ELTK: Eltek reported strong 3rd quarter financial results which supports our price target of $14.00.
NASDAQ:ELTK
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Eltek Ltd. (NASDAQ:ELTK) reported strong 3rd quarter 2023 financial results on November 16, 2023. Revenues increased 15.0% to $11.9 million from $10.3 million in the 3rd quarter of 2022. Customers continue to move PCB manufacturing needs from Asian markets to Western markets which creates strong demand for the company’s printed circuit boards (PCB). The current conflict in Israel provides evidence of the critical significance of a domestic PCB industry in which Eltek plays an important role. The PCB industry produces complex circuits tailored to specific defense requirements, employing state-of-the-art technology, and ensuring the highest quality standards. Additionally, the company is capable of providing speedy delivery to meet the immediate demands of the defense sector. Eltek holds the status of an Essential Enterprise as designated by the Israeli government, granting the company permission to operate 365 days a year if needed.
Gross profit was $3.68 million (31.0% gross margin) compared to $2.4 million (23.4% gross margin) in the prior year period. Because of the high level of demand and limitation of production capacity, the company was able to choose orders with high margin potential and when combined with efficient operations, the gross margin was higher than expected. The company experienced a favorable mix of sales, which included sales with relatively low material components and high technological added value which helped increase gross margins. The gross margin was above the company’s long-term goal of 27%.
Operating profit for the 3rd quarter of 2023 was $2.3 million compared to operating profit of $1.1 million in the 3rd quarter of 2022. Net income for the 2nd quarter of 2023 was $2.1 million or $0.36 per fully diluted share which was a substantial increase from net income of $1.0 million or $0.17 per fully diluted share in the prior year period. EBITDA for the 3rd quarter of 2023 was $2.6 million (22.0% EBITDA margin) compared to EBITDA of $1.45 million (14.0% EBITDA margin) in the 3rd quarter of 2022.
Operating cash flow for the first nine months of 2023 was $6.5 million and with capital expenditures of $1.19 million, free cash flow was $5.3 million. This free cash flow, along with $2.0 million in insurance proceeds received in the 2nd quarter, was primarily used to eliminate outstanding debt.
The company maintains a strong balance sheet with $11.3 million in cash and short-term investments and no bank debt as of September 30, 2023. Inventories were $5.6 million at year end, an increase of 8.7% from the end of 2022. Net working capital was $16.4 million and shareholders equity was $24.8 million. In addition, the company has approximately $10.4 million in tax operating loss carryforwards to shield against future taxes.
CEO Eli Yaffe stated, "The ongoing conflict in Israel underscores the critical significance of a domestic PCB industry. Such an industry would not only offer advanced technological solutions but also produce intricate circuits tailored to specific defense requirements, employing state-of-the-art technology, and ensuring the highest quality standards. Additionally, it would enable swift delivery to meet the immediate demands of the defense sector. Eltek holds the status of an Essential Enterprise as designated by the Israeli government, granting us permission to operate around the clock, 365 days a year, as needed."
Mr. Yaffe continued, "Over the past weeks, and up to the present moment, we have maintained seamless operations without any disruptions. In certain instances, we've even accelerated the delivery of products to our valued customers. Our dedicated workforce remains fully engaged, reporting for duty on their regular schedules. We have implemented a series of strategic measures to ensure we meet our customers' demands. These includes securing commitments from our suppliers to continue delivering the essential raw materials to our facility in conformance with our orders, bolstering our inventory levels for selected raw materials and expediting the deliveries of crucial resources."
The company indicated they are still in the process of entering the U.S. markets through an acquisition of an existing manufacturing plant if the right deal can be found. In addition, the $15 million capital improvement plan is on track with the majority of purchase orders for new equipment planned to be operable in 2024 and 2025. Some equipment to improve capacity may occur in late 2023.
On November 20th, the company announced it had recently received five purchase orders totaling $3.8 million. The orders are in connection with two projects for a customer and most of the orders will be supplied by Eltek in 2024. One of the projects is an existing legacy strategic project and the second project is a new one with very high technological specifications. The second order was received after providing a successful proof of concept. A proof of the concept required to meet a high level of technological production and the use of exotic materials.
Valuation and Estimates
Due to the strong operating results in the 3rd quarter, we are raising our 2023 annual EPS estimate to $1.16 from $1.10. We are increasing our price target to $14.00. That price target, if achieved, would put the stock selling at roughly 11.3x our 2024 EPS estimate of $1.24. Based on the last closing price of $12.76, ELTK stock is currently selling at 11.0x our revised 2023 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% 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 $14.00 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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