ELTK: Eltek future growth profile supports price target of $18.00 per share.
NASDAQ:ELTK
READ THE FULL ELTK RESEARCH REPORT
On March 11, 2024, Eltek (NASDAQ:ELTK) announced 4th quarter and full year financial results which were mostly in line with our expectations. Full-year revenue increased to a record $46.7 million in 2023, which was an 18% increase compared to the prior year period in 2022. The increase was attributed to increased production capacity and the ongoing demand for the company’s critical PCB products.
Net income was $6.4 million in 2023, which almost doubled from 2022 net income of $3.2 million. EBITDA reached $8.6 million, which was a 91% increase from $4.5 million in 2022. Diluted EPS jumped to $1.07 in 2023, an increase of 93% compared to $0.55 in 2022. This growth is attributed to the efficiency of company operations, ongoing strategic initiatives, and a loyal and supportive customer base.
In the 4th quarter of 2023, revenue climbed to $12.3 million, which was an 18% increase from the prior year period. Net income for the quarter reached $1.3 million and EBITDA for the quarter increased to $2.4 million.
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.
Eltek Places New Purchase Order
On December 18, 2023, the company announced the placement of purchase orders totaling $4.5 million for state-of-the-art machines, software, and a comprehensive service contract. All deliveries were received and installed during the 1st quarter of 2024. These purchase orders are in addition to the three production lines ordered in August 2023.
The first production line has been received and is currently in the commissioning stages. The company also installed an additional press which is a significant component of the accelerated investment plan. The press is in the final installation stages and in the software adjustment phase. During the first quarter of 2024, the company plans to complete the training of dedicated engineers. This software positions the company to be at the front end of technological advancements in this field.
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 and additional management commentary.
Our 2024 annual revenue estimate is now $50.8 million and our EPS estimate is now $1.12. We are maintaining our price target of $18.00. That price target, if achieved, would put the stock selling at roughly 16.0x our 2024 EPS estimate of $1.12.
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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