Zacks Small Cap Research – ELTK: Eltek Reports 1st Quarter 2024 Financial Results – Fitnes Fusion

By Thomas Kerr, CFA



On May 15, 2024, Eltek (NASDAQ:ELTK) announced financial results for the 1st quarter of 2024 which were largely in line with expectations. Revenues for the 1st quarter were $11.8 million compared to $11.5 million in the 1st quarter of 2023. Gross profit for the first quarter was $3.3 million (28% gross margin) compared to $3.0 million (26% gross margin) in the prior year period.

Operating profit for the 1st quarter of 2024 was $1.7 million compared to $1.6 million in the 1st quarter of 2023. Net income for the quarter was $1.7 million or $0.27 per fully diluted share compared to net income of $1.6 million or $0.27 per fully diluted share in the prior year period.

EBITDA for the 1st quarter of 2024 was $2.1 million (18% EBITDA margin) compared to EBITDA of $1.9 million (17% EBITDA margin) in the 1st quarter of 2023. Operating cash flow was $1.3 million and capital expenditures were $2.7 million as the company continued to execute on its Accelerated Investment Plan.

Cash and short-term bank deposits were $19.9 million as of March 31, 2024 and the company has no outstanding debt. Working capital at the end of the 1st quarter was $25.6 million. Cash balances were boosted by an equity offering in February 2024 which raised $10.0 million in gross proceeds.

Business Update

➢ The company indicated it has seen a consistent uptrend in both product orders and requests for quotations during the quarter. 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 mentioned it anticipates significant challenges as it undertakes extensive construction work and integrates 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 quarter.

➢ 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.

Growth Drivers

The company attributes its success to a multi-pronged approach:

Innovation: The persistent pursuit of innovation has allowed the company to stay at the forefront of technological advancements, meeting the evolving needs of its defense, aerospace, and medical customers.

Customer Focus: Building strong, long-lasting relationships with its customers has been a cornerstone of their success. Understanding the unique challenges faced by the defense, aerospace, and medical sectors, and their tailored solutions have contributed to customers’ success.

Operational Efficiency: Eltek continues to invest in state-of-the-art manufacturing processes and quality control measures, ensuring the production of reliable and high-performance PCBs.

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. Capital spending may reach $10 million in 2024 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 come 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.

$10 Million Public Offering

On February 15, 2024, the company announced the closing of its previously announced public offering of 625,000 ordinary shares at a public offering price of $16.00 per share. Gross proceeds were $10,000,000, before deducting underwriting discounts and offering expenses. There were no dilutive warrants associated with this offering.

The company intends to use the net proceeds from this offering to strategically invest in the expansion of its production capabilities and for general corporate purposes including working capital.

Valuation and Estimates

Despite the potential capacity improvement delays mentioned above, the growing market demand persists, and 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.

We adjust our EPS to account for potential capacity improvement delays, additional management commentary, and a higher share count. Our 2024 annual revenue estimate is now $50.5 million and our EPS estimate is now $1.09. We are maintaining our price target of $18.00. That price target, if achieved, would put the stock selling at roughly 16.5x our 2024 EPS estimate of $1.09.

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% 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.

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