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

Canaccord Genuity analyst Scott Chan sees tailwinds emerging for Canadian banks from their personal and commercial operations as net interest margins benefit from a “positive change” in future rate hike expectations.

In a research report released Monday, he raised his financial expectations and target prices for shares of the Big 6, also seeing encouraging loan growth trends.

“For 2022, the futures market is now pricing in less-than 5/more than 5 interest rate hikes in the U.S./Canada, respectively,” he said. “Based on Canadian banks interest rate sensitivity disclosures (assuming 100 basis points increase in interest rates), we analyze each Bank’s incremental NII and EPS accretion potential (largely falls to the bottom line). In that scenario, we suggest that TD would benefit the most with EPS accretion at 9.9 per cent (CM second) and BNS the lowest at 1.6 per cent. Among the other Banks, we suggest that CM (4.9 per cent) and RY (4.7 per cent) have above-average EPS accretion potential, while BMO (3.5 per cent) and NA (2.7 per cent) are below average. That said, we note that BMO’s US P&C exposure (US proforma PTPP at 44 per cent of total) should significantly benefit from their recent Bank of the West acquisition.

“We believe bank sensitivities give us a good sense of direction on potential positive implications toward NII and EPS accretion. In our models, we have incorporated 50 bps of incremental rate increases in U.S./CA, which could still prove conservative (other items to consider such as product mix, market competitiveness, yield curve has flattened recently, forward yield curve as well) based on our prior assumptions (and current futures interest rates market pricing). Overall, we now forecast Group F2022E / F2023E NII growth of 6 per cent/10 per cent, representing 1 per cent/2 per cent positive NII revisions.”

With his revised total return assumptions, Mr. Chan downgraded Royal Bank of Canada (RY-T) to “hold” from “buy,” pointing to total return on revenue (RoR) potential of 4 per cent, which is the lowest among its peers and below the 6-per-cent average.

“Over the past 3 months, RY stock has been one of the best Bank performers due to its defensive attributes,” he said. “Overall, we increased our Group fiscal 2022/2023 cash EPS assumptions by 1 per cent/3 per cent, respectively (TD incurred most EPS upside based on sensitivities of 100 bps increase in interest rates; BNS least). In fiscal 2023, we now forecast Group EPS growth of 8 per cent (from 5 per cent).

“Going forward, we favour the Banks (BMO, BNS, CM, TD) with larger P&C exposure/ rate sensitivity (largely lagged most other segments during the pandemic) and generally less constructive on Banks (RY, NA) with more market-sensitive segments (e.g. Capital markets, Asset management, Wealth management). In the near term, we see tough comps and headwinds on market-sensitive businesses (e.g. asset declines, trading normalization) impacting relative valuation.”

Mr. Chan raised his target for RBC shares to $148 from $141. The average on the Street is $146.16, according to Refinitiv data.

His other changes were:

  • Bank of Montreal (BMO-T, “buy”) to $167 from $160. Average: $159.11.
  • Bank of Nova Scotia (BNS-T, “buy”) to $98 from $96. Average: $95.66.
  • Canadian Imperial Bank of Commerce (CM-T, “buy”) to $172 from $161. Average: $167.09.
  • National Bank of Canada (NA-T, “hold”) to $108 from $105. Average: $107.
  • Toronto-Dominion Bank (TD-T, “hold”) to $108 from $102.50. Average: $106.83.

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Continuing to push Shopify Inc. (SHOP-N, SHOP-T) as “an attractive long-term investment,” RBC Dominion Securities analyst Paul Treiber sees an “asymmetrical risk-reward” for its shares currently, though he expects it to be pressured by any “negative surprises” coming from the release of its fourth-quarter financial results on Feb. 16.

“Shopify’s shares pulled back 14 per cent on January 21 following media reports that Shopify cancelled contracts with several SFN [Shopify Fulfillment Network] warehouse partners, effectively reducing its capacity by 50 per cent,” he said. “The article also indicated that Shopify was no longer allowing services such as shipping merchant branded boxes or two-day shipping without express costs. In a response, Shopify indicated that it is making changes to SFN, which is not expected to reduce capacity.

