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Inside the Market’s roundup of some of today’s key analyst actions

As fourth-quarter 2021 earnings season ramps up, equity analysts at National Bank Financial reiterated their view that the Canadian oil and gas sector is poised to deliver another year of strong returns, believing many companies “provide compelling investment opportunities in today’s commodity price environment.”

“Similar to last year, 2022 provides investors with a fascinating setup, backstopped by a myriad of factors that should complement the return of capital profile that investors are beginning to believe has some longer-term duration (with some skepticism),” said Travis Wood and Dan Payne in a research report released Thursday. “The well-documented tightness of the crude oil supply/demand complex is now compounded by growing geopolitical tensions, and given the continued strengthening in demand, we remain of the view that spot prices will remain relatively strong throughout most of 2022. Altogether, the sector is set to provide investors with a universe characterized by: liquidity strength, cheap valuations, ample FCF [free cash flow] and option value surrounding FCF allocation strategies. Keeping pace with the rapidly improved oil prices, we have updated our pricing assumptions to better align with strip pricing.”

The analysts expect earnings season to be “relatively uneventful quarter on the operations front” and project positive cash flow per share momentum to continue given stronger price realizations.

The firm raised his 2022 and 2023 forecast for WTI to US$81.00 per barrel (from US$70) and US$75.00 (from US$65), respectively. For natural gas, its 2022 NYMEX price assumption rose to US$4.05 per thousand cubic feet from US$3.75.

To align with those changes, the analysts made a series of target price adjustments to stocks in their coverage universe. The changes for large-cap stocks are:

  • Canadian Natural Resources Ltd. (CNQ-T, “outperform”) to $90 from $74. The average on the Street is $66.87.
  • Cenovus Energy Inc. (CVE-T, “outperform”) to $28 from $25. Average: $21.43.
  • Imperial Oil Ltd. (IMO-T, “sector perform”) to $70 from $58. Average: $53.74.
  • Ovintiv Inc. (OVV-N/OVV-T, “outperform”) to $60 from $52. Average: US$49.67.
  • Suncor Energy Inc. (SU-T, “outperform”) to $53 from $45. Average: $42.57.

For mid-cap stocks, their changes are:

  • Advantage Energy Ltd. (AAV-T, “outperform”) to $11 from $10. Average: $9.36.
  • ARC Resources Ltd. (ARX-T, “outperform”) to $21 from $20. Average: $18.78.
  • Birchcliff Energy Ltd. (BIR-T, “outperform”) to $11 from $10. Average: $9.60.
  • Baytex Energy Corp. (BTE-T, “sector perform”) to $6.50 from $5. Average: $5.02.
  • Crescent Point Energy Corp. (CPG-T, “outperform”) to $15.50 from $13.50. Average: $10.25.
  • Enerplus Corp. (ERF-T, “outperform”) to $20 from $19. Average: $17.58.
  • Freehold Royalties Ltd. (FRU-T, “outperform”) to $18 from $17. Average: $16.17.
  • Headwater Exploration Inc. (HWX-T, “outperform”) to $10.50 from $9. Average: $8.76.
  • Kelt Exploration Ltd. (KEL-T, “outperform”) to $8.50 from $7. Average: $6.85.
  • MEG Energy Corp. (MEG-T, “sector perform”) to $25 from $18.50. Average: $16.83.
  • NuVista Energy Ltd. (NVA-T, “sector perform”) to $11.50 from $9. Average: $10.04.
  • Peyto Exploration & Development Corp. (PEY-T, “outperform”) to $15 from $14. Average: $13.68.
  • Pipestone Energy Corp. (PIPE-T, “sector perform”) to $6 from $4.50. Average: $5.17.
  • Paramount Resources Ltd. (POU-T, “outperform”) to $35 from $30. Average: $29.60.
  • PrairieSky Royalty Ltd. (PSK-T, “sector perform”) to $22 from $18.50. Average: $18.80.
  • Spartan Delta Corp. (SDE-T, “outperform”) to $14.50 from $10. Average: $11.33.
  • Tourmaline Oil Corp. (TOU-T, “outperform”) to $62.50 from $57.50. Average: $63.21.
  • Topaz Energy Corp. (TPZ-T, “outperform”) to $25 from $24. Average: $23.35.
  • Tamarack Valley Energy Ltd. (TVE-T, “outperform”) to $7 from $5.50. Average: $6.03.
  • Vermilion Energy Inc. (VET-T, “outperform”) to $34 from $30. Average: $19.72.
  • Whitecap Resources Inc. (WCP-T, “outperform”) to $16 from $14. Average: $11.67.

