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

With stocks of Canadian energy services and diversified energy companies “ending the year on a high note,” Industrial Alliance Securities analyst Elias Foscolos warns investors to be more selective heading into 2021.

Buoyed by both rising oil prices and the start of distribution of the COVID-19 vaccine, five of the nine companies in the analyst’s coverage universe have posted returns of over 40 per cent thus far in the fourth quarter with valuations now converging near historical averages.

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“Stocks returns in our coverage universe have been very strong quarter-to-date, exhibiting high beta to the broad market recovery. Names with greater leverage (excluding PSI) and exposure to CAPEX and drilling in the E&P sector have posted the strongest returns, with SES, SCL, and CEU leading the way,” he said. “Although TEV shares these characteristics, it has been one of our bottom performers in Q4/20. TEV refinanced its debt in the quarter, which had been the Company’s primary uncertainty in our view, but at an interest rate that investors were likely not expecting. MTL’s stock has continued to experience positive momentum, spurred by another quarter of strong financial results, and currently leads our coverage universe in price return year-to-date. BAD and CMG have been essentially flat quarter-to-date.”

Given this jump, Mr. Foscolos “refreshed” his valuations for coverage universe, results in several target price increases. He also thinks “risk-adjusted upside has compressed enough to warrant rating downgrades for select companies.”

He moved both Secure Energy Services Inc. (SES-T) and Tervita Corp. (TEV-T) to “hold” recommendations from “speculative buy” previously.

His target for Secure shares rose to $3.25 from $2.75. The average on the Street is $3.10, according to Refinitiv data.

Mr. Foscolos’s target for Tervita is now $3.75, up from $3.25 but below the $4.06 average.

He also made the following target price changes:

  • Badger Daylighting Ltd. (BAD-T, “hold”) to $39 from $37. Average: $41.
  • Pulse Seismic Inc. (PSD-T, “speculative buy”) to $1.50 from $1.40. Average: $1.40.
  • Pason Systems Inc. (PSI-T, “hold”) to $7.50 from $7. Average: $7.86.

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Cameco Corp.’s (CCO-T) valuation has “run ahead” of its fundamentals during its recent rally, according to RBC Dominion Securities analyst Andrew Wong, leading him to downgrade its shares to “underperform” from “sector perform.

“We believe the recent run in Cameco’s shares (up 34 per cent since Dec. 1, 2020) have been driven by several factors - catch-up with other commodities, excitement around U.S. support for domestic uranium, expectations for higher prices from Cigar Lake shut-down, increased interest as an ESG/clean energy name,” he said. “However, we think shares have run well ahead of fundamentals and are now trading at the higher-end of our range of potential outcomes and pricing in an upside scenario, resulting in greater downside risk and limited potential upside.”

Mr. Wong predicts near-term upward pressure on uranium, but he predicts “still a more gradual” long-term recovery.

“We expect Cameco to purchase 13 million pounds uranium in 2021 (with Cigar Lake outage resulting in 5 million pounds incremental vs. our prior expectations), which could add upward pressure on the uranium market,” he said. “However, we note that Cameco should be entering 2021 with a much better inventory position than this time last year (we estimate 15 million pounds at end-2020 vs. 6 million pounds at end-2019), and market purchases will likely be less than the 25-30 million pounds purchased by Cameco in 2020.

“We have raised our 2021 spot price forecast to $32 per pound, from $30 per pound. We also note rising Covid-19 cases in Kazakhstan as a potential risk for shutdowns from Kazatomprom which could further tighten the near-term market, but would not significantly alter our long-term view.”

With that change, Mr. Wong raised his target for Cameco shares by a loonie to $15. The average on the Street is $17.77.

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“We continue to believe Cameco has a very solid financial position to weather any operational and market uncertainties, and remains well positioned to benefit from a long-term recovery in the uranium market,” the analyst said.

Elsewhere, BMO Nesbitt Burns analyst Alexander Pearce raised his target for Cameco shares to $18.50 from $16.50 with an “outperform” recommendation.

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Aphria Inc. (APHA-T) is “positioned to continue leading the Canadian recreational market” following its merger with Tilray Inc. (TLRY-Q), according to Canaccord Genuity analyst Matt Bottomley.

