discretionary (2.41); consumer staples (2.33); utilities (2.63); telecommunication services (2.12); and industrials (2.20). Healthcare (1.74) and information technology (1.47) both fell below the average.
Comparing the June 2017 D2D results with December 2016, some interesting trends appeared. While the average consumer discretionary D2D score improved from 2.25 to 2.41, driven by stronger performance in automobiles and household products, there was a widening disparity between the ‘haves and have nots’ in retail. The report’s analysis reflects that while there were more consumer discretionary companies performing above a score of 3 there were also more reporting below 1, particularly in specialty retail. In contrast, consumer staples fell from 2.49 to 2.33 – a trend largely influenced by the competitive pricing war in the supermarket industry, according to the report. The materials and energy sectors showed an uplift in performance, their average D2D score increased by at least 10 percent.
Carl Gunther, Partner Restructuring Services, added: “Although the energy sector score lifted due to improvement in oil and gas prices, over half of companies that make up this sector have a D2D score below 1. They are predominantly explorers and live hand-to-mouth from one capital raising to the next. Interestingly, 1 in 5 of ASX-listed companies are what we call zombie companies, in that they have been reporting a D2D score of under 1 for 3 or more periods. That equates to over $11.1 billion of market capitalisation tied up in these companies that could be deployed to better or higher use.”
Despite an overall improvement, some sectors saw a decline in performance. Healthcare, information technology, telecommunication services and consumer staples all suffered.
With Amazon’s entry to Australia continuing to dominate headlines, the D2D report spotlights the performance of the retail and consumer sector, which saw a decline from 2.40 to 2.28 from December 2016 to June 2017.
The report also revealed an increase in the proportion of retail and consumer markets’ companies performing below the ASX average D2D score, with 52 percent of participants now performing below the ASX average. This is an indicator of pressure in the sector as compared to the ASX more broadly.
“Pressure is particularly evident across companies in the distributor and specialty retail industries. This decline may reflect retailers looking to sell direct to customers rather than wholesale through distributors, which typically generates a higher margin and stronger brand control. Given the squeeze on discretionary spending, specialty retailers are struggling to stay relevant unless they have a strong omni-channel and in-store experience,” said Gayle Dickerson.
Dickerson warned that while cutting costs is a necessary tool to help reign in spending and potentially save a distressed retailer, it can also signal the beginning of a downward spiral.
“It is difficult to cut your way to growth. Retailers also need to think in terms of innovation and readjusting the business model to a truly customer-centric model or they won’t set themselves up for long term growth,” she said.
“With clear ‘haves’ and ‘have nots’ emerging in retail and consumer markets, traditional retailers have rarely been under more pressure from more sources. Those on the edge need to re-consider their strategy, review their locations, really know their customers, and consider how they are going to fund the investment needed to stabilise their business, amid increasing pressure on margins and overseas competition. Those retailers relying on a bumper Christmas may be disappointed as there is little to indicate consumers will be anything less than savvy, given that pre-Christmas discounting of inventory has become something to expect and consumers’ growing appetite to buy their Christmas goods in advance on the Australian Black Friday and Cyber Monday sales,” added Dickerson.
T: +61 408 195 368
KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 152 countries and have 189,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.