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

After making “material” cuts to his financial forecast for Spin Master Corp. (TOY-T) following a “big” third-quarter revenue miss and guidance reduction, National Bank Financial analyst Adam Shine downgraded the toymaker to “sector perform” from “outperform” on Thursday.

The Toronto-based company reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $167.6-million, in line with the Street’s expectation but down 12 per cent year-over-year, when excluding the one-time contribution of $26- million from the Paw Patrol movie. However, gross product sales dropped 9.3 per cent to $617.7-million, missing Mr. Shine’s $684.5-million estimate with declines seen across each of its categories.

Spin Master reduced its 2022 guidance, now expecting revenue, excluding foreign exchange, to rise low single-digits year-over-year versus a previous estimate of low double-digit gains, excluding the contribution from the Paw Patrol movie. Adjusted EBITDA margins are now expected to be slightly lower than 2021 levels.

“Management called out challenging macro issues impacting consumers, but we’ll see what more it has to say on its [Thursday] call,” said Mr. Shine. “We anticipate material revisions to 2022 and forward expectations, as the Street again turns cautious on TOY as it did after its logistics problems over two years ago. The outlook revisions ex-FX (if we think about the mid-point of top-line growth ranges falling to 2 per cent from 11 per cent and Adj. EBITDA margin contracting to 18.8 per cent from 19.3 per cent) point to top-line assumptions being pushed lower by at least $180-million and Adj. EBITDA by $45-million - all this is before 2-3 per cent of FX pressure. Implied 4Q looks like a drop near 20 per cent or worse for GPS and Total Revs with Adj. EBITDA possibly 90 per cent. We won’t get 2023 guidance until next March, with TOY facing tough 1H22 comps.”

Given the guidance cuts and grim macroeconomic pressure, Mr. Shine expects a “knock-on effect post-2022,” leading him to cut his target for Spin Master shares to $42 from $57. The average target on the Street is $60.

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Seeing encouraging signs for the box office for the remainder of the year, Canaccord Genuity analyst Aravinda Galappatthige upgraded Cineplex Ltd. (CGX-T) to “buy” from “speculative buy” ahead of the Nov. 10 release of its third-quarter financial results.

“Cineplex pre-announced their Q3 box office revenues at $124.7-million, representing 70 per cent of the pre-pandemic levels, higher than our 65-per-cent prior estimate,” he said. “While this is lower than 72 per cent of the pre-pandemic levels that Cineplex achieved last quarter, management had alluded (alongside their Q2 results) to a slower box office recovery this quarter on account of certain production-related delays. Additionally, management provided a month-wise breakdown, with July seeing 85 per cent of the pre-pandemic levels and August and September at 64 per cent and 52 per cent, respectively.

“That said, the film slate for Q4 looks strong with titles such as Black Adam, Black Panther: Wakanda Forever, Glass Onion: A Knives Out Mystery, and Avatar: The Way of Water. We are looking for Q3 attendance at 10.2 million or 58 per cent of the Q3/19 level (down from 65 per cent of the pre-pandemic levels last quarter), with BPP at $12.29, up from $11.38 (flat quarter-over-quarter). On the other hand, we expect Concession revenues, which have so far recovered faster than Box office revenues, at $90.5-million, representing 77 per cent of the pre-pandemic levels (down from 84 per cent last quarter) benefiting from continued growth in CPP [concession revenues per patron] at $8.92, up from $8.58 last year and compared to $8.84 in Q2.”

For its third quarter, Mr. Galappatthige is projecting revenue of $321.2-million and EBITDA after leases of $21.8-million, which he notes represent 77 per cent and 35 per cent of pre-pandemic levels, respectively. Its pre-released box-office revenues of $124.7-million is 70 per cent.

“We continue to expect momentum within LBE [location-based entertainment] and P1AG [Player One Amusement Group] businesses, while media recovery may be more gradual,” he said.

“We made only modest changes to our 2022 estimates while slightly revising down our 2023 estimates, mainly to reflect a more prudent approach to our Media estimates given the macro-related headwinds. Considering media is a high-margin business yielding 70-80-per-cent contribution margins, our 2023 EBITDAaL is revised down to $220-million (from $242-million), with Media contributing $18-million to the decline.”

