ELTK: INITIATION: Established Israeli based manufacturer of Printed Circuit Boards entering new growth phase. The company is experiencing strong market demand from the military, defense, space and aerospace industries.
NASDAQ:ELTK
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Eltek (NASDAQ:ELTK) is a leading global provider of complex Rigid and Rigid-Flex Printed Circuit Boards (PCBs). Established in 1970, Eltek is an AS9100, ISO-9100, Nadcap and ITAR & EAR certified high technology printed circuit board manufacturer. Eltek currently has over 300 employees including strong engineering support and 50 years of success in aerospace, defense, medical and industrial markets where it is recognized as a reliable PCB global leader.
The company manufactures and supplies technologically advanced custom-made circuitry solutions for use in sophisticated and compact electronic products. The company offers specialized services and are a solution provider in the PCB business, primarily in Israel, Europe, North America and Asia. PCBs are platforms that conduct an electric current among active and passive microelectronics components, microprocessors, memories, resistors and capacitors and are integral parts of the products produced by high technology industries. Eltek’s focus is on short run quick-turnaround, prototype, pre-production and low to medium volume runs of high-end PCB products for high growth, advanced electronics applications, mainly flex-rigid PCBs.
The company designs and develops innovative manufacturing solutions pursuant to complex interconnect requirements of original equipment manufacturers (OEMs) and provides customers with a wide range of custom designed PCBs, including complex rigid, double-sided and multi-layer PCBs as well as flexible circuitry (flex and flex-rigid boards) made of several types of high-performance base material. To complement the quick-turnaround, prototype, pre-production and low to medium volume production capabilities and to provide customers with a single source service, the company also acts as an agent for the importation of PCBs from Southeast Asia when customers require high volume production runs.
The company recently commenced Phase 1 of a $15 million capital improvement plan which is expected to substantially increase manufacturing capacity and create a more efficient manufacturing process.
The company maintains a strong balance sheet with $7.3 million in cash and short-term investments and total debt of $3.5 million. The net leverage ratio was below 1.0 X based on $4.5 million in trailing EBITDA. Inventories were $5.1 million at year end, an increase of 4.8%. Net working capital was $12.9 million, and shareholders’ equity was $21.0 million.
The global PCB market is expected to grow to $76.0 billion by 2027 which is a CAGR of almost 5.0%. The majority of that market is low margin rigid PCBs. The higher margin flex-rigid PCB market is expected to grow to $7.5 billion by 2025 which is the current focus of Eltek.
The company currently has revenue capacity of approximately $40-$55 million when operating at 70%-90% utilization and considering the first phase of its capital investment plan at its Petach Tikva facility. After the company’s $15 million accelerated investment is completed and considering additional capacity created through an M&A transaction, the company’s total revenue capacity could reach up to $90 million.
Our primary valuation tool utilizes a Discounted Cash Flow process. Under the scenario described above, our DCF based valuation target is approximately $9.50 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.
Our 2023 full year EPS estimate is $0.61 which puts the stock selling at approximately 7.0x earnings. This compares to an average 2023 P/E of 14.5x for the company’s competitors which includes TTM Technologies (NASDAQ:TTMI), Firan Technology Group (TSE:FTG), and Cicor Group (SIX:CICN). Applying the industry average P/E of 14.5x to Eltek’s estimated 2023 earnings creates a value that is reasonably close to our DCF calculation.
Another competitor, PCB Technologies (TLV:PCBT), trades at a Price/Sales ratio of 1.11x based on 2022 revenues while Eltek trades at 0.60x 2022 revenues. Applying a 1.11x Price/Sales ratio to Eltek’s 2022 revenues would produce a stock price approximately 45% higher than today’s price.
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