Zacks Small Cap Research – ELTK: Eltek Potential Growth Opportunities Supports Price Target of $18.00 – Technologist

By Thomas Kerr, CFA

NASDAQ:ELTK

READ THE FULL ELTK RESEARCH REPORT

On November 19, 2024, Eltek (NASDAQ:ELTK) announced financial results for the 3^rd

quarter of 2024 which showed impressive revenue growth. Revenues for the 3rd quarter were $13.5 million compared to $11.9 million in the 3rd quarter of 2023. The 14% increase was due to strong orders from the defense and medical device end-markets. Approximately 65% of revenues are generated from the country of Israel with other revenues coming from North America, the Netherlands, India and other countries. 

Gross profit for the 3rd quarter was $3.5 million (26% gross margin) compared to $3.7 million (31% gross margin) in the prior year period. The gross margin decrease was related to labor shortages in Israel which puts upward pressure on wages. It’s also worth noting that in the 3^rd

quarter of 2023, the company experienced unusually low material costs which produced above average gross margins. The company’s goal is to produce gross margins in the range of 26%-29% over the medium to long-term.

Operating profit for the 3rd quarter of 2024 was $1.9 million compared to $2.3 million in the 3^rd

quarter of 2023. Net income for the quarter was $1.7 million or $0.25 per share compared to net income of $2.2 million or $0.36 per share in the prior year period. EBITDA for the 3rd quarter of 2024 was $2.3 million (16.9% EBITDA margin)

compared to EBITDA of $2.6 million (22.0% EBITDA margin) in the 3^rd

quarter of 2023. Operating cash flow was $1.65 million and capital expenditures were $1.9 million as the company continued to execute on its Accelerated Investment Plan.

There is approximately $8.0 million remaining to invest on the AIP which will be spent in 2024 and 2025. By the end of 2024, the company plans to open a new 15,000 sq. ft. manufacturing space in its current facility. This will primarily be a state-of-the-art full Solder Mask Application line. After completion of the AIP, total capacity could generate revenues in excess of $60 million. 

Cash and short-term bank deposits were $18.1 million as of September 30, 2024 and the company has no outstanding debt. Working capital at the end of the 2nd quarter was $24.0 million. Cash balances were boosted by an equity offering in February 2024 which raised $10.0 million in gross proceeds.

Business Update

• 
  Despite the near-term revenue volatility as a result of customer order patterns, the company indicated it has seen a consistent uptrend in both product orders and requests for quotations during 2024. Recently, the company secured a repeat order worth $1.6 million from a defense client for PCB supply. $1.0 million of this order is due by the end of 2024 and the remainder by the end of 2025.

• 
  The company anticipates sustained high demand in the defense sector for the next 2-3 years due to ongoing geopolitical conflicts around the world.

• 
  Eltek mentioned that production constraints are largely due to workforce shortages and not in physical capacity at its plants. To manage the increased demands for PCBs, the company is actively seeking to boost its workforce by 15% in the short term and an additional 10% after that. The company is seeking to increase its labor force with an additional 50 employees by the end of 2025.

• 
  The company mentioned it anticipates significant challenges as they undertake extensive construction work and integrate additional new production lines and machines. The focus is on ensuring the efficient installation of new equipment while sustaining full production capacity on existing lines. Despite a slight delay of several months in the investment program, progress remains steady with the successful installation of the first of three ordered coating lines during the first quarter of 2024.

• 
  The company indicated it continues to seek a suitable PCB manufacturing company to acquire in the U.S. market to enhance its presence in North America. Also, the company is exploring additional options for expanding production at its plant in Israel to support its growth strategy.

Market Trends and Outlook

The PCB industry is experiencing mostly positive dynamic shifts which are driven by advancements in technology and evolving market demands. As Eltek primarily operates in the defense, aerospace and medical sectors, the company is well-positioned to capitalize on the following market trends:

• 
  
  Increasing Demand for Advanced Electronics: The defense and aerospace industries are witnessing a growing need for sophisticated electronic components which drives the demand for high-performance PCBs.

• 
  
  Emphasis on Reliability and Quality: With critical applications in defense, aerospace and medical devices – reliability and quality are essential. Eltek has consistently delivered PCB solutions that meet the stringent standards of these industries.

• 
  
  Global Supply Chain Challenges: The industry has faced challenges related to the global supply chain. Eltek has proactively managed these challenges through strategic partnerships and diversified sourcing, ensuring minimal impact on overall operations.

The company has diversified its revenue base by exploring opportunities outside of the traditional defense and medical devices market. For example, Eltek is focused on strengthening collaboration and securing substantial orders for new products with a leading customer whose machinery and technology play a crucial role in the large-scale production of semiconductor chips.

The company is making progress with its $15.0 million Accelerated Investment Program. Customers have financed a portion of this plan which calls for equipment and facilities to increase production capacity. There is approximately $8.0 million left to spend as the company executes on this program. The company indicated that there could be possible delays as qualified engineers and essential employees are difficult to source at times.

The ongoing situation in Israel, coupled with the continual rise in defense budgets across European nations and the trade tension between the US and China, continue to influence the demand for the company’s high-end PCB products.

In addition, the company mentioned that as a result of the security challenges in Israel and the logistical issues of shipments entering the country and the arrival of the supplier technical team to the country, there may be potential delays in executing the accelerated investment program. Some of the equipment to be implemented in the program comes from locations outside of Israel and certain suppliers are reluctant to send engineering and installation teams to Israel at this time.

The company continues to actively pursue the acquisition of a PCB manufacturing company in the U.S. Recognizing the strategic importance of the U.S. market, Eltek anticipates substantial growth in the coming years. The underlying motivation behind the

CHIPS and Science Act

and the

Protecting Circuit


Boards and Substrates Act

is to repatriate microelectronics and PCB production to America which will foster increased demand for domestic PCB manufacturing.

Valuation and Estimates

The growing market demand persists, and it is anticipated that this trend will continue in upcoming years. The company indicated that the influence of the current conflict in Israel has not been fully manifested in the company’s backlog yet. However, the positive impact of increased domestic defense spending is likely to materialize in the second half of 2024 and into 2025.

We adjust our EPS to account for recent financial results and additional management commentary regarding labor costs in Israel. Our 2024 annual revenue estimate is now $49.2 million, and our EPS estimate is $0.87. We are maintaining our price target of

$18.00.

The stock is currently selling at approximately 13.4x our 2024 EPS estimate.

The global market for flex-rigid PCBs is expected to grow at a CAGR of approximately 10% and reach $7.5 billion by 2025. We expect the company’s revenues to grow at solid double-digit rates for at least the next 5 years. We expect gross margins to steadily increase to 28%-29% over the next 2-3 years. EBITDA margins could increase from 16.0% in 2023 to 20.0% in coming years depending on gross margins and levels of SG&A spending going forward.

Our primary valuation tool utilizes a Discounted Cash Flow process. Under the scenario described above, our DCF based valuation target is approximately

$18.00

per share. Our target price may be conservative as it does not account for any M&A transactions that would materially increase the company’s manufacturing capacity.

The company announced it will initiate a dividend policy starting in 2025 and will be based on an annual distribution of up to 25% of reported net income. Based on 3^rd

quarter 2024 net income, we estimate that the annualized dividend yield could be in the

2.0%-2.3%

range in 2025.

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