“we reiterate our top ideas which were highlighted in our 2022 outlook (CVE, WCP, CPG, HWX and TVE as our top oil ideas, and TOU, ARX, BIR and SDE as our top gas ideas). For context, this collection of names offers, on average, a FCF yield of 17 per cent on leverage of 0.1 times D/CF [debt to cash flow], while trading at 3.7 times 2022 estimated EV/DACF [enterprise value to debt-adjusted cash flow],” they said,

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National Bank analysts Shane Nagle and Don DeMarco expecting few surprises from the fourth-quarter financial results of base metals producers given their production and 2022 guidance have largely already been released.

However, they expect logistical challenges and the impact from rising inflation to “feature prominently” in the coming weeks.

“Flooding in B.C. (impacting TECK/B, TKO and to a lesser extent CMMC) as well as additional shipping constraints and general inflationary pressures are expected to impact operational results in Q4,” the analyst said. “Looking forward, companies that have provided capital/operating cost budgets for 2022 suggest a 10-per-cent increase year-over-year.”

“Q4 production results remain outstanding for: CMMC, HBM and TECK/B, while guidance is outstanding for CMMC, HBM, TECK/B and TKO. NBF Q4/21 and 2022 estimates are more conservative than consensus as a result of more conservative operating cost assumptions.”

Mr. Nagle made minor target price reductions to these stocks:

* Capstone Mining Corp. (CS-T, “outperform) to $8 from $8.25. The average target is $7.98.

* Copper Mountain Mining Corp. (CMMC-T, “outperform”) to $4.50 from $4.75. Average: $5.18.

“Q4/21 operating results are likely to be impacted by lower grades and ramp-up of the 45,000 tpd mill expansion,” he said. “As a result, our Q4/21 EBITDA estimates are 11 per cent lower than consensus and 2022 production estimates are modestly lower. Despite this, the balance sheet continues to improve and the company is expected to benefit from ongoing exploration efforts showcasing longer-term optionality of the portfolio.”

* Ero Copper Corp. (ERO-T, “sector perform”) to $19.50 from $21. Average: $25.64.

* Taseko Mines Ltd. (TKO-T, “sector perform”) to $3 from $3.25. Average: $3.21.

* Teck Resources Ltd. (TECK.B-T, “outperform”) to $52.50 from $55. Average: $46.31.

“With lower sales, elevated coal costs and general 2022 capital guidance pre-released, Q4/21 results contain few negative surprises,” he said. “Our operating assumptions are largely in line with consensus for 2022, except for our more conservative startup assumptions at QB2. Despite logistical challenges from heavy rainfall in B.C. to start the year, strong FCF from the coal division and completion of QB2 will drive near-term FCF growth leading to increased shareholder returns.”

* Trevali Mining Corp. (TV-T, “sector perform”) to $2 from $2.25. Average: $2.63.

He maintained his targets for First Quantum Minerals Ltd. (FM-T, “outperform” and $40), Hudbay Minerals Inc. (HBM-T, “outperform” and $12.50) and Lundin Mining Corp. (LUN-T, “sector perform” and $12.50). The averages on the Street are $36.44, $12.94 and $12.24, respectively.

Mr. DeMarco kept a “sector perform” rating and 55-cent target for Sherritt International Corp. (S-T). The average is 79 cents.

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Predicting “fading economic growth momentum and cost inflation will present challenges for the mining sector this year,” Barclays analyst Matthew Murphy made a series of rating changes to stocks in his coverage universe on Thursday.

“We remain Neutral on the sector as a whole, but recommend tactical rotation from late-cycle copper miners into gold names, which, in our view, now represent an attractive hedge against risks of central bank error,” he said.