Mr. Galappatthige cut his target for Cineplex shares to $13 from $16. The average is $14.29.

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Scotia Capital analyst Ben Isaacson expects weakness in shares of Nutrien Ltd. (NTR-T) in the near term, pointing to “the end of the super-cycle, and soon, the end of peak cycle P+K pricing too.”

Accordingly, he downgraded the Saskatoon-based company’s shares to “sector perform” from “sector outperform” after it third-quarter EBITDA missed his expectation by 30 per cent (US$2.5-billion versus US$3.6-billion) and its guidance was reduced “materially.”

“While we really don’t like to change our stock recommendations frequently, we believe it’s warranted in what’s been a weird and volatile ag/fert year,” said Mr. Isaacson. “We see no choice but to downgrade NTR back to Sector Perform.

“First, the main reason for our upgrade in the summer was due to a nitrogen bull thesis that has now vanished. Back then, EU gas was approximately $60/mmbtu, or double the $30 gas that ammonia was pricing in at the time (and still is). This week, EU gas was $25. Second, the sector rotation into ags/ferts as a hiding place from other sectors has also faded, as the fert downturn is in full gear, while other sectors are certainly closer to finding a floor. Third, potash price and demand erosion are moving much faster than we had anticipated. We knew potash volume would be weak in Brazil, but we didn’t expect NA volume to be the lowest since ‘09! Wow. What hasn’t changed is a compelling valuation story. We’ll have more on valuation tomorrow, but in short, we struggle to see what will close the valuation gap near-term.”

The analyst maintained a US$110 target for Nutrien shares. The average on the Street is US$110.05.

Elsewhere, Credit Suisse’s John Roberts cut his target to US$68 from US$70 with an “underperform” rating.

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Making “meaningful” increases to his financial forecast after “strong” third-quarter results due to North American fracturing tailwinds, Stifel analyst Cole Pereira upgraded Calfrac Well Services Ltd. (CFW-T) to “buy” from “hold” on Thursday.

The Calgary-based company reported EBITDA of $91-million for its third quarter, the strongest result since the third quarter of 2018. It exceeded both the analyst’s $78-million estimate and the Street’s $80-million forecast as well as its own guidance ($75-85-million).

“Relative to our estimates, the beat was driven by strong performance from its Canadian fracturing business,” said Mr. Pereira. “EBITDAS margins of 20.8 per cent were its highest since 1Q12′s 24.2 per cent, and this was the strongest quarter on an EBITDAS basis since 3Q18′s $118- million.”

“Calfrac’s Canadian business generated EBITDAS of $37-million in the quarter, its strongest showing since 3Q17′s $44-million. The Canadian fracturing market remains balanced, albeit not as under-supplied as the United States. Calfrac continues to operate four fleets and five coiled tubing spreads in the WCSB, and the company has been successful at extracting pricing gains in excess of cost inflation.”

With increases to his pricing and margin assumptions for its North American businesses, Mr. Pereira hiked his 2022 EBITDA projection by 10 per cent to $224-million and 2023 by 19 per cent to $350-million.

That led him to increase his target for Calfrac shares to $12 from $7. The average is $9.25.

“The company’s improved financial performance and outlook has de-risked the stock in our view, and we are raising our target price to $12.00 per share (prior: $7.00 per share) and upgrading the stock to Buy from Hold,” he said. “CFW trades in line with its U.S. exposed peers, however we view the stock as unique in that we forecast 61% of its 2023E pre-corporate EBITDAS to be generated by its U.S. fracturing business, where the market remains extremely tight. We would be buyers even with the stock up 34 per cent in the past month vs. the TSX Composite up 5 per cent.

Elsewhere, others making adjustments include:

* BMO’s John Gibson to $8.50 from $6.50 with a “market perform” rating.

“CFW’s results were strong relative to pre-released guidance, driven by margin expansion across its core geographies. The company remains an intriguing pressure pumping option, particularly given its large US presence, which has experienced stronger pricing dynamics relative to Canada. Post quarter, we are increasing estimates,” said Mr. Gibson.

* Raymond James’ Andrew Bradford to $10 from $5.50 with a “market perform” rating.