“As a result of the merger, the pro-forma entity will maintain the leading market share within the Canadian recreational space at current run-rates,” he said. “Management estimates that the combined company achieved 17.3-per-cent retail market share from August 2020 to October 2020, with a stated goal of capturing 30 per cent of all recreational demand at full scale. More specifically, APH currently maintains a leadership position within the Ontario and Alberta adult-use categories while Tilray is vying for a top spot in Quebec along with HEXO. As a result, the opportunity for cannibalized sales are slightly mitigated given the geographical prominence of the brands.

“Further, in addition to more than $100-million of expected pre-tax annual cost synergies over the 24-month period following the transaction close date, management expects to realize potential revenue savings both domestically and internationally. Within Canada, the company has identified the following avenues to drive revenue growth as a result of the merger: (1) bolster Aphria Brands in Quebec; (2) bolster Tilray Brands in Ontario; (3) provide additional 2.0 form factor capabilities to the Aphria brands via Tilray’s London, Ontario facility.”

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Though he thinks the deal increased Aphria’s financial scale and also bolsters its exposure to both European and U.S. markets, Mr. Bottomley thinks its shareholders are “already getting full value using the terms of the proposed deal.”

With that view, he lowered his rating for Aphria shares to “hold” from “speculative buy.”

“This lowered recommendation is not a reflection of the specific merits of the transaction, as the long-term value of APHA is set to accrue to the newly issued TLRY shares upon closing (which we do not cover), but is more of a commentary that the market appears to be pricing in limited deal risk,” he said.

Mr. Bottomley maintained an $11 target for Aphria shares. The current average on the Street is $10.58.

Elsewhere, Stifel analyst Jason Zandberg cut Aphria to “hold” from “buy” and raised his target to $9.80 from $8.25.

CIBC World Markets analyst John Zamparo raised his target to $12.50 from $9 with an “outperformer” rating.

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“The combination of Aphria and Tilray should create significant synergies leading to a material improvement in profitability with multiple avenues for growth,” he said. “Questions remain on a U.S. THC presence, but for the moment, APHA is well-positioned for the markets it can occupy. We view APHA (soon to assume the Tilray name) as the most profitable and most investible of the Canadian cannabis space.”

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Raymond James’ Brad Sturges expects TSX-listed industrial real estate investment trusts to benefit from e-commerce tailwinds.

According to the analyst, industrial REITS have generated average unweighted total returns of 16 per cent thus far in 2021, versus a negative 11 per cent from the broader Canadian REIT/REOC sector and a 6-per-cent return for the S&P/TSX Composite Index.

“Notably, all 4 Canadian-listed industrial REITs are in the top 10 for total return sector performance in 2020 year-to-date, with Granite at the top of the list (up 22 per cent YTD),” he said. “In addition, both WPT (up 9 per cent YTD) and DIR (up 4 per cent YTD) have also generated positive total returns in 2020 YTD.”

“We believe that the outlook for the global industrial real estate sector seems even brighter, with the potential for further leasing demand driven by accelerating ecommerce adoption as a percentage of total retail sales. Furthermore, recent disruptions during the pandemic could result in global supply chains to be partially re-shored, while just-in-time (JIT) inventory strategies could also be adjusted to just-in-case (JIC) inventory strategies.”

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Moving forward, Mr. Sturges pointed to several potential near-term catalysts including: “improving AFFO [adjusted funds from operations] per unit growth generated year-over-year; additional evidence of growing leasing activity from key demand drivers such as ecommerce adoption, supply chain adjustments, and population growth; potential for further merger and acquisition (M&A) activity within the North American industrial REIT sector; continued industrial property cap rate compression; and other positive catalysts (e.g. increases to monthly distribution rates).”

In a research report, Mr. Sturges initiated coverage of 3 REITS with “outperform” ratings:

* Dream Industrial REIT (DIR.UN-T) with a $14.50 target. The average on the Street is $13.56.