He upgraded these stocks:

* Franco-Nevada Corp. (FNV-N, FNV-T) to “equal-weight” from “underweight” with a US$110 target, up from US$107. The average on the Street is US$147.49.

* Ero Copper Corp. (ERO-T) to “overweight” from “equal-weight” with a $21 target, down from $23 and below the $25.64 average.

* Agnico Eagle Mines Ltd. (AEM-N, AEM-T) to “overweight” from “equal-weight” with a US$69 target, up from US$67 but below the US$75.78 average.

Conversely, Mr. Murphy cut First Quantum Minerals Ltd. (FM-T) to “underweight” from “equal-weight” with a $23 target, below the $36.44 average.

His target adjustments included: Teck Resources Ltd. (TECK.B-T, “equal-weight”) to $42 from $34 and Wheaton Precious Metals Corp. (WPM-N/WPM-T, “equal-weight”) to US$44 from US$41. The averages are $46.31 and US$55.51, respectively.

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National Bank’s Mike Parkin, Shane Nagle and Don Marco expect the fourth-quarter of 2021 to display “strong” cash flows for precious metals companies, citing “general guidance trends for 2021 calling for a stronger second half as catch-up capex spending was completed in the first half of the year, and generally, mines were expected to transition into stronger production periods in the second half thanks to either increased mining rates and/or expected improved grade profiles.”

In a research report released Thursday, they said a key focus of earnings season will be on mine site staffing given the “rapid onslaught” of the Omicron variant. They are lookin for “a signal to expect a weak Q1 in the making.”

“With respect to earnings results, we see a positive tailwind from concentrate provisional pricing as all key metals finished up quarter-over-quarter (gold up 4.1 per cent, copper up 8.9 per cent and silver up 5.1 per cent),” they said. “We expect cost pressures from inflation to generally weigh on Q4 earnings, with modest FX weakness Q/Q doing little to offset these pressures. For some of our producing companies, the outlooks for 2022 have already been provided; for the remaining companies, we should see 2022 guidance come out with earnings. Generally, for the companies that have provided guidance, the releases have noted inflationary pressures as a key reason for higher operating and capital costs year-over-year.”

The analysts made several minor target price adjustments, including these changes for senior and intermediate producers:

  • B2Gold Corp. (BTO-T, “outperform”) to $7.75 from $8. The average on the Street is $7.82.
  • Endeavour Mining Corp. (EDV-T, “outperform”) to $45.50 from $46. Average: $43.58.
  • Kinross Gold Corp. (K-T, “outperform”) to $13.50 from $13. Average: $12.70.
  • Eldorado Gold Corp. (ELD-T, “outperform”) to $17 from $16. Average: $19.75.
  • Lundin Gold Inc. (LUG-T, “sector perform”) to $11.75 from $13. Average: $14.81.
  • New Gold Inc. (NGD-T, “sector perform”) to $2.75 from $2.50. Average: $2.55.
  • OceanaGold Corp. (OGC-T, “outperform”) to $3 from $3.25. Average: $3.28.
  • SSR Mining Inc. (SSRM-T, “outperform”) to $27.50 from $28.50. Average: $30.90.
  • Yamana Gold Inc. (YRI-T, “outperform”) to $6.50 from $7. Average: $7.25.

“We have conviction in our differentiated view of 4Q21 earnings estimates vs. consensus for Dundee Precious Metals (DPM, OP, $11.00 target), Pan American Silver (PAAS, OP, $44.00), K92 Mining (KNT, OP, $11.50) and Endeavour Mining (EDV, OP, $45.50). Senior Top Picks: Endeavour Mining (EDV, OP, C$45.50), Kinross (K, OP, $13.50), Pan American Silver (PAAS, OP, $44.00). Intermediates/Juniors Top Picks: Aya Gold & Silver (AYA, OP, $11.25), Centerra Gold (CG, OP, $14.00) and Wesdome (WDO, OP, $15.25); Royalties Top Picks: Sandstorm (SSL, OP, $9.50),” they said.

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Expecting a rebound in leasing profitability this year and touting growth potential opportunities ahead, Scotia Capital analyst Konark Gupta raised his rating for Chorus Aviation Inc. (CHR-T) to “sector outperform” from “sector perform” on Thursday.