“While SFN is a large opportunity for Shopify, we believe the pullback is reflective of the risk-off environment, given: 1) SFN is still early access and has nominal impact on near-term financial results; 2) reports regarding the slow ramp of SFN were well known; and 3) Shopify has several options to re-invigorate SFN (e.g. new partnerships).”

For the quarter, Mr. Treiber predicts headline results will exceed expectations, seeing gross merchandise volume (GMV) momentum remaining “healthy” versus the Street’s estimates.

He’s projecting revenue of US$1.4-billion, up 43 per cent year-over-year and above the consensus forecast of $1.34-billion. Pointing to seasonality and operating leverage, he’s expected adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to fall 2 per cent to year-over-year but rise 41 per cent from the previous quarter to US$209-million, topping the Street (US$183-million). His adjusted earnings per share projection of US$1.44 also beats the consensus (US$1.27).

“Consensus GMV estimates already anticipate deceleration and appear achievable,” said Mr. Treiber. “We anticipate GMV to rise 33 per cent year-over-year to $54.7-billion Q4, above consensus at $53.4-billion, which appears achievable to us. Consensus estimates imply GMV up 28 per cent quarter-over-quarter (RBC 31 per cent), below Shopify’s typical seasonality (3-year average up 38 per cent quarter-over-quarter). Moreover, we anticipate Shopify to continue to grow faster than broader e-commerce industry sales, which according to U.S. Census data, rose 23 per cent quarter-over-quarter in Q4/CY21,stronger than Q4/CY20 (20% Q/Q). Potential headwinds to Q4 GMV such as late December deceleration, supply chain constraints, and reduced stimulus, in our view, are already reflected in GMV estimates.”

While seeing the Ottawa-based e-commerce giant possessing “one of the most compelling growth opportunities” in his coverage universe, Mr. Treiber cut his target to US$1,450 from US$1,800 with an “outperform” rating. The average on the Street is US$1,514.18.

“While the stock is likely to remain choppy in the short-term, we see Shopify continuing to rapidly scale and monetize its large TAM,” he said. “We adjust our target ... to reflect the meaningful multiple contraction among high-growth software stocks.”

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With its “diversified portfolio of companies across sectors/geographies” continuing to deliver “solid” results, Brookfield Business Partners L.P. (BBU-N, BBU.UN-T) is “recovering nicely from pandemic impacts,” according to National Bank Financial analyst Jaeme Gloyn.

On Friday, Brookfield reported better-than-anticipated fourth-quarter 2021 financial results, pushing its shares higher by 0.8 per cent in New York.

Adjusted earnings before interest, taxes, depreciation and amortization rose almost 30 per cent year-over-year to US$550-million, topping both Mr. Gloyn’s US$422-million projection and the consensus forecast of US$434-million. Adjusted earnings from operations per unit rose 36 per cent to US$2.69, also topping expectations (US$1.83 and US$1.81, respectively).

“BBU beat our expectations in all segments, enhanced its liquidity position through a preferred shares arrangement with Brookfield Asset Management and announced the acquisition of Cupa Group,” the analyst said.

Keeping an “outperform” recommendation, Mr. Gloyn raised his target to US$68 from US$63. The average is US$60.

“We hold a favourable view of BBU’s recent flurry of acquisition activity (SG Lottery, DexKo and Modulaire), including the upcoming creation of BBUC and eventual launch into the technology sector,” he said. “We anticipate BBU’s ongoing successful execution/integration will drive the shares higher. Our US$68 price target implies a valuation multiple of 8.8 times EV/EBITDA on our 2023E estimates.”

Other analysts making target adjustments include:

* Scotia Capital’s Phil Hardie to US$58 from US$56 with a “sector outperform” rating.

“BU delivered record Q4/21 results that were ahead of expectations and reflected a broad-based beat with all segments contributing higher-than-anticipated earnings,” he said. “Some seasonal benefits from Westinghouse and exceptionally strong underwriting from Sagen do not likely reflect a sustainable run-rate performance. That said, the quarter’s strong operational performance further underpin our confidence in BBU’s value creation potential.

“Some key themes coming out of 2021 and its fourth-quarter results include: strong value creation opportunities, high level of capital recycling, and increased financial flexibility. We expect the ability to deliver NAV growth in the mid-teens and improved recognition of the evolution of BBU’s portfolio quality to close its NAV discount over time.”