“DIR is well positioned to capture improving 2021 estimated AFFO per unit growth, driven by higher occupancies year-over-year, accelerating rent growth year-over-year, and anticipated interest costs savings,” he said. “Despite greater operating headwinds, DIR has been able to maintain an above-average occupancy rate relative to the market occupancy rate in Calgary. As DIR reviews its capital recycling plans and acquisition opportunities for 2021, DIR could reduce its Alberta portfolio weighting, increase its European exposure, and maintain its relative exposure to Ontario, Quebec, and the U.S.”

* Granite REIT (GRT.UN-T) with a $87 target, exceeding the $85.19 average.

“We believe Granite checks all the investment boxes, as a blue-chip Canadian REIT and one of the top-performing Canadian-listed REITs in 2020 year-to-date,” he said. “Granite is uniquely positioned to benefit from improving global industrial property fundamentals, its best-in-class balance sheet, senior management’s historical track record of generating unitholder returns, and the potential to deliver above-average AFFO/unit growth year-over-year (which may support further distribution increases). Given its sizeable liquidity position, Granite may be a sizeable strategic buyer of industrial real estate globally. Further transformation and quality improvement of Granite’s global industrial real estate platform could support further P/AFFO multiple expansion for the REIT’s units.”

* WPT Industrial REIT (WIR.U-T) with a US$16 target. The average is US$15.23.

“We believe WPT provides attractive pure-play exposure to the growing U.S. industrial real estate market, while trading at a discount valuation that has become more rare within the U.S. industrial REIT subsector of late,” he said. “Given that going-in industrial property cap rates have more broadly compressed by 25 to 50 basis points across the US since the start of COVID, the REIT’s NAV per unit accretion from its PIRET transaction earlier this year is even further enhanced given WPT’s recent leasing success.”

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Industrial Alliance Securities analyst Michael Charlton said the near-term outlook for natural gas companies is “torqued to the upside” with the colder weather bringing a rise in demand and prices.

“Significant temperature swings can definitely cause natural gas prices to spike in the short term, but even with the delay of bitter cold winter weather across much of North America this season, prices are on trend to rise on the back of higher demand, lower domestic production, and overall recovery of global gas prices as we look to the end of the COVID-19 pandemic and the start of global economic recoveries as vaccinations take off en masse by the middle of 2021,” he said.

“Despite the rather slow start to winter, this year is a La Nina year, which typically means colder-than-normal temperatures for the winter. Models are predicting a more than 90-per-cent chance of La Nina through the winter heating months and into March, and a 65% chance it could be extended and last through May. Although we have yet to see the brunt of winter, it undoubtedly is on its way and we say, ‘Bring on the Polar Vortexes.’”

In a research report released Thursday, Mr. Charlton sees the “formation of what can be the perfect storm with a high probability of colder weather, increasing demand and decreasing supply, all bullish indicators to raise natural gas prices.”

“When we looked at the gas- weighted players, who we believe have the most upside potential in a rising natural gas price environment, we found that several also screen very well even at current prices,” he added. “We believe that years of persistently low pricing has forced Canadian E&Ps (particularly gas producers) to live within cash flow as capital has not been as readily available as with oily options in Canada and shale players in the U.S.. But because they have learned to live within cash flow, they’ve optimized operations and already have great margins, sustainable growth, and are just waiting to open the door to increasing free cash flow in 2021. With a view to maximum FCF and sustainability, we recommend that investors bullish on gas take another look at BIR, TOU, and AAV; all the royalty players TPZ, PSK and FRU that enjoy minimal to no operating costs; and two new high-margin, dividend paying companies which we are initiating on with PEY and ARX.”

Mr. Charlton initiated coverage of both Peyto Exploration & Development Corp. (PEY-T) and ARC Resources Ltd. (ARX-T) with “buy” recommendations.

He sees Calgary-based Peyto producing “above-average margins and cash flow growth at a discount” and believes its track record is impressive.

“Since inception, Peyto has posted 19-per-cent CAGR [compound annual growth rate] on production, 14 per cent on reserves, 13 per cent on Funds From Operations, and an 11-per-cent increase to its 2P NPV5 less debt value per share, as reported in its corporate presentation,” the analyst said. “These are notable accomplishments given some of the commodity price cycles we have seen during that same period and a testament to management’s capabilities and the strength of Peyto’s gas- weighted assets.”

