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Investing.com -- Barclays (LON:BARC) has revised its view on the U.K. water sector, pointing to stronger prospects for investment and returns, and upgraded United Utilities (LON:UU) to “overweight.”
In its latest sector report, the bank said the outlook has improved on three fronts: a more stable regulatory framework under the Cunliffe Review, sharply higher capital investment expected in the coming decade, and the likelihood of returns above regulatory requirements.
Barclays raised its price target for United Utilities to £15.35 from £12.80, while Severn Trent’s was lifted to £33.85 from £29.60 and Pennon’s to 670p from 650p.
The research estimated that the water sector is trading at a 10% premium to its March 2026 regulated capital value (RCV), below the 20-year average premium of 15%.
At that level, Barclays calculates internal rates of return of 11.5% for United Utilities, 14% for Pennon (LON:PNN) and 10% for Severn Trent (LON:SVT) by 2030.
Barclays expects capital expenditure across the industry to rise 40% from £56 billion in AMP8 (2025–30) to £78 billion in AMP9 (2030–35), with United Utilities’ investment projected to increase by 78%.
The brokerage flagged spending pressures from drought resilience, asset health and contamination risks from PFAS chemicals.
It noted that United Utilities is the most exposed to water resource and asset health challenges.
The bank also forecast nominal returns of 8.5% for United Utilities in AMP8, alongside 9.2% for Severn Trent and 8.4% for Pennon.
It said returns could edge higher in AMP9 as companies benefit from larger regulatory bases, though with less scope for outperformance.
Regulatory and political developments remain key risks. Barclays pointed to the government’s forthcoming White Paper on the Cunliffe recommendations, the Competition and Markets Authority’s rulings on appeals, and ongoing enforcement actions from Ofwat and the Environment Agency as potential drivers for the sector through 2026.