* ATB Capital Markets’ Waqar Syed to $11.50 from $10 with an “outperform” rating.

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After seeing Cenovus Energy Inc.’s (CVE-T) third-quarter results as “operationally solid but financially soft,” RBC Dominion Securities analyst Greg Pardy said his favourable outlook on the Calgary-based company remains intact.

“Our constructive stance towards Cenovus reflects its capable leadership team, strengthening balance sheet, stern capital discipline, favorable operating momentum and rising shareholder returns,” he said.

On Wednesday, Cenovus reported in-line production of 777,900 barrels of oil equivalent per day, but Mr. Pardy called its downstream margins of $493-million “underwhelming.” It also declared a variable dividend of $219-million or 11.4 cents per common share.

“Cenovus’ balance sheet deleveraging progress remains unmistakable,” the analyst said. “The company’s net debt (company definition) fell more than $2.2-billion sequentially (supported by a $1.2 billion working capital draw) to stand at approximately $5.3-billion as of September 30. Cenovus anticipates reaching its magic $4-billion net debt floor around the end of 2022—opening the door to 100 per cent payout of excess quarterly free cash flow. The company defines excess quarterly free cash flow as free cash flow after common/preferred share dividends, acquisition costs, non-core dispositions closing in the quarter, and other uses of cash (including decommissioning liabilities and principal repayments of leases). Enhanced shareholder returns could include intensified share repurchases, further base dividend growth and/or special/variable dividends.

“On that front, Cenovus will continue to weigh base dividend growth with variable dividends as it moves into next year, but remains disciplined by top-line/bottom-line growth and sustainability considerations under trough pricing conditions (US$45 WTI and US$12.50 WTIWCS). This is very sensible in our minds because you never know what lies around the corner when it comes to oil markets.”

Reiterating an “outperform” rating for Cenovus shares, Mr. Pardy raised his target by $1 to $32. The average is $33.18.

“Cenovus is trading at a debt-adjusted cash flow multiple of 4.5 times in 2022 and 3.4 times in 2023 (vs. our Canadian major peer group avg. of 4.8 times in 2022 and 4.2 times in 2023) and a free cash flow yield of 15 per cent in 2022 and 19 per cent in 2023 (vs. our peer group avg. of 18 per cent in 2022 and 19 per cent in 2023),” he said. “In our minds, Cenovus should trade at an above average multiple vis-à-vis our peer group reflective of its capable leadership team, much improved balance sheet, upstream operating momentum and bolstered shareholder returns partially off-set by its fractionalized downstream portfolio.”

Elsewhere, Raymond James’ Michael Shaw moved his target to $32 from $30 with an “outperform” rating.

“The market rightly looked past the headline miss on upstream and downstream inventory impacts in 3Q and focused on 1) accelerated shareholder returns for 2023 and 2) a downstream recovery in 4Q. We expect the market will appreciate the 1Q step-up in shareholder returns and the improved downstream operating results next quarter,” he said. “The combination of CVE’s ongoing strong performance in its core oil sands assets and the application of CVE’s SAGD expertise to Sunrise should contribute to CVE’s continued outperformance.”

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Following its release of in-line third-quarter results and a dividend increase, National Bank Financial analyst Travis Wood called Tourmaline Oil Corp. (TOU-T) “a different breed,” believing “the strength of its model in consistently growing its cash returns continues to support momentum and establishment of material long value upside.”

After the bell on Wednesday, the Calgary-based company reported production of 481,897 barrels of oil equivalent per day, in line with the Street’s expectation and its guidance range. That led to cash flow per share of $3.06, exceeding Mr. Payne’s $2.94 estimate.

“During the quarter, the company maintained a solid margin in the face of contracting domestic gas prices (reflecting its liquids, costs, market diversification, hedge book), with a cash netback of $24/boe (down 20 per cent quarter-over-quarter; 63-per-cent margin vs. 52 per cent prior quarter), and which underpinned a payout ratio of 45 per cent and associated annualized FCF yield of 10 per cent,” said the analyst.

In a note titled Isn’t That Special, he said LNG tailwinds continue to drive Tourmaline’s growth.

