UK water stocks rally after strong regulatory determination for AMP8

Investing.com -- UK water stocks rallied on Thursday following the release of a robust regulatory package for the sector's forthcoming investment period, AMP8 (2026-2030). 

Analysts at Morgan Stanley (NYSE:MS ) have flagged several key factors underpinning this surge, including favorable determinations on expenditure, returns, and regulatory incentives.

Morgan Stanley's analysis points to a "strong result" for the water sector, with regulatory allowances coming in above expectations. 

Additionally, companies like Severn Trent (LON:SVT ), United Utilities (OTC:UUGRY ), and Pennon (LON:PNN ) Group secured total expenditure allowances 9%, 8%, and 3% higher than Morgan Stanley's estimates, respectively. 

This upward adjustment reflects increased confidence in the sector's ability to meet investment requirements while maintaining financial stability.

The allowed base return on equity was set at 5.1% in real terms, aligning with market consensus but exceeding expectations in terms of its impact on valuations. 

Furthermore, the regulatory cost of debt allowance of 3.15% includes a 30 basis point "reverse halo" adjustment, further enhancing sector attractiveness. These factors collectively boost the sector's capacity for long-term cash flow generation.

Dividend expectations also received a lift, with a base regulatory assumption of 4%, marking an improvement from earlier drafts and enhancing investor appeal. 

Additionally, performance-based incentives (Outcome Delivery Incentives) have been recalibrated to an annual mechanism, benefiting outperforming companies, particularly Severn Trent (NS:TREN ), which remains the sector leader.

This regulatory clarity and financial support have reassured investors, translating into upward momentum for listed water utilities. 

Severn Trent, United Utilities, and Pennon shares were up 2%, 0.9% and 3.3%, respectively, on Thursday, with Morgan Stanley emphasizing potential upside in their price targets—25% for Severn Trent, 22% for United Utilities, and 29% for Pennon.

Source: Investing.com