“We had been bearish on the stock since March 2020 due to a rapid deterioration in the aircraft leasing market and a stretched balance sheet heading into the pandemic, which we believe were the key drivers behind its underperformance in 2020 and 2021,” he said. “However, we think the stock could outperform this year as we are seeing signs of a rebound in the leasing market and given CHR has re-marketed vast majority of the off-lease aircraft. In addition to the leased portfolio returning to pre-pandemic levels this year, we expect CHR to be active on growth opportunities (organic and inorganic) as aircraft lease rates and residual values are likely recovering. Although the rebound in COVID cases globally could impact near-term results, we expect the market to look through and rather focus on growth potential in leasing and other non-CPA assets, which could drive multiple expansion.”

Mr. Gupta said the Halifax-based company has “strong” liquidity of $434-million, placing it in a good position to follow through on management’s plan to invest to $300-million to $400-million on aircraft acquisitions this year.

“We currently assume $340-million capex and seven aircraft acquisitions at CAC this year but our fleet growth assumptions could be conservative as mix (aircraft type) and source of aircraft (i.e., airline, lessor or OEM) would play a key role in average aircraft values,” he said. “In addition, we see a high probability of CHR pursuing other growth opportunities.”

“We believe the regional aircraft leasing market is ripe for some consolidation with opportunities driven by lessor restructuring, merger between large-aircraft lessors or private equity transactions. We think CHR could participate in industry consolidation as a buyer of aircraft portfolios from other lessors or even an entire lessor. However, we don’t think CHR will be alone in competing for any opportunities as private equity players remain active in the leasing space and CHR’s smaller competitor, TrueNoord (owns a portfolio of 56 aircraft worth US$975-million), recently raised US$250-million to further grow its leasing portfolio to 100 regional aircraft over the next 12 to 24 months.”

Mr. Gupta increased his target for Chorus shares to $6 from $4.75 based on a multiple expansion. The average is currently $5.31.

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After Wednesday’s release of “solid” third-quarter 2022 financial results for ATS Automation Tooling Systems Inc. (ATA-T), National Bank Financial’s Maxim Sytchev said: “we are buyers here.”

Before the bell, the Milton, Ont.-based automation solutions provider reported revenue of $546.8-million, up 48 per cent year-over-year and exceeding both the analyst’s $508.4-million estimate and the consensus projection on the Street of $506.8-million. Adjusted earnings per share of 52 cents also blew past expectations (42 cents and 44 cents, respectively).

Despite the beat, shares of ATS fell almost 3.4 per cent in Wednesday trading, leading Mr. Sytchev to conclude the “flat reaction to strong print is too conservative.”

“Investors are generally on edge now with only stories that ‘beat and raise’ capable of maintaining momentum,” he said. “In our view, ATA had a very strong quarter and backlog additions provide forward visibility (while revenue conversion metric is in line with co’s practice). While supply chain/inflation challenges persist for any company that touches physical production, ATA has been managing through the issues (while items like steel are already coming off the peaks). Longer-term trends of enabling greater automation will HELP the investment thesis. In addition, M&A optionality in the form of $1.5-billion shelf prospectus positions the company nicely when it comes to negotiating with potential sellers. All-in, we continue to view ATA shares as one of the most compelling in our coverage for 2022.”

Maintaining an “outperform” rating, Mr. Sytchev raised his target to $66 from $64. The average is $64.40.

Elsewhere, Stifel analyst Justin Keywood hiked his target to $66 from $61 with a “buy” recommendation.

“ATS is executing well in an above-average growth industry with the backdrop of supply chain disruptions, rising costs/wages and a tight labour market,” he said. “ATS operates in the higher valued verticals within the industry, like Life Sciences (55 per cent of sales) and leading to even higher growth. The company is also executing on a disciplined M&A program through largely a cultivation strategy at favorable multiples. ATS continues to be undervalued at 14 times forward EBITDA vs peers at 20 times. We increased our target price from $61 to $66 based on 16 times (15.5 times prior) and slightly higher F2023 EBITDA estimates. We see justification for higher valuation with the solid organic growth, margin expansion and with M&A looming as catalysts. ATS remains our 2022 top pick.”