“Its budget and operations remain on track with expectations, with capital spending expectations unchanged through 2023e to drive 5-10-per-cent sequential annual PPS growth within a 30-per-cent payout ratio (10-15-per-cent implied FCF yield),” he said. “Similarly, the company’s five-year outlook holds for 5-per-cent annualized growth within a 35-40-per-cent payout (15-per-cent implied FCF yield). Activity in support of that remains robust with tailwinds to capital efficiencies and complements from liquids growth (8-per-cent CAGR) in addition to expanding exposures to U.S. markets & LNG.”

Pointing to its pledge of returning the majority of its free cash flow to shareholders, Tourmaline raised his quarterly base dividend by 11 per cent to 25 cents per share.

“In addition to the announcement of its fifth special dividend announced ($2.25 per share) as its fourth consecutive increase, and the sum of which reflects a trailing 10-per-cent cash yield of returns to shareholders,” said Mr. Payne. “That context remains important, as it eclipses and extends its previously stated payout targets, and the application of which through the outlook supports potential for 20-per-cent dividend growth, and ultimately a value proposition towards $100 per share (assuming 10-per-cent yield).”

Keeping an “outperform” recommendation for Tourmaline shares, he hiked his target to $100 from $85. The average on the Street is $97.67.

“Tourmaline is a unique intermediate producer that provides investors exposure to one of the most compelling growth stories in our coverage universe. The company was founded in 2008 and entered the public market through an IPO in November 2010. Since TOU’s inception, management has executed a strategy of creating per share production and reserve growth. The management team has an exceptional track record,” he said.

Elsewhere, Raymond James’ Jeremy McCrea raised his target to $95 from $90 with a “strong buy” rating.

“TOU’s operations continue to reap the rewards from its well-timed acquisitions over the last few years with commodity (natgas) prices also still holding in,” he said. “As TOU has become the go-to name for gas exposure, its size also provides a number of advantages including better cost of debt/capital, preferential drilling/completion contracts and likely a logical provider of LNG gas supply. Combined with a geologic foothold in top basins through western Canada, there are very few companies that are as profitable as Tourmaline. This low-cost structure and its diversified marketing portfolio continues to allow TOU to pay attractive special dividends ($2.25 per share for3Q), while at the same time, reduce leverage, and modestly grow production. Overall, the key takeaway from 3Q includes another large special dividend, while also increasing its base dividend by 11 per cent. And while many operators have increased capex due to inflation, TOU has kept spending plans unchanged, which should alleviate some fears heading into the quarter.”

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After its release of disappointing quarterly results and a reduction to its full-year guidance caused its shares to drop by 9.1 per cent in price on Wednesday, several equity analysts on the Street reduced their targets for Canada Goose Holdings Inc. (GOOS-T).

Those making changes include:

* CIBC World Markets’ Mark Petrie to $30 from $36 with a “neutral” rating. The average on the Street is $31.91.

* Credit Suisse’s Michael Binetti to $30 from $31 with an “outperform” rating.

* Barclays’ Adrienne Yih to US$20 from US$28 with an “overweight” rating.

* Cowen and Co.’s Oliver Chen to $33 from $38 with an “outperform” rating.

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In other analyst actions:

* RBC Dominion Securities’ Luke Davis raised his Athabasca Oil Corp. (ATH-T) target to $3.25, matching the average on the Street, from $3 with a “sector perform” rating.

“Athabasca posted a strong quarter backstopped by growing thermal volumes. The company continues to focus on debt repayment, supported by oil pricing and improved operational performance. Management reiterated the potential for a RoC program once debt targets are reached, which will be outlined with the updated 2023 budget in early December,” said Mr. Davis.

* Following weaker-than-anticipated third-quarter results and a cut to its full-year guidance, RBC’s Douglas Miehm cut his Bausch + Lomb Corp. (BLCO-N, BLCO-T) target to US$17 from US$18 with an “outperform” rating. Others making changes include: Guggenheim’s Yatin Suneja to US$24 from US$26 with a “buy” rating., Jefferies’ Zach Weiner to US$19 from US$20 with a “buy” rating and Cowen and Co.’s Ken Cacciatore to US$30 from US$35 with an “outperform” rating. The average is US$19.75.