“Above-average margins, propelled by its extremely low-cost structure and relatively low decline rates drive free cash flow and fuel Peyto’s dividend. At current dividend levels and commodity prices, using consensus free cash flow and capex estimates, we believe that Peyto’s dividend is covered over 8x, making it one of the safest dividend payors in the Canadian E&P space. With this much dividend coverage, we believe investors need not lose sleep over the stability of Peyto’s dividend in the near term.”

Mr. Charlton set a target price of $5 for Peyto shares. The current average on the Street is $3.79.

“Investors have probably gone overweight on oil and liquids in their portfolios over the past several years, and no one would blame them– it’s where the returns were, the commodity price was robust, and the demand was there,” he said. “Now times have changed, and demand for oil is lower this year than in the past several years, but the outlook for gas continues to improve. Given this improvement, we believe that investors would likely do well adding some of the lowest cost, most sustainable, GHG sensitive natural gas production on the planet by picking up Peyto shares. The way we see it, Peyto offers above-average margins and free cash flow potential and, right now anyway, is available at below-average cash flow multiples.”

For ARC, he emphasized its “asset advantage” with its strong margins providing “ample dividend defence.”

“ARC’s land assets are right on the Montney trend from Attachie up in northeastern B.C. (NEBC) to Ante Creek in central Alberta, with its oilier Pembina Cardium assets a bit further to the south,” he said. “Not only are ARC’s assets readily exploitable using horizontal multi-frac drilling and completion techniques, the Montney developments contain multiple layers for greater ultimate recoveries and excellent upside potential.”

“ARC has generated above-average EBITDA margins as well as cash flow margins in the trailing twelve months, and based on the estimates, looks to deliver above-average CF [cash flow] margins again in 2021 to drive strong returns and provide dividend defense. We believe the dividend is sustainable at current levels with over 4 times estimated dividend coverage ahead in 2021, and that is without factoring in the effects of potentially strong seasonal gas pricing over the coming winter months.”

He set a target of $9.50 per share, which exceeds the current average of $9.12.

“In our view, ARC has a lot to offer investors as its gas-weighted sustainable developments look to continue delivering above-average CF margins to pump returns. With a strong balance sheet (2021 D/CF estimated at 0.8 times), strong margins, free cash flow generation, and a portfolio of diverse high-quality assets, ARC is positioned to continue delivering best-in-class operational performance with top-tier economics, as it is able to move between core development areas to capture the strongest commodity prices, fuelling corporate success and natural gas-driven shareholder returns including dividends, sustainable production growth, and free cash flow.”

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After Air Canada’s (AC-T) $850-million equity raise bolstered its balance sheet, Canaccord Genuity analyst Doug Taylor said he’s “refocusing attention on the skyline,” seeking signs of a recovery in fundamentals to pre-pandemic levels.

“Following the beginning of vaccine rollouts in Canada and around the world, travel and tourism stocks have benefited from improved market sentiment, giving Air Canada the opportunity to improve its liquidity position with a substantial ($850-million) equity raise,” he said. “With that said, our near-term estimates for a traffic rebound in H1/21 remain subdued, consistent with increased Q4 cash burn guidance.

“We have introduced 2022 forecasts given better visibility on vaccine rollout timing and the likely pent-up demand for travel, noting an ongoing heightened degree of model uncertainty as to both the degree and shape of the demand recovery. Given this uncertainty ... we provide some sensitivity to the shape and ultimate degree of the recovery; based on our current 2022 model, the current valuation leaves some upside.”

Mr. Taylor lowered his traffic expectations for the fourth quarter of 2020 through the second quarter of 2021, while he increased his projections for the second half of next year.

He also introduced 2022 EBITDA and revenue estimates of $14.3-billion and $2.4-billion, respectively, noting they are 25 per cent and 33 per cent below 2019 peak levels.