* iA Capital Markets analyst Matthew Weekes to US$58 from US$57 with a “buy” rating.

“BBU’s strong Q4 results strengthen our outlook for the Partnership, which we believe will continue to experience tailwinds and execute on growth and profitability initiatives across its portfolio, leading to continued growth in NAV,” said Mr. Weekes. “We are increasing our EBITDA estimate.”

* Desjardins Securities’ Gary Ho to US$59 from US$57 with a “buy” rating.

“BBU reported strong 4Q results. The overall portfolio update was positive and management sees further upside to its NAV, targeting +US$20/unit over the next few years. Integration of recent acquisitions will be a near-term focus. The addition of the BBUC structure should also broaden the investor base. We will continue to monitor the impacts from rising rates and inflation,” he said.

* TD Securities’ Cherilyn Radbourne to US$77 from US$75 with an “action list buy” rating.

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Raymond James analyst Andrew Bradford thinks Enerflex Ltd. (EFX-T) was a “standout unvalued stock before the accretive acquisition” of Exterran Corp. (EXTN-N) and “now it’s even more so.”

Accordingly, seeing a lack of obstacles threatening the US$735-million deal and the potential for Enerflex to “return cash to shareholders directly and meaningfully within the next 18 months, either via increased dividends or share buyback,” he raised his rating for the Calgary-based company to “strong buy” from “outperform” on Monday.

“While the combination of Enerflex and Exterran will carry more debt, and the current year’s build/growth program will consume free cash flow, once done, the free cash flow potential from the combined company will be highly attractive and difficult to ignore,” said Mr. Bradford. “The valuation is low both on its own merit and relative to close comps. .... Lastly, natural gas will almost certainly be a multi-decades-long bridge in energy transition.”

He raised his target for Enerflex shares to $14 from $12.25. The average is $11.47.

“Even prior to the deal announcement, we saw a provocative dislocation in Enerflex’s market value relative to its pure rental and service peer group,” said Mr. Bradford. “Today, we strongly suspect the market is implicitly and unintentionally ascribing negative values to both Enerflex and Exterran’s Engineered Systems/Product Sales business lines, where these values should at worst be nil. Prior to the Covid-induced downturn, these business lines had long track records of profitable operations. It’s our view they will return to profitability, and in doing so will unencumber EBITDA. From a high level, this will appear as EBITDA growth and drive value appreciation.”

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RBC Dominion Securities analyst Michael Siperco sees Novagold Resources Inc.’s (NG-A, NG-T) Donlin project in Alaska as a “next-generation, large-scale, high-quality deposit with long-term upside.”

“Donlin stands out compared to other large-scale, undeveloped gold or gold/copper projects with its 39moz resource at 2.28g/t and potential for 30-plus years of mine life, with ongoing optimization work on the project design and economics,” he said. “Donlin’s other advantages include the location in a tier 1 jurisdiction, the 50-per-cent Barrick interest, and the key federal permits in hand.”

“Finding, advancing, and building large-scale gold projects is becoming harder, with less exploration and fewer new discoveries, especially larger (+6moz) discoveries. Sector-wide reserve life has fallen almost 30 per cent over the last 15 years due to mined ounces, lower economic gold price assumptions, and a lack of new mines, while average open-pit (OP) mined grade has also dropped 30 per cent over the same period. A project like Donlin, with above-average grade and a very long life, stands out as being the type of asset that can make a material impact on a larger production profile and move the needle for senior producers (including Barrick).”

In a research report released Monday in which he initiated coverage with a “sector perform” rating, Mr. Siperco thinks Donlin could be “moving up the value chain” in partner Barrick Gold Corp.’s (ABX-T) portfolio, particiularly if upfront capital expenditures can be reduced.

“For Novagold, a partner like Barrick reduces technical risk, financing risk, and (eventually) operating risk while providing a valuation backstop for the project/stock,” he said. In our view, higher spending in 2022 ($60m total project budget) indicates Barrick’s interest in further development and study, focused on optimizing the project and economics.”