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Stifel analyst Cody Kwong reaffirmed Enerplus Corp. (ERF-T) as “a Top Idea versus its peers” following Wednesday’s release of better-than-anticipated fourth-quarter 2021 production results and announcement of its plan to sell its Canadian assets to focus on operations south of the border.

“An update summary of Enerplus’ 4Q21 results shows production near the high end of guidance while capital investment overlaid Management’s expectations,” he said. “The Company has also announced its intention to sell its Canadian assets in efforts to streamline focus on its core Williston Basin region. This could be in addition to our speculation that ERF is also looking at potentially selling its Marcellus assets. If successful, Managements’ track record of high grading its portfolio over the past two years has been nothing short of impressive, with picking up high quality Williston Basin assets during the COVID-19 lows, and now potentially selling non-core assets with oil and natural gas prices at multi-year highs.”

Keeping a “buy” recommendation, he raised his target for Enerplus shares to $21 from $19. The average on the Street is $17.58.

“In our view, Enerplus continues to be an industry bellwether in how it not only has survived the COVID-19 driven downturn, but how it has become significantly stronger because of the multi-decade opportunities that the downturn presented,” said Mr. Kwong. “Now finally starting to be recognized as a demonstrated leader in return of capital policy, an ambassador of perennially high-grading assets, and growing a highly economic production base with an expanded drilling inventory, we believe that the stock valuation is long overdue a re-rate, and should eventually attract a premium multiple versus its peers.”

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Scotia Capital analyst Phil Hardie remains bullish on all four TSX-listed P&C insurers in his coverage universe early in 2022, believing “each name can offer attractive opportunities across a spectrum of investment styles ranging from value to growth and defensive.”

“At the start of 2022, we believe P&C insurance investors are focused on three key interrelated themes: (1) personal auto line performance as “return to the office” builds momentum and a ‘new normal’ for driving patterns evolves, (2) inflationary trends, and (3) premium rate environment and duration of the current pricing cycle,” he said in a research note.

The analyst raised his target for Intact Financial Corp. (IFC-T) to $198 from $196 with a “sector outperform” rating. The average on the Street is $198.42.

He lowered his Fairfax Financial Holdings Ltd. (FFH-T) target to $780 from $790, exceeding the $773.61 average, with a “sector outperform” rating.

Mr. Hardie maintained a $34 target for Definity Financial Corp. (DFY-T, “sector outperform”) and $53 target for Trisura Group Ltd. (TSU-T, “sector outperform”). The averages are $32.33 and $57.64, respectively.

“FFH is likely to appeal to large-cap value investors and offers the highest one-year expected upside of the group,” the analyst said. “Large-cap investors looking for a high-quality name to reduce portfolio beta that trades at reasonable valuation should look to IFC. For small-cap investors, we recommend TSU, a unique and diversified specialty insurance platform that provides a high-growth business with an attractive growth profile. We view DFY as an evolutionary story, but we believe that what truly set it apart from its publicly traded peers are the themes of excess capital and M&A and what they mean for the ROE outlook and the stock’s valuation.”

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In other analyst actions:

* Coming off research restriction, Barclays analyst John Aiken reinstated coverage of Manulife Financial Corp. (MFC-T) with an “overweight” rating and $36 target, exceeding the $31.21 average.

“Despite a strong rally to start off 2022, significant upside remains for MFC as we believe the market continues to undervalue its growth profile and reduced risk profile,” he said. “MFC retains strong leverage to a rising rate environment and continues to expand its high growth/high profitability businesses. While we do not expect the stock will approach a market multiple until its LTC exposure is dealt with, we believe that the 2.8 times P/E and 0.8 times P/B discounts are overly punitive and represent strong upside potential for investors.”

“We expect Manulife will rebound from a somewhat surprisingly weak third quarter, with the reinsurance losses not expected to recur. Further, one of the surprises in the third quarter was a 4.5-point increase in its efficiency ratio. We believe that this is transitory (with much of the losses coming from Global Wealth) and contributes to our expected recovery in profitability in the fourth quarter.”