* RBC’s Geoffrey Kwan bumped his Brookfield Asset Management Inc. (BAM-N, BAM.A-T) target to US$62 from US$61 with an “outperform” rating. The average is US$61.73.

“We think BAM’s Asset Manager spinoff is likely to result in valuation upside (potentially substantial) for existing BAM shareholders through valuation multiple expansion for its Fee Related Earnings (FRE), reflecting increased interest from investors attracted to an ‘asset light’ way to play the Brookfield story,” he said. “With BAM’s shares trading at 8.5 times implied NTM FRE (at the low end of historical and well below its 18 times historical average and 24 times prior peak), we think there could be substantial valuation upside in BAM’s shares in the near to medium term. While the new Asset Manager may appeal to certain investors, we think Brookfield Corp. (what the current BAM will be re-named) remains an attractive story given exposure to Brookfield’s positive long-term investment track record and that BN will still own 75 per cent of the Asset Manager, retain 100 per cent of carried interest on existing funds plus receive 1/3 of carried interest on new funds. Adjusting for recent share price movements of subsidiaries, we increase our price target.”

* BMO’s Devin Dodge cut his Brookfield Infrastructure Partners LP (BIP-N, BIP.UN-T) target to US$41, below the US$43.86 average, from US$46 with an “outperform” rating.

“The majority of BIP’s investments have inflation-protected cash flows, there is limited direct risks from rising interest rates, and its businesses have proven to be resilient through the economic cycle. In the past, BIP has been adept at sourcing very attractive deals during periods of market dislocations, and we suspect similar opportunities could emerge over the next 12-24 months,” said Mr. Dodge.

* CIBC’s Dean Wilkinson lowered his Dream Industrial Real Estate Investment Trust (DIR.UN-T) target to $14.50, below the $15.25 average, from $16.50 with an “outperfomer” rating.

* Mr. Wilkinson also lowered his target for First Capital Real Estate Investment Trust (FCR.UN-T) to $19 from $19.50 with an “outperformer” recommendation, while Canaccord’s Mark Rothschild raised his target to $18.50 from $17.50 with a “buy” rating. The average is $18.81.

“Just as important as the solid operating performance is the recent activism led by Ewing Morris, a unitholder of First Capital REIT, in cooperation with the REIT’s former CEO Dori Segal,” said Mr. Rothschild. “Their most notable complaints are related to the REIT’s recently raised distribution and asset sale strategy. It does not appear likely that there will be an easy resolution, and we believe a proxy contest is likely. Though we believe that the REIT’s relatively weak performance over the past several years does allow for questions to be asked, we view FCR’s portfolio as relatively unique and expect healthy operating performance to drive cash flow growth for the foreseeable future.”

* TD Securities’ Mario Mendonca cut his ECN Capital Corp. (ECN-T) target to $5 from $8.50 with a “buy” rating. The average is $6.97.

* Canaccord Genuity’s Dalton Baretto lowered his Ero Copper Corp. (ERO-T) target to $20 from $21.50 with a “buy” rating, while Scotia Capital’s Orest Wowkodaw cut his target to $18 from $20 with a “sector outperform” rating. The average is $19.50.

“Operating hiccups in the Pilar mine were compounded by a $10 million realized provisional pricing adjustment that carried over from Q2, resulting in a significant financial miss vs. consensus estimates. That said, we view ERO as a growth company and view current quarterly results as not overly relevant unless they impact the company’s balance sheet and liquidity (we are not there yet),” said Mr. Baretto. “The growth projects appear to be on schedule, although capex appears to be creeping up (no surprise, given the current macro environment). We note limited discussion around the growth projects or exploration on the call, ahead of the company’s planned Investor Day on Nov 8.”

* National Bank Financial’s Travis Wood raised his Imperial Oil Ltd. (IMO-T) target to $80 from $73 with a “sector perform” rating. The average is $75.41.

* With its US$207-million acquisition of Wetzel’s Pretzels, Scotia Capital’s George Doumet raised his MTY Food Group Inc. (MTY-T) target to $66 from $64 with a “sector perform” rating, while National Bank’s Vishal Shreedhar increased his target to $65 from $63 with an “outperform” rating. The average is $67.57.