“Donlin is among Barrick’s largest development projects globally, and with fewer apparent acquisition alternatives and potential for optimized/phased development, Donlin might be Barrick’s best large-scale growth option.”

The analyst set a target of US$8 per share. The average is US$15.33.

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Bullish on the industrial real estate investment trust sector, Scotia Capital analyst Himanshu Gupta initiated coverage of Pro Real Estate Investment Trust Instrument (PRV.UN-T) with a “sector perform” recommendation, seeing it “best suited to investors who are looking for higher yield but could benefit from higher NAV growth as well if cap rate spread between primary and secondary markets narrows over time.”

“PRV is trading at a 5-per-cent discount to NAV and with a 6.6-per-cent distribution yield. PRV has one of the highest distribution yields in our coverage universe, with a manageable 85-per-cent AFFO [adjusted funds from operations] payout ratio in 2022,” he said. “In fact, PRV is one of the few names with combination of 5-per-cent-plus discount to NAV and 5-per-cent-plus distribution yield.”

Mr. Gupta said he likes the Montreal-based REIT’s plan to continue to increase exposure to Industrial real estate and reduce exposure to grocery-anchored retail and offices.

“The Industrial cap rate spread between MTV (Montreal, Toronto, and Vancouver) and non-MTV (Halifax, Ottawa, Calgary, Edmonton, Winnipeg) markets has widened to 159 basis points currently, versus a 15-year long-term average of 78 bp,” he said. “Of PROREIT’s portfolio, 48 per cent is based in the Maritimes (Halifax, Moncton) and another 39 per cent in other secondary markets (Winnipeg, Ottawa) with only 15 per cent in MTV markets. With cap rate transactions in the 2s and 3s in MTV, investors are likely to look outside the core for better yields – this could drive further cap rate compression for PROREIT. While rent growth has been outsized in MTV markets, it is slowly creeping into other secondary markets as well. PROREIT has a mark-to-market rent upside potential of 24 per cent in its industrial portfolio.”

Believing it is “trading like a diversified REIT despite high concentration in Industrial real estate,” he set a target of $7.25 per unit, narrowly below the $7.70 average.

Mr. Gupta also initiated coverage of Parkit Enterprise Inc. (PKT-X) with a “sector perform” rating, calling it a “value-add industrial real estate play at an early stage.”

He set a $1.50 target, below the $1.78 average.

“Parkit is a consolidation play in an attractive Canadian Industrial real estate sector,” he said. “Parkit is more than just a roll-up story, as we see the company as a ‘value creator’ with an active expansion/re-development program in major markets (Greater Toronto Area, Greater Montreal Area, Ottawa).

“We recommend Parkit to small cap growth investors, as we see outsized NAV growth over the next few years.”

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Though he sees value in its stock at current levels, RBC Dominion Securities analyst Drew McReynolds said he’s “looking for more timely entry points” into AcuityAds Holdings Inc. (AT-T).

He initiated coverage of Toronto-based digital advertising firm with a “sector perform” rating.

“AcuityAds has not been immune to industry headwinds that have included concerns around the potential impacts of evolving privacy controls, a choppy digital ad market, competitive intensity and rising bond yields,” said Mr. McReynolds. “While at 2.0 times FTM [forward 12-month] EV/net revenue (versus an average of 3.8 times for peers) we believe the stock is more fully pricing in these headwinds, we do expect the stock to be somewhat range bound pending incremental visibility around the growth trajectory for illumin, the impact of new privacy controls and the easing of COVID-19 and supply chain disruptions. Timing-wise, we look for such visibility to begin to emerge in the back half of 2022.”

He set a $6 target, below the current $9.65 average on the Street.

“Recent market volatility has resulted in a meaningful pullback across our broader media coverage. In light of this pullback and given ongoing headwinds for ad tech stocks that at minimum are likely to persist until H2/22, we see better risk-adjusted returns elsewhere in our media coverage at the moment,” said Mr. McReynolds.