* Following the release of “solid” fourth-quarter results and a quarterly distribution increase of 6 per cent, National Bank Financial analyst Patrick Kenny raised his target for Brookfield Infrastructure Partners L.P. (BIP-N, BIP.UN-T) to US$68 from US$67, exceeding the US$65.83 average, with an “outperform” rating, while Scotia’s Robert Hope also bumped up his target to $68, from $65, with a “sector outperform” recommendation.

“While inflation headwinds continue to present a macro headwind for certain economies around the globe, Brookfield Infrastructure Partners’ portfolio is positively correlated with approximately 70 per cent of revenues adjusted for inflation indexes, including 80-90-per-cent protection across its Utilities, Transport and Data investments. Meanwhile, with a robust deal pipeline presenting opportunities across all its segments and two utility investments totaling US$715-million (AusNet & Intellihub) expected to close by the end of Q1/22, BIP is well on track to achieve its US$1.5-billion capital deployment target for 2022. On the capital recycling front, BIP anticipates executing US$1.0-billion of asset sales in 2022, with $100-million net to BIP already announced year-to-date, while anticipating completing the sales process for a portion of its Brazilian electricity transmission business by H2/22,” Mr. Kenny said.

* National Bank Financial analyst Matt Kornack cut his target for Allied Properties Real Estate Investment Trust (AP.UN-T) by $1 to $51 with an “outperform” rating. The average is $51.21.

* CIBC World Markets analyst John Zamparo cut his Canopy Growth Corp. (WEED-T) target to $9 from $12, keeping an “underperformer” recommendation. The average on the Street is $13.02.

* Mr. Zamparo also reduced his Aurora Cannabis Inc. (ACB-T) target to $6.50 from $9.25 with a “neutral” rating. The average is $7.17.

* CIBC’s Stephanie Price raised her target for CGI Inc. (GIB.A-T) to $135, exceeding the $127.13 average, from $130, reiterating an “outperformer” recommendation, while Scotia’s Paul Steep bumped up his target by $1 to $132 with a “sector outperform” rating.

“We believe CGI is positioned to benefit from ongoing efforts by firms to transform their operations and to increase their focus on new and updated systems, although we continue to monitor for volatility as firms navigate the impacts of the pandemic. In our view, CGI remains positioned to execute well despite end-market volatility, generating strong FCF to both invest in its business and provide returns to shareholders through capital deployment,” said Mr. Steep.

* Mr. Steep cut his Dye & Durham Ltd. (DND-T) target by $1 to $59, keeping a “sector outperform” rating. The average is $62.80.

“Our view is that the firm’s financial results will continue to be fueled by its organic growth and integration of recent acquisitions (ex TELUS Financial Solutions),” he said. “We believe that near term DND’s focus will be on closing and integrating the pending acquisition of Link Administration. Beyond this, the firm is expected to undertake M&A activity in adjacent markets. Risks for the stock are: ability to complete and integrate acquisitions (incl. regulatory approvals), exposure to real estate activity in Canada/U.K./APAC, and customer acceptance of pricing changes for the firm’s products/services. Our near-term focus for DND’s financial performance remains centered on its integration and onboarding efforts given recent M&A activity along with real estate activity levels in key markets.”

* Following its late Wednesday release of “solid” third-quarter results and an a leadership change, Raymond James analyst Steven Li cut his target for shares of Lightspeed Commerce Inc. (LSPD-T) to $68 from $110 with an “outperform” rating.

* CIBC initiated coverage of Magnet Forensics Inc. (MAGT-T) with an “outperformer” rating and $33 target. The average on the Street is $49.83.

* Canaccord Genuity analyst John Bereznicki raised his Keyera Corp. (KEY-T) target by $1 to $35, above the $34.06 average, with a “buy” rating.

* BMO Nesbitt Burns analyst Mike Murphy raised his Parex Resources Inc. (PXT-T) target to $36 from $34 with an “outperform” rating. The average is $36.25.

* After a “significiant” first-quarter earnings miss, BMO’s Peter Sklar reduced his Exco Technologies Ltd. (XTC-T) target by $1 to $10, below the $11.75 average, with a “market perform” recommendation.

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