NASDAQ:ELTK
READ THE FULL ELTK RESEARCH REPORT
On August 15, 2024, Eltek (NASDAQ:ELTK) announced financial results for the 2nd quarter of 2024 which were slightly below expectations. Revenues for the 2nd quarter were $10.5 million compared to $11.0 million in the 2nd quarter of 2023. The decrease was due to a significant timing shift by some key customers who prioritized orders for PCBs with medium technology requirements which resulted in lower prices and margins. Orders for more complex, higher-margin PCBs were pushed back and are scheduled to be produced in the 3rd quarter of 2024. Approximately 2/3rds of revenues are generated from the country of Israel with the other 1/3rd coming from North America, the Netherlands, India and other countries.
Gross profit for the 1st quarter was $1.6 million (16% gross margin) compared to $3.0 million (27% gross margin) in the prior year period. Operating profit for the 2nd quarter of 2024 was $0.4 million compared to $1.4 million in the 2nd quarter of 2023. Net income for the quarter was $0.8 million or $0.11per fully diluted share compared to net income of $1.3 million or $0.22 per fully diluted share in the prior year period.
EBITDA for the 2nd quarter of 2024 was $0.8 million (7.6% EBITDA margin) compared to EBITDA of $1.7 million (15.3% EBITDA margin) in the 2nd quarter of 2023. Operating cash flow was $1.8 million and capital expenditures were $3.2 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.
Cash and short-term bank deposits were $18.3 million as of June 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 plans to hire 50 manufacturing employees throughout the rest of 2024
➢ 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.
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 and into 2025.
We adjust our EPS to account for recent financial results and additional management commentary. Our 2024 annual revenue estimate is now $48.3 million, and our EPS estimate is $1.02. We are maintaining our price target of $18.00. The stock is currently selling at approximately 9.4x 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% 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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