Ashtead's Proposed US Listing

Investing.com – Ashtead (LON:AHT) has proposed moving its listing to the US from the UK, and Goldman Sachs sees the potential for more companies going down the same route.

The valuation gap to the US has become larger, the US bank said, and only a small proportion of this is due to sector distribution; every sector in the UK is on a double-digit P/E discount to its US counterpart sector.

This discount is, of course, a Europe-wide phenomenon, but the gap between the UK and US is especially large.

A lack of allocation to UK equities by long-term domestic capital (pensions/insurance funds) and households is a significant reason for the discount, we think. Only about one-third of the UK equity market is held domestically, compared with over 80% in the mid-1990s.

Assuming we do not see fund flows into UK stocks, there are only so many ways to try to narrow the valuation gap to the US: relisting, taking private (where valuation gaps are lower), being taken over, or doing more buybacks (if you think your shares are undervalued).

“We are seeing all of these happen … but, of course, these create their own momentum, shrinking the UK market further and reducing total trading turnover,” Goldman said.

Exposure to North America for the FTSE 100 is, in aggregate, 29%, which is higher than UK exposure (22%) or Europe-ex UK (16%).

“There are plenty of opportunities for UK stocks to relist,” Goldman said. “That all being said, smaller stocks would find themselves tiny within the context of the much larger US market, while bigger stocks that hope to be in the S&P 500 would have no guarantee of inclusion and would likely face a long wait until it happened.”

To stem this migration and reduction in equity supply, more allocation to equity by UK-based capital is needed, in our view. This is something both the current and previous governments have recognized, but material policy action has been lacking.

“It will take substantial commitment to reverse the outflow from UK equities that has been happening since the 1990s. Changing rules for insurance companies, reducing subsidies for allocating to cash or bonds, and increasing those for allocating to equity could all be part of any remedy, in our view,” the US bank added.