“In our view, while headlines related to vaccine and travel restrictions continue to dictate near-term share performance, investors will increasingly look to 2022/23 fundamentals to support further share price upside,” he said. “We lay out our assumptions and sensitize the impact given what is still a wide range of outcomes to help investors better visualize the degree of recovery assumed in the current share price. To that end, using our new 2022 estimates and assuming a further $2.5-billion in cash burn before returning to positive free cash flow metrics, the current share price represents 6.1 times EV/EBITDA and this would be 4.1 times assuming EBITDA recovered all the way to 2019 levels, for context. Note that AC averaged 5 times EBITDA in the years leading into the pandemic.”

Keeping a “buy” rating, Mr. Taylor raised his target to $30 from $25 based on his updated share count. The average is $27.03.

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Touting the potential stemming from its “significant” investors, Fundamental Research analyst Sid Rajeev initiated coverage of QMX Gold Corp. (QMX-X) with a “buy” rating.

The Toronto-based junior exploration company is focused on exploring its 200 square kilometre land package in the Val d’Or Mining Camp in the Abitibi Belt of Quebec.

“Eldorado Gold (ELD-T), Osisko Gold Royalties (OR-T), O3 Mining (OIII-X), and Probe Metals (PRB-X) are significant investors of QMX, and are active players in the region,” said Mr. Rajeev. “We believe this creates opportunities for QMX to position itself as an acquisition candidate.

He set a fair value of 31 cents for QMX shares. The average is 41 cents.

“QMX is trading at an Enterprise Value to resource ratio of $67 per ounce versus the comparables average of $63,” he said. “We do not believe that the higher EV to resource ratio of QMX indicates that its shares are fully valued. We attribute the higher ratio to the following two factors – a) the current resource estimate only includes one of several targets on QMX’s large land package, and b) access to a mill implies lower initial CAPEX for QMX, if one or more of its deposits are advanced to production.”

“We expect a number of catalysts for the share price as results of an ongoing 45,000-metre drill program are expected in the coming weeks.”

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Desjardins Securities analyst John Chu has increasing concerns about the ability of Aurora Cannabis Inc.’s (ACB-T) Aurora Sky facility to produce the premium flower expected from management.

Though he thinks the Edmonton-based company’s revised covenant provides additional flexibility and its decision to cut capacity and costs “should help keep the company on its path to positive EBITDA (albeit later than expected),” he thinks the output at its flagship facility is “the biggest unknown and risk factor.”

“The company has been testing Sky’s ability to grow premium cultivars throughout 2020 and management did tell us that the facility is still undergoing testing and trials to determine its capabilities,” said Mr. Chu. “Our concern is that premium flower is generally grown in a smaller footprint (less than 250,000 square feet or a maximum of 25,000 kilograms per year of capacity) and usually in an indoor setting vs a greenhouse; however, we are aware of premium flower being grown in greenhouse settings but under a smaller footprint (eg Rubicon with 11,000 kilograms per year of capacity).”

After trimming his earnings outlook to reflect “a slower path” to positive EBITDA, which he now expects in the fourth quarter of 2021, Mr. Chu lowered his target for Aurora shares to $12 from $13 with a “hold” recommendation (unchanged). The average on the Street is $10.45.

“We need increased comfort with regard to the path to positive EBITDA and Aurora Sky’s capability to produce premium flower consistently,” he said.

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BMO Nesbitt Burns revised its targets for a group of TSX-listed mining stocks on Thursday.

The firm’s changes included:

  • Teck Resources Ltd. (TECK.B-T, “market perform”) to $19 from $20.50. The average on the Street is $24.22.
  • Ero Copper Corp. (ERO-T, “outperform”) to $23 from $22.50. Average: $23.75.
  • First Quantum Minerals Ltd. (FM-T, “outperform”) to $23 from $19.50. Average: $21.26.
  • Hudbay Minerals Inc. (HBM-T, “outperform”) to $11 from $10. Average: $9.02.
  • Lundin Mining Corp. (LUN-T, “outperform”) to $13 from $11.50. Average: $11.25.
  • Taseko Mines Ltd. (TKO-T, “outperform”) to $1.90 from $1.60. Average: $1.59.
  • Copper Mountain Mining Corp. (CMMC-T, “outperform”) to $2.10 from $1.80. Average: $1.88.
  • Labrador Iron Ore Royalty Corp. (LIF-T, “market perform”) to $32 from $27. Average: $34.43.