“Following a meaningful pullback across our broader media coverage (media technology, content and distribution, diversified media and other) over the past six months, we see significant value in our Outperform-rated small cap media stocks in a post COVID-19 recovery scenario in 2022. In light of this pullback and given ongoing headwinds for ad tech stocks that at minimum are likely to persist until H2/22, we see better risk-adjusted returns elsewhere in our media coverage at the moment. On a positive note, at 2.0 times EV/net revenue versus 3.8 times for peers (excluding outliers The Trade Desk and DoubleVerify), we believe AcuityAds’ stock has begun to more fully price in evolving privacy controls, digital ad market choppiness, competitive intensity and rising bond yields and thus we see a stronger floor under the stock at current levels.”

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Premier Health of America Inc. (PHA-X) is “uberizing healthcare staff across Canada,” said Echelon Capital Markets analyst Amr Ezzat, calling it an “under-covered” story featuring an “attractive” entry point for investors.

He initiated coverage of Montreal-based company, which provides outsourced service solutions in the healthcare sector, with a “buy” recommendation on Monday.

“PHA is a digital disrupter leveraging its technology to drive efficiencies and growth within the staffing agencies it acquires,” said Mr. Ezzzat. “The economics of its acquisitions are quite compelling. The Company generates strong ROIC [return on invested capital] levels by acquiring cash flow positive companies at 4.0 times EBITDA and seeks to drive additional earnings out of its targets post-acquisition, where platform efficiencies and cross-selling opportunities can double EBITDA over time. Trading at 7.9 times EV/EBITDA, we expect that any future acquisitions would be accretive to shareholders. The Company has identified over 100 agencies across Canada, many of which are deemed potential acquisition targets that can be completed and integrated seamlessly into its existing PSweb platform.”

Though it is an “earlier stage high-growth company,” Mr. Ezzat called Premier Health an “explosive” free cash flow generator, expecting EBITDA to grow by a compound annual growth rate of 15.4 per cent though fiscal 2024, pointing to its “aggressive growth and operating leverage.”

“Specifically, we are calling for $3.2-million/$3.9-million of FCF in fiscal 2023/2024 against the Company’s current enterprise value of $49.0-million, equating to very attractive 6.6 per cent/7.9 per cent FCF yields,” he said.

“We take a longer-term approach when evaluating the merits of an investment in PHA. Namely, given that short-term forecasts do not reflect the Company’s aggressive growth potential, we opt for a long-term financial model to showcase Premier Health’s revenue growth and margin expansion profile.”

The analyst set a target of $1.50, exceeding the consensus on the Street by 10 cents.

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With the Omicron variant stalling its recovery, Canaccord Genuity analyst Tania Gonsalves lowered her rating for Greenbrook TMS Inc. (GTMS-T) to “speculative buy” from “buy” on Monday.

“We recently had the opportunity to catch up with management to get an update on how Omicron has been impacting operations,” she said. “When GTMS reported Q3/21 results last November, it highlighted that patient consult and start volumes had begun to normalize in October, approaching the record levels witnessed in Q2/21. Unfortunately, this trend seems to have reversed during the last few weeks of the year as Omicron took hold. GTMS has been impacted by higher levels of absenteeism among physicians, technicians and patients. This is expected to weigh on revenue in Q4. The effect has dragged.”

Ms. Gonsalves said the Toronto-based provider of Transcranial Magnetic Stimulation (TMS) therapy is now shifting into “capital conservation mode,” forcing it to pause new centre development.

“For 2022, we’ve stripped out all new centre development (versus 12 new centres per quarter previously), resulting in the network stabilizing at 149 locations,” she said. “Although management is committed to organically growing same-centre volumes within this network, we’re taking a more cautious stance, assuming the effects of Omicron drag into 2022. We’ve reduced our forecast of patient consults/device and the conversion rate to starts, which alongside a lower number of locations, results in our forecast of treatments performed declining from 341.4K to 275.5K. Our revenue estimate moves down from $83.7-million to $67.5-million.

“On the operating expense side, we’re hopeful that optimization efforts will result in a rebound back to pre-pandemic margins. Specifically, we forecast operating margin at the centre level moving back above 40 per cent and at the regional level moving back above 10 per cent. GTMS expects to reach adjusted EBITDA breakeven by Q4/22, which aligns with our new forecast. Overall, our 2022 adjusted EBITDA estimate declines from a loss of $3.3-million to $4.9-million loss into 2022 with employees and patients continuing to get sick. This has resulted in appointment cancellations and interruptions in patients’ treatment courses.”

