Investing.com -- Morgan Stanley sees a short-term opportunity in French utility Engie into year-end, after French utility shares fell as the gap between French and German government bond yields widened.

The brokerage kept its “overweight” rating on Engie but cut its price target to €29 from €31, while lowering its targets on Veolia and Voltalia.

Morgan Stanley said Engie’s share price has been closely linked to the French-German bond yield gap, known as the OAT spread.

It expects the company to report 2026 recurring net income in the top half of its €4.9 billion to €5.5 billion guidance range, helped by higher commodity prices, favourable currency moves and cost savings.

The brokerage forecasts 2026 recurring net income of €5.33 billion, about 2% above consensus and 3% above the midpoint of Engie’s guidance range. Its 2027-29 estimates are about 6% above consensus, and it expects rolling the group’s guidance into those years at full-year results to be positive.

Morgan Stanley said Engie trades at about 8 times 2027 estimated enterprise value to core earnings, versus about 9 times for peers, and about 11 times 2026 estimated price-to-earnings, compared with 15 times for peers. It sees average total shareholder returns of about 12% over 2026-29.

It identified three potential catalysts in the coming months: the value of Engie’s French gas networks, an update on talks over a Belgian nuclear deal and new asset sales under the company’s €6 billion 2026-28 plan.

Morgan Stanley said recent European gas network deals were valued at about 10 to 12 times core earnings and at a 0% to 55% premium to regulated asset value, compared with about 8 times and less than 5%, respectively, in its model for Engie.

Engie is due to report nine-month results on Nov. 5. Morgan Stanley said a further increase in 2026 guidance on that day is not its base case.

It expects Engie may provide an update on Belgian nuclear talks after the deadline to conclude heads of terms was postponed to Nov. 4 from Oct. 1.

Risks to its Engie view include new French taxes on power and gas activities, lower gas and electricity prices, a further widening of the bond yield gap and another delay or cancellation of the Belgian nuclear deal.

Morgan Stanley kept water and waste group Veolia at “equal-weight” but cut its price target to €35 from €38, citing the same higher discount rate. It expects weak earnings momentum, with high diesel prices creating a short-term squeeze and higher bond yields having a small negative impact.

The brokerage said Veolia is the least exposed among its French utilities to political developments, with about 20% of revenue coming from France, mainly through municipal contracts. Its bull case is €41 a share, implying more than 30% upside.

Morgan Stanley raised Voltalia to “equal-weight” from “underweight” after a 40% fall in its share price and two disappointing earnings updates this year.

It cut its price target to €5 from €7, implying 3% upside, and said it still views the valuation as relatively unattractive.

Morgan Stanley said political headline risk could remain high, with about seven months to go before the 2027 presidential election. The first round is on April 18, 2027, followed by the second round on May 2. It said it is too early to call a bottom for French utility shares.

It said Engie has limited exposure to French power prices and that risks to its French gas networks are limited because the regulator is independent and sets network tariffs.

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