“We see strategic merits to the Wetzel’s Pretzels transaction as it allows MTY to: (i) tilt its mix in favour of the faster-growing snack category space and reduces overall business seasonality, (ii) generate unit growth in Canada where the brand is currently under-penetrated; and (iii) roll out combo locations (i.e., with Cold Stone). We see modest cost synergies at this point,” said Mr. Doumet. “Following this transaction, we estimate pro forma leverage of 3.8 times (2023 exit leverage of 2.8 times), likely leading to a lower cadence of M&A (i.e., more bolt-on in nature) as the company focuses on de-leveraging the balance sheet over the NTM.”

* BMO’s John Gibson bumped his Pason Systems Inc. (PSI-T) target to $24 from $23 with an “outperform” rating. The average is $20.

* National Bank’s Zachary Evershed trimmed his Savaria Corp. (SIS-T) target to $19 from $19.50 with an “outperform” rating. The average is $21.14.

* TD Securities’ Aaron MacNeil downgraded Secure Energy Services Inc. (SES-T) to “hold” from “buy” with an $8.50 target. Others making changes include: CIBC’s Jamie Kubik to $9.50 from $8.50 with an “outperformer” rating, BMO’s John Gibson to $11 from $10 with a “market perform” rating, ATB Capital’s Nate Heywood to $10.50 from $9 with an “outperform” rating, Raymond James’ Andrew Bradford to $10 from $8.75 with a “strong buy” recommendation and Stifel’s Cole Pereira to $11 from $10 with a “buy” rating. The average is $14.93.

“While Secure’s stock has been trending positively over the last month or so, the analysis suggests the gains are entirely a function of expectations adjustments to higher EBITDA and not to any stock re-rating, which given the almost 3-year fact pattern, we feel is overdue,” said Mr. Bradford.

* Raymond James’ Brad Sturges trimmed his Slate Office REIT (SOT.UN-T) target to $4.50 from $5 with a “market perform” rating. The average is $4.81.

* Morgan Stanley’s Toni Kaplan lowered his Thomson Reuters Corp. (TRI-N, TRI-T) target to US$108 from US$112, below the US$116.93 average, with an “equal-weight” rating.

* With its increased guidance, Desjardins Securities’ Chris MacCulloch raised his Topaz Energy Corp. (TPZ-T) target by $1 to $30 with a “buy” rating. The average is $30.23.

“Although there was nothing flashy in the update, the company continues executing its business plan—providing growth through accretive M&A while maintaining an attractive dividend yield. In our view, TPZ has the best organic growth visibility in the Canadian royalty space through extensive exposure to both the Montney and Clearwater plays. Meanwhile, TPZ also retains capacity to execute additional M&A,” he said.

* CIBC’s Jacob Bout raised his Toromont Industries Ltd. (TIH-T) target to $111 from $107 with a “neutral” rating, while Scotia’s Michael Doumet bumped his target to $116 from $114 with a “sector outperform” rating. The average is $118.50.

“Toromont delivered a larger-than-expected beat as several positives came together,” said Mr. Doumet. “Strong pricing, high utilization of installed fleet and rental fleet, ramping deliveries as supply improves (and as it executes against its record backlogs), and strong cost discipline. Gross margins are at record levels; SG&A-to-gross profit ratios are at all-time lows, demonstrating strong throughput and cost efficiencies.

“On a consolidated basis, Toromont’s 2022 gross margins are set to expand ~200bp versus 2019. Since 2019, the integration of Hewitt has progressed well, with the rental expansion strategy beginning to mature. Therefore, we are inclined to think that about half of those gains (i.e 100bp) are structural, while the other half is a result of cyclical tailwinds that should normalize through the cycle. While we expect several strong Qs ahead, forecasting healthy revenue growth into 1H23, we expect a partial normalization of gross margins to offset/flatten the EPS growth in 2023. We believe TIH premium multiple is justified on the basis of its through-the-cycle performance and its $2-billion of deployable capital (i.e. M&A optionality).”

* Raymond James’ Michael Glen increased his 5N Plus Inc. (VNP-T) target to $4 from $3 with an “outperform” rating, while National Bank’s Rupert Merer raised his target to $3.25 from $2.50 with an “outperform” rating. The average is $3.05.

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