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In other analyst actions:

* BMO Nesbitt Burns analyst Rene Cartier raised Capstone Mining Corp. (CS-T) to “outperform” from “market perform” with a $2.60 target, rising from $2.20. The average is $2.38.

·”Following the previously announced silver stream transaction with Wheaton Precious Metals, CS has positioned itself to significantly deleverage its balance sheet,” he said. “On the back of our revised commodity assumptions, our cash flow outlook for CS has improved meaningfully, affording the company the opportunity to continue to invest in quick-win, low capital projects.

“Value surfacing for the Santo Domingo project also exists, representing further upside.”

* RBC Dominion Securities analyst Luke Davis upgraded Athabasca Oil Corp. (ATH-T) to “sector perform” from “underperform” with a 25-cent target, up from 15 cents. The average is 14 cents.

* Scotia Capital analyst Ovais Habib moved Premier Gold Mines Ltd. (PG-T) to “tender” from “sector outperform” with a $3 target, down from $4. The average is $3.82.

* National Bank Financial analyst John Sclodnick cut Equinox Gold Corp. (EQX-T) to “sector perform” from “outperform” with an $18 target, down from $20.25, while TD’s Arun Lamba cut his target to $24 from $27 with a “buy” recommendation (unchanged). The average is $22.83.

* TD Securities analyst Steven Green raised his target for Yamana Gold Inc. (AUY-N, AUY-T) to US$9 from US$8.50, keeping a “buy” rating. The average is US$7.98.

* TD’s Daryl Young increased his target for Westshore Terminals Investment Corp. (WTE-T) to $16.50 from $15 with a “hold” recommendation. The average is $19.50.

* Alliance Global Partners initiated coverage of Enthusiast Gaming Holdings Inc. (EGLX-T) with a “buy” rating and $6 target, exceeding the $4.40 average.

* JP Morgan analyst Brian Ossenbeck cut his target for Canadian Pacific Railway Ltd. (CP-T) to $495 from $497 with an “overweight” rating. The average is $460.81.

* Scotia’s Michael Doumet raised his target for Wajax Corp. (WJX-T) to $22 from $17, which is the current consensus, with a “sector perform” recommendation.

* Scotia’s Konark Gupta raised his target for Transat AT Inc. (TRZ-T) to $6 from $5, maintaining a “sector perform” rating. The average is $6.50.

* Raymond James analyst Stephen Boland hiked his target for Dye & Durham Ltd. (DND-T) to $46 from $35.50 with an “outperform” recommendation. The average is $40.25.

* Echelon Capital analyst Rob Goff increased his target for Canaccord Genuity Group Inc. (CF-T) to $13 from $10.25 with a “buy” rating. The average is $11.33.

“The continued strength of global underwritings amongst mid-market and smaller firms supports the strong prospects of continued outperformance against our forecasts and those reflected in the consensus,” he said.

* National Bank Financial analyst Zachary Evershed raised his target for Dexterra Group Inc. (DXT-T) to $8.50 from $7.50 with an “outperform” rating. The current average is $6.18.

* Calling its acquisition of a royalty portfolio from South32 Ltd. “transformational,” Canaccord Genuity analyst Carey MacRury raised his target for Elemental Royalties Corp. (ELE-X) to $2.75 from $2.25 with a “buy” rating. The average on the Street is $2.38.

* Raymond James analyst Frederic Bastien raised his target for Black Diamond Group Ltd. (BDI-T) to $3.60 from $2.75 with an “outperform” rating. The average is $2.64.

* Following virtual investor meetings with its CEO on Wednesday, Raymond James’ David Quezada moved his target for Greenlane Renewables Inc. (GRN-X) to $2.25 from $1.65, keeping a “strong buy” rating. The average is $1.86.

“The meetings we attended strengthened our conviction in the Greenlane story with key elements including: 1) significant expected industry growth as gas utility and oil & gas players drive growing demand and large addressable market; 2) GRN’s competitive positioning and track record as a provider of all three key biogas upgrading technologies for the largest projects globally; 3) substantial current momentum in sales and order activity; and 4) longer term potential through the company’s Build-Own-Operate model,” he said.

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