Expecting the need to raise capital later this year to fund its cash burn, the analyst cut her target for Greenbrook shares to $7.50 from $18.50. The current average is $14.71.

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In other analyst actions:

* Citing concern about near-term fundamentals, BMO Nesbitt Burns analyst Jonathan Lamers downgraded Ballard Power Systems Inc. (BLDP-Q, BLDP-T) to “market perform” from “outperform” with a US$10 target, down from US$23. The average is US$19.47.

“Our analysis indicates revenue growth will underperform fuel cell sector leaders through 2022, and we expect the market to value the stock more consistently with the mid-point of the fuel cell sector,” he said.

* BMO’s Stephen MacLeod raised his Aritzia Inc. (ATZ-T) target to $70 from $65, keeping an “outperform” rating. The average is $65.57.

“Our ‘refreshed’ brand awareness survey shows that Aritzia is well-positioned to build upon recent growth in the U.S., which has been ‘unprecedented,’” he said. “Since 2018, Aritzia’s brand awareness has increased materially, customer satisfaction levels have grown, consumers have embraced omnichannel, and brand discovery continues to unfold.

“The U.S. market presents a multi-year growth opportunity. We believe Aritzia is well-positioned to capitalize, with ample liquidity to build on its established infrastructure to support growth, strong omnichannel platform, category expansion opportunities, and a loyal employee and client base.”

* CIBC World Markets analyst Hamir Patel raised Interfor Corp. (IFP-T) to “outperformer” from “neutral” with a $48 target, rising from $46. The average on the Street is $51.17.

“While relative valuation held us back from getting more constructive on Interfor when we upgraded West Fraser on January 9, with IFP shares having lagged WFG by 15 per cent over the past month, we see an attractive entry point,” he said.

* Mr. Patel cut his Resolute Forest Products Inc. (RFP-N, RFP-T) to US$16 from US$19 with a “neutral” rating. The average is US$17.38.

* CIBC’s Krista Friesen increased her Magna International Inc. (MGA-N, MG-T) target to US$104 from US$102 with an “outperformer” rating. The average is US$98.

* Ms. Friesen also raised his Linamar Corp. (LNR-T) target to $95, below the $97.80 average, from $94 with an “outperformer” recommendation.

“2021 was a difficult year for the auto sector, first contending with the impact of COVID-19, then managing through the chip shortage and contemplating how best to deal with inflationary pressures. While we expect Q4 to have been tough, we do see 2022 setting up to be a strong recovery year, particularly in the latter half. We expect production to ramp up in the back half of the year as chip shortages continue to improve, and the industry should continue to benefit from healthy levels of demand. We maintain our Outperformer ratings on ACQ, LNR, MGA and MRE,” she said.

* CIBC’s Chris Thompson initiated coverage of Spartan Delta Corp. (SDE-T) with an “outperformer” recommendation and $10 target, below the $11.74 average.

“Spartan Delta has rapidly assembled an intriguing asset suite, and has a well-known management team that has a number of de-risking opportunities over the next 12 months,” he said. “We believe the risk of a poor outcome for Spartan’s 2022 Montney development program is already reflected in the share price. We view this scenario as unlikely given the team’s track record of meeting its targets and the quality of its Gold Creek asset. Our $10.00/share price target assumes Spartan can achieve average results in its 2022 Gold Creek and Deep Basin development programs, and computes to 21-per-cent upside to the current share price, which we consider a compelling risk/reward ratio.”

* Eight Capital analyst Ty Collin cut his target for Canopy Growth Corp. (WEED-T) to $7 from $12 with a “sell” rating. The average is $13.02.

* TD Securities analyst Jonathan Kelcher raised his Sienna Senior Living Inc. (SIA-T) target to $18, above the $16.63 average, from $17.50, keeping a “buy” rating.

* JP Morgan analyst Tien-Tsin Huang sliced his Lightspeed Commerce Inc. (LSPD-T) target to $41 from $100 with an “underweight” rating. The current average is $95.69.

* JP Morgan’s Sebastiano Petti raised his target for BCE Inc. (BCE-T) to $68 from $66 with a “neutral” recommendation. The average is